For the quarterly period ended July 4, 2009
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-22512

 

 

WEST MARINE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   77-0355502

(State or Other Jurisdiction of

Incorporation or Organization)

  (IRS Employer
Identification No.)

500 Westridge Drive

Watsonville, CA 95076-4100

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (831) 728-2700

 

 

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨
     

(Do not check if a smaller

reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At August 1, 2009, the number of shares outstanding of the registrant’s common stock was 22,221,059.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page No.
PART 1 – Financial Information    3

Item 1.

   Financial Statements    3
   Condensed Consolidated Balance Sheets as of July 4, 2009, January 3, 2009 and June 28, 2008    3
  

Condensed Consolidated Statements of Operations for the 13 weeks ended July 4, 2009 and June 28, 2008 and the 26 weeks ended July 4, 2009 and June 28, 2008

   4
   Condensed Consolidated Statements of Cash Flows for the 26 weeks ended July 4, 2009 and June 28, 2008    5
   Notes to Condensed Consolidated Financial Statements    6
   Report of Independent Registered Public Accounting Firm    11

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    12

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    17

Item 4.

   Controls and Procedures    17

PART II – Other Information

   18

Item 1.

   Legal Proceedings    18

Item 1A.

   Risk Factors    18

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    18

Item 3.

   Defaults Upon Senior Securities    18

Item 4.

   Submission of Matters to a Vote of Security Holders    19

Item 5.

   Other Information    19

Item 6.

   Exhibits    20


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

WEST MARINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

JULY 4, 2009, JANUARY 3, 2009 AND JUNE 28, 2008

(Unaudited and in thousands, except share data)

 

     July 4,
2009
    January 3,
2009
    June 28,
2008
 

ASSETS

      

Current assets:

      

Cash

   $ 17,691      $ 7,473      $ 12,422   

Trade receivables, net

     8,521        5,824        9,876   

Merchandise inventories

     229,278        222,601        277,063   

Other current assets

     17,575        16,369        22,170   
                        

Total current assets

     273,065        252,267        321,531   

Property and equipment, net

     57,183        59,615        64,539   

Intangibles, net

     135        154        173   

Other assets

     3,159        2,556        3,243   
                        

TOTAL ASSETS

   $ 333,542      $ 314,592      $ 389,486   
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 49,024      $ 26,788      $ 65,569   

Accrued expenses and other

     49,058        42,256        51,815   
                        

Total current liabilities

     98,082        69,044        117,384   

Long-term debt

     18,000        47,000        51,000   

Deferred rent and other

     9,758        8,928        8,328   
                        

Total liabilities

     125,840        124,972        176,712   
                        

Stockholders’ equity:

      

Preferred stock, $.001 par value: 1,000,000 shares authorized; no shares outstanding

     —          —          —     

Common stock, $.001 par value: 50,000,000 shares authorized; 22,251,565 shares issued and 22,220,675 shares outstanding at July 4, 2009; 22,142,949 shares issued and 22,115,377 shares outstanding at January 3, 2009; and 22,049,113 shares issued and 22,021,541 shares outstanding at June 28, 2008

     22        22        22   

Treasury stock

     (385     (366     (366

Additional paid-in capital

     175,581        173,997        172,427   

Accumulated other comprehensive income (loss)

     397        590        (266

Retained earnings

     32,087        15,377        40,957   
                        

Total stockholders’ equity

     207,702        189,620        212,774   
                        

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 333,542      $ 314,592      $ 389,486   
                        

See accompanying notes to condensed consolidated financial statements.

 

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WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share data)

 

     13 Weeks Ended    26 Weeks Ended  
     July 4,
2009
    June 28,
2008
   July 4,
2009
   June 28,
2008
 

Net revenues

   $ 215,371      $ 226,681    $ 316,336    $ 339,944   

Cost of goods sold

     142,278        148,270      221,332      239,048   
                              

Gross profit

     73,093        78,411      95,004      100,896   

Selling, general and administrative expense

     40,529        48,926      77,413      95,747   

Store closures and other restructuring costs

     (26     —        51      —     

Impairment of long-lived assets

     —          1,897      —        2,163   
                              

Income from operations

     32,590        27,588      17,540      2,986   

Interest expense

     302        762      633      1,608   
                              

Income before income taxes

     32,288        26,826      16,907      1,378   

Provision (benefit) for income taxes

     (200     22,385      197      14,598   
                              

Net income (loss)

   $ 32,488      $ 4,441    $ 16,710    $ (13,220
                              

Net income (loss) per share:

          

Basic

   $ 1.46      $ 0.20    $ 0.75    $ (0.60

Diluted

   $ 1.46      $ 0.20    $ 0.75    $ (0.60

Weighted average common and common equivalent shares outstanding:

          

Basic

     22,187        21,972      22,152      21,933   

Diluted

     22,234        21,985      22,188      21,933   

See accompanying notes to condensed consolidated financial statements.

 

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WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     26 Weeks Ended  
     July 4,
2009
    June 28,
2008
 

OPERATING ACTIVITIES:

    

Net income (loss)

   $ 16,710      $ (13,220

Adjustments to reconcile net income (loss) to net cash used in operating activities:

    

Depreciation and amortization

     8,363        9,460   

Impairment of store assets

     —          2,163   

Impairment of long-lived assets

     —          54   

Share-based compensation

     1,187        1,083   

Tax benefit from equity issuance

     —          (89

Deferred income taxes

     (603 )     14,568   

Provision for doubtful accounts

     245        215   

Lower of cost or market inventory adjustments

     1,646        1,662   

Loss on asset disposals

     122        119   

Changes in assets and liabilities:

    

Trade receivables

     (2,942     (3,387

Merchandise inventories

     (8,323     (30,418

Other current assets

     (1,206 )     (701

Other assets

     (275 )     194   

Accounts payable

     22,711        30,372   

Accrued expenses and other

     6,802        4,039   

Deferred items and other non-current liabilities

     830        153   
                

Net cash provided by operating activities

     45,267        16,267   
                

INVESTING ACTIVITIES:

    

Proceeds from sale of property and equipment

     16        21   

Purchases of property and equipment

     (6,401     (9,138
                

Net cash used in investing activities

     (6,385     (9,117
                

FINANCING ACTIVITIES:

    

Borrowings on line of credit

     34,595        51,303   

Repayments on line of credit

     (63,595     (52,603

Proceeds from exercise of stock options

     52        1   

Proceeds from sale of common stock pursuant to Associates Stock Buying Plan

     345        444   

Treasury shares acquired

     (19 )     (18 )
                

Net cash used in financing activities

     (28,622 )     (873 )
                

Effect of exchange rate changes on cash

     (42 )     19   

NET INCREASE IN CASH

     10,218        6,296   

CASH AT BEGINNING OF PERIOD

     7,473        6,126   
                

CASH AT END OF PERIOD

   $ 17,691      $ 12,422   
                

Other cash flow information:

    

Cash paid for interest

   $ 645      $ 1,648   

Cash paid (refunded) for income taxes

     422        (2,462

Non-cash investing activities

    

Property and equipment additions in accounts payable

     94        435   

See accompanying notes to condensed consolidated financial statements.

 

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WEST MARINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Thirteen and Twenty-Six Weeks Ended July 4, 2009 and June 28, 2008

(Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of West Marine, Inc. and its subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring items, except as discussed in Notes 2 and 7 below) necessary to fairly present the financial position at July 4, 2009 and June 28, 2008, and the interim results of operations for the 13-week and 26-week periods and cash flows for the 26-week periods then ended, have been included.

The condensed consolidated balance sheet at January 3, 2009 presented herein has been derived from the audited consolidated financial statements of the Company for the year then ended that was included in the Company’s Annual Report on Form 10-K for the year ended January 3, 2009 (the “2008 Form 10-K”). These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the fiscal year ended January 3, 2009, that were included in the 2008 Form 10-K.

Accounting policies followed by the Company are described in Note 1 in the audited consolidated financial statements for the year ended January 3, 2009. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted for purposes of the condensed consolidated interim financial statements presented herein. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13-week and 26-week periods ended July 4, 2009 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending January 2, 2010. Historically, the Company’s revenues and net income are higher in the second and third quarters and decrease in the first and fourth quarters of the fiscal year. The increase in revenues and earnings, principally during the period from April through August, is representative of the peak months for boat buying, usage and maintenance in most of our retail markets.

The Company’s fiscal year consists of 52 or 53 weeks, ending on the Saturday closest to December 31. The 2009 fiscal year consists of 52 weeks ending on January 2, 2010 and the 2008 fiscal year consisted of the 53 weeks ended January 3, 2009. All quarters of both fiscal years 2009 and 2008 consist of 13 weeks, except for the fourth quarter of 2008, which consisted of 14 weeks. All references to years relate to fiscal years rather than calendar years.

Subsequent events were evaluated through August 10, 2009, the date these condensed consolidated financial statements were issued.

Fair Value of Financial Instruments

On the first day of fiscal 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” for financial assets and liabilities. The Company adopted SFAS No. 157 for fair value measurement of non-financial assets and liabilities which are non-recurring (e.g., store asset impairment) at the beginning of fiscal 2009. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). There was no material impact on the Company’s financial position, results of operations or cash flows with the adoption of SFAS No. 157.

Also, effective December 30, 2007, the Company adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of Financial Accounting Standards Board (“FASB”) statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Election of the fair value option is irrevocable and is applied on a contract-by-contract basis. The Company has elected not to apply the fair value option to its eligible financial assets and liabilities and, accordingly, the adoption of SFAS No. 159 had no financial statement impact.

The estimated fair value of long-term debt was $17.5 million as of July 4, 2009. The Company’s only long-term debt consists of amounts outstanding under its credit facility. The fair value was estimated based on rates currently offered for debt with similar terms and maturities. The entire debt was treated as one coupon bond, with a monthly coupon payment and maturity equal to that of the credit facility. This bond was then valued at the current cost of debt for the Company under the credit facility.

 

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NOTE 2: INCOME TAXES

The Company calculates its interim income tax provision in accordance with Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods.” At the end of each interim period, the Company estimates the annual effective tax rate and applies that rate to its year-to-date ordinary earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in tax laws, rates or status is recognized in the interim period in which the change occurs.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income (loss) for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision (benefit) for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

The Company’s income tax rate was a provision for state taxes of 1.2% resulting in expense of $0.2 million for the twenty-six weeks ended July 4, 2009, and the effective tax rate of 1,059.4% resulted in an expense of $14.6 million for the twenty-six weeks ended June 28, 2008. The change in the effective tax rate was primarily due to the Company’s decision in the second quarter of 2008 to record a full valuation allowance against its net deferred tax assets and to cease recording any future income tax benefits going forward.

The fiscal 2008 adjustment had no impact on the Company’s cash flow or future prospects, nor did it alter the Company’s ability to utilize the underlying tax net operating loss and credit carryforwards in the future, the utilization of which is limited to achieving future taxable income.

Under GAAP, when the Company’s results demonstrate a pattern of future profitability and reverse the current cumulative loss trend, the Company’s valuation allowance may be adjusted and may result in the reinstatement of all or a part of the net deferred tax assets.

NOTE 3: SHARE-BASED COMPENSATION

For purposes of calculating the share-based compensation under SFAS No. 123(R), the Company estimates the fair value of stock options under the Omnibus Equity Incentive Plan (the “Incentive Plan”) and shares issued under the Associates Stock Buying Plan (the “Buying Plan”), using a Black-Scholes option-pricing model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive stock options.

Included in cost of goods sold and selling, general and administrative expense is share-based compensation expense, net of estimated forfeitures, that have been included in the statements of operations for all share-based compensation arrangements as follows:

 

(in thousands)

   13 Weeks Ended
July 4, 2009
   13 Weeks Ended
June 28, 2008
   26 Weeks Ended
July 4, 2009
   26 Weeks Ended
June 28, 2008

Cost of goods sold

   $ 102    $ 136    $ 211    $ 240

Selling, general and administrative expense

     532      529      976      843
                           

Share-based compensation expense

   $ 634    $ 665    $ 1,187    $ 1,083
                           

Stock Options: The Incentive Plan provides for the granting of stock options to eligible associates employed at the time of the grant, and such grants to associates represent non-qualified stock options. The exercise price of an option is established at the fair market value of a share of the Company’s common stock on the date of grant. Options awarded under the Incentive Plan generally vest over three years (options awarded under the Incentive Plan in 2006 generally vest over four years) and expire five years following the grant date. As of July 4, 2009, there was $3.6 million of unrecognized share-based compensation expense for stock options, net of expected forfeitures, with a weighted-average future expense recognition period of approximately 1.9 years.

 

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The following table summarizes the activity for stock options for the twenty-six weeks ended July 4, 2009:

 

     Options     Weighted-Average
Exercise Price
   Weighted-Average
Remaining
Contractual Term
(in Years)

Outstanding at January 4, 2009 (beginning of fiscal year)

   3,731,583      $ 13.89    3.9

Granted (weighted average grant date fair value of $1.88)

   715,375        5.80    4.9

Exercised

   (11,569     4.43   

Forfeited

   (78,215     8.59   

Expired

   (182,404     16.81   
           

Outstanding at July 4, 2009

   4,174,770        12.48    3.7
           

Vested as of July 4, 2009

   2,456,435        16.52    3.5
           

Restricted Share Awards: The Incentive Plan also provides for awards of shares to eligible associates and directors that are subject to restrictions on transfer for a period of time (commonly referred to as “restricted shares”). Compensation expense for restricted shares was less than $0.1 million for the thirteen weeks ended July 4, 2009 and $0.1 million for the thirteen weeks ended June 28, 2008, and $0.1 million for each of the twenty-six weeks ended July 4, 2009 and June 28, 2008.

Associate Stock Buying Plan: The Company also has the Buying Plan under which all eligible associates may elect to participate on the grant dates twice each year. All associates may participate, other than those who own 5% or more of the Company’s outstanding stock.

NOTE 4: SEGMENT INFORMATION

The Company has three reportable segments—Stores, Port Supply (wholesale) and Direct Sales (Internet and call center)—all of which sell merchandise directly to customers. The customer base overlaps between the Company’s Stores and Port Supply segments, and between its Stores and Direct Sales segments. All processes for the three segments within the supply chain are centralized, including purchases from vendors, distribution center activity and customer delivery.

Revenues are attributed to the segment that processes the orders from the customer. Through the Direct Sales segment, the Company promotes and sells products internationally through both its websites and call center. The Company operates primarily in the United States with foreign revenues representing 5% or less of total net revenues during each of the thirteen-week and twenty-six-week periods ended July 4, 2009 and June 28, 2008, and foreign long-lived assets totaled less than 2% of long-lived assets at each of these dates.

Segment assets are those directly allocated to an operating segment’s operations. For the Stores segment, assets primarily consist of leasehold improvements, computer assets, fixtures, land and buildings. For the Port Supply and Direct Sales segments, assets primarily consist of computer assets. Unallocated assets consists of merchandise inventory, shared technology infrastructure, distribution centers, corporate headquarters, prepaid expenses, deferred taxes and other assets. Capital expenditures and depreciation expense for each segment are allocated to the assets assigned to the segment. Contribution is defined as net revenues less product costs and direct expenses.

 

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Following is financial information related to the Company’s business segments (in thousands):

 

     13 Weeks Ended     26 Weeks Ended  
     July 4,
2009
    June 28,
2008
    July 4,
2009
    June 28,
2008
 

Net revenues:

        

Stores

   $ 194,671      $ 199,633      $ 282,976      $ 296,730   

Direct Sales

     11,824        14,284        17,667        21,378   

Port Supply

     8,876        12,764        15,693        21,836   
                                

Consolidated net revenues

   $ 215,371      $ 226,681      $ 316,336      $ 339,944   
                                

Contribution:

        

Stores

   $ 45,741      $ 42,668      $ 42,385      $ 35,191   

Direct Sales

     2,612        2,589        3,932        3,644   

Port Supply

     48        350        (371     (303 )
                                

Consolidated contribution

   $ 48,401      $ 45,607      $ 45,946      $ 38,532   
                                

Reconciliation of consolidated contribution to net income:

        

Consolidated contribution

   $ 48,401      $ 45,607      $ 45,946      $ 38,532   

Less:

        

Indirect costs of goods sold not included in consolidated contribution

     (7,859     (8,365     (11,398     (14,280

General and administrative expense

     (7,952     (9,654     (17,008     (21,266

Interest expense

     (302     (762     (633     (1,608

Benefit (provision) for income taxes

     200        (22,385     (197     (14,598
                                

Net income (loss)

   $ 32,488      $ 4,441      $ 16,710      $ (13,220 )
                                
     13 Weeks Ended     26 Weeks Ended  
     July 4,
2009
    June 28,
2008
    July 4,
2009
    June 28,
2008
 

Assets:

        

Stores

       $ 33,310      $ 35,952   

Port Supply

         7,491        9,713   

Direct Sales

         1,094        2,571   

Unallocated

         291,647        341,250   
                    

Total assets

       $ 333,542      $ 389,486   
                    

Capital expenditures:

        

Stores

   $ 2,947      $ 2,832      $ 5,563      $ 4,864   

Port Supply

     —          560        26        727   

Direct Sales

     —          10        —          131   

Unallocated

     170        1,107        812        3,416   
                                

Total capital expenditures

   $ 3,117      $ 4,509      $ 6,401      $ 9,138   
                                

Depreciation and amortization:

        

Stores

   $ 2,670      $ 2,866      $ 5,103      $ 5,707   

Port Supply

     51        83        111        172   

Direct Sales

     85        129        176        262   

Unallocated

     1,532        1,657        2,973        3,319   
                                

Total depreciation and amortization

   $ 4,338      $ 4,735      $ 8,363      $ 9,460   
                                

NOTE 5: COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss) (income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity). The Company’s comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments for all periods presented, and did not differ significantly from the reported net income (loss).

 

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NOTE 6: CONTINGENCIES

On July 23, 2009, the U.S. Securities and Exchange Commission (“SEC”) approved a final settlement between the Company and the SEC regarding the previously-disclosed investigation of the Company. The investigation involved the facts and circumstances that gave rise to the Company’s 2007 restatement of its financial results for fiscal years 2002 through 2005 and for the first three quarters of fiscal year 2006. Under the terms of the settlement, the Company, without admitting or denying any of the SEC’s allegations, agreed to settle the charges by consenting to a permanent injunction against committing or causing any violations or future violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended. The settlement does not require the Company to pay a monetary penalty and, therefore, the Company does not expect the settlement to have a material adverse effect on its future financial position or results of operation. This settlement concludes the SEC’s investigation of the Company.

In December 2008, the Company entered into a settlement agreement in connection with a lawsuit filed on March 21, 2008 in the California Superior Court, County of Orange by a former hourly associate, seeking to represent himself and all similarly situated current and former hourly paid associates employed by the Company in the State of California, alleging, among other things, that the Company failed to provide meal and rest periods, to provide correct itemized statements, to pay discharged employees, and engaged in unfair business practices in violation of certain applicable sections of the California Labor Code and the California Business and Professions Code (see Item 3 – “Legal Proceedings,” in the 2008 Form 10-K for more information). Following the court’s preliminary approval of the settlement agreement on April 9, 2009, the Company reviewed the class data and determined that additional class members needed to be included. As a result, on July 1, 2009, the court approved the modified settlement terms agreed to by the parties. The Company does not expect the settlement, as modified, to have a material adverse effect on its future financial position or results of operations.

The Company also is party to various legal proceedings and claims arising from normal business activities. Based on the facts currently available, the Company does not believe that the disposition of matters that are pending or asserted, individually or in the aggregate, will have a material adverse effect on future financial results. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact the Company’s results of operations in any given period.

NOTE 7: STORE CLOSURE AND OTHER RESTRUCTURING COSTS

Restructuring charges include severance costs, lease termination fees, legal and professional fees paid for lease termination negotiations, and other costs associated with the closure of facilities. The Company has accounted for severance costs in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” These benefits are detailed in an approved severance plan, which is specific as to number, position, location and timing. In addition, severance benefits are communicated in specific detail to affected employees, and it is unlikely that the plan will change when the costs are recorded. Costs are recognized ratably over the period services are rendered, otherwise they are recognized when they are communicated to the employees. Other associated costs, such as legal and professional fees, have been expensed as incurred, in accordance with SFAS No. 146.

During the twenty-six weeks ended July 4, 2009, the Company recognized charges of $0.1 million for estimated lease contract termination obligations, termination benefits and other store closure costs. Accrued liabilities related to store closure costs outstanding as of July 4, 2009 were $7.5 million.

Costs and obligations (included in “Accrued liabilities” in the Company’s condensed consolidated balance sheets) recorded by the Company in 2009 and 2008, in conjunction with the store closures and other restructuring costs are as follows (in thousands):

 

     Termination
Benefits
and Other
Costs
    Store Lease
Termination
Costs
    Total  

Balance, December 29, 2007

   $ —        $ 1,988      $ 1,988   

Charges

     3,023        7,664        10,687   

Payments

     (1,954     (1,652     (3,606
                        

Ending balance, January 3, 2009

     1,069        8,000        9,069   

Charges

     8        43        51   

Payments

     (215     (1,367     (1,582
                        

Ending balance, July 4, 2009

   $ 862      $ 6,676      $ 7,538   
                        

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

West Marine, Inc.

Watsonville, California

We have reviewed the accompanying condensed consolidated balance sheets of West Marine, Inc. and subsidiaries (“West Marine”) as of July 4, 2009 and June 28, 2008, and the related condensed consolidated statements of operations for the 13-week and 26-week periods then ended and cash flows for the 26-week periods then ended. These interim financial statements are the responsibility of West Marine’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of West Marine, Inc. and subsidiaries as of January 3, 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 16, 2009, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph relating to the adoption of a new accounting standard. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 3, 2009 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

/s/ DELOITTE & TOUCHE LLP
San Francisco, California
August 10, 2009

 

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 3, 2009 (the “2008 Form 10-K”). All references to the second quarter and the first six months of 2009 mean the thirteen-week and twenty-six-week periods ended July 4, 2009, respectively, and all references to the second quarter and the first six months of 2008 mean the thirteen-week and twenty-six-week periods ended June 28, 2008, respectively. Unless the context otherwise requires, “West Marine,” “we,” “us” and “our” refer to West Marine, Inc. and its subsidiaries.

Overview

West Marine is one of the largest boating supply retailers in the world. We have three reportable segments — Stores, Port Supply (wholesale) and Direct Sales (Internet and call center) — all of which sell aftermarket recreational boating supplies directly to customers. At the end of the second quarter of 2009, we offered our products through 342 company-operated stores in 38 states, Puerto Rico and Canada and two franchised stores located in Turkey; on the Internet; and through our call center channel. We also are engaged, through our Port Supply division, in our stores and on the Internet, in the wholesale distribution of boating products to commercial customers. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.

Critical Accounting Policies and Estimates

Our unaudited financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information pursuant to Regulation S-X. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We have identified certain policies that require the application of significant judgment by management. Our most critical accounting policies are those related to inventory valuations including allowances and capitalization of indirect costs, costs associated with exit activities (e.g., store closures), impairment of long-lived assets and deferred tax assets and applicable valuation allowance. These critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2008 Form 10-K. The following discussion and analysis should be read in conjunction with such description of critical accounting policies and with our condensed consolidated financial statements and related notes included in Part I, Item 1 of this report.

Results of Operations

The following table sets forth certain statement of operations components expressed as a percent of net revenues:

 

     13 Weeks Ended     26 Weeks Ended  
     July 4,
2009
    June 28,
2008
    July 4,
2009
    June 28,
2008
 

Net revenues

   100.0   100.0   100.0   100.0

Cost of goods sold

   66.1      65.4      70.0      70.3   
                        

Gross profit

   33.9      34.6      30.0      29.7   

Selling, general and administrative expense

   18.8      21.6      24.5      28.2   

Store closures and other restructuring costs

   0.0      0.0      0.0      0.0   

Impairment of long-lived assets

   0.0      0.8      0.0      0.6   
                        

Income from operations

   15.1      12.2      5.5      0.9   

Interest expense, net

   0.1      0.4      0.2      0.5   
                        

Income before income taxes

   15.0      11.8      5.3      0.4   

Income taxes

   (0.1 )   9.8      0.0      4.3   
                        

Net income (loss)

   15.1   2.0   5.3   (3.9 )% 
                        

 

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Thirteen Weeks Ended July 4, 2009 Compared to Thirteen Weeks Ended June 28, 2008

Net revenues for the second quarter of 2009 were $215.4 million, a decrease of $11.3 million, or 5.0%, compared to net revenues of $226.7 million in the second quarter of 2008. While the sale of new boats have continued to be soft and the areas of our business that support that industry segment continue to suffer, we believe we have benefited from an increase in boat usage product categories in some markets, a shift towards more “do-it-yourself” purchases in light of the current economic environment, and a positive reaction to our focus on core boating parts and accessories. We believe we have also benefited from changes in the competitive landscape, including the demise of a large competitor and lower gas prices versus the same period last year. We had 342 company-operated stores and two franchised stores in Turkey open at the end of the second quarter of 2009 compared to 369 company-operated and one franchise store in Turkey at the end of the second quarter of 2008.

Net revenues attributable to our Stores division decreased $5.0 million to $194.7 million in the second quarter of 2009, a 2.5% decrease compared to the second quarter of 2008, primarily due to a decrease of $10.3 million from store closures in 2008 and the first six months of 2009, partially offset by $6.2 million from new stores opened since the end of the second quarter last year. Comparable store sales decreased 1.0% in the second quarter of 2009, compared to a comparable store sales decrease of 7.8% in the second quarter last year. The decline in comparable store sales reflects lower sales of higher-priced discretionary items partially offset by increased sales of core boating parts and accessories, which we believe indicates more boat usage during the quarter and the favorable impact from changes in the competitive landscape and lower gas prices. Comparable store sales for the second quarter benefited by $8.4 million, or 4.2%, because of a favorable fiscal calendar shift from fiscal 2008. Sales typically build week-over-week leading up to the peak of boating season, and the fiscal calendar shift meant there were more peak season days in the second quarter of this year, which benefited comparable store sales. The calendar shift also resulted in the Fourth of July holiday falling in the second fiscal quarter in 2009, rather than the third fiscal quarter in 2008. Wholesale (Port Supply) net sales through our distribution centers decreased $3.9 million, or 30.5%, to $8.9 million in the second quarter of 2009 compared to 2008, primarily due to lower sales to boat dealers and boat builders. Net sales in our Direct Sales division decreased $2.5 million, or 17.2%, to $11.8 million in the second quarter of 2009 compared to 2008, primarily due to lower sales to international customers, lower call center volume and lower sales of big ticket discretionary items. The overall decline in the Direct Sales division was partially offset by increased sales to domestic Internet customers.

Gross profit decreased by $5.3 million, or 6.8%, to $73.1 million in the second quarter of 2009, compared to $78.4 million for the same period last year. Gross profit decreased as a percentage of net revenues by 70 basis points to 33.9% in the second quarter of 2009, compared to 34.6% for the same period last year. Gross profit as a percentage of net revenues decreased by 117 basis points due to higher unit buying and distribution costs given the reduced inventory levels during the period. The gross profit rate also decreased by an additional 22 basis points due to the deleveraging of store occupancy costs as revenues decreased relative to the fixed nature of these expenses. However, these declines were partially offset by improved product margins, which increased 92 basis points driven by lower promotional activity during the quarter as well as a shift in sales mix to higher margin core boating categories, such as maintenance.

Selling, general and administrative expense decreased $8.4 million, or 17.2%, to $40.5 million in the second quarter of 2009, compared to $48.9 million for the same period last year, and decreased as a percentage of net revenues to 18.8% in the second quarter of 2009, compared to 21.6% for the same period last year. The decrease in selling, general and administrative expense was primarily due to $4.7 million in lower support and selling overhead and a reduction in costs related to the recently settled SEC investigation, $3.3 million in lower payroll, marketing and other variable expenses reflecting lower revenues and a $1.7 million reduction due to the reduced store count. These decreases were partially offset by a $1.9 million increase in accrued bonus expense reflecting performance ahead of budgeted expectations.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax rate for the second quarter of 2009 was a benefit of 0.6% compared with an effective tax rate of 83.4% for the same period last year. The change in our effective tax rate was largely due to management’s decision to establish a full valuation allowance of $14.6 million on our net deferred tax assets in the second quarter of 2008 and to cease recording any future income tax benefits going forward. For more information, see Note 2 to our condensed consolidated financial statements included in this report.

Net income for the second quarter of 2009 was $32.5 million compared to net income of $4.4 million in the second quarter of 2008.

 

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Twenty-Six Weeks Ended July 4, 2009 Compared to Twenty-Six Weeks Ended June 28, 2008

Net revenues for the twenty-six weeks of 2009 were $316.3 million, a decrease of $23.6 million, or 6.9%, compared to net revenues of $339.9 million in the twenty-six weeks of 2008.

Net revenues attributable to our Stores division decreased $13.8 million to $283.0 million in the twenty-six weeks of 2009, a 4.6% decrease compared to the twenty-six weeks of 2008, primarily due to a decrease of $14.0 million from store closures in 2008 and the first six months of 2009 and an $8.1 million decrease in comparable store sales. Revenues of $7.9 million from new stores partially offset sales declines. Comparable store sales decreased 2.9% in the twenty-six weeks of 2009, compared to a decrease of 8.4% in the same period last year, and benefited by $13.3 million, or 4.4%, because of the fiscal calendar shift described above. The decline in comparable store sales reflects lower sales of higher-priced discretionary items partially offset during the second quarter by increased sales of core boating parts and accessories, which we believe indicates more boat usage during that quarter and the favorable impact from changes in the competitive landscape and lower gas prices. While we have seen increased boat usage in some markets during the second quarter, we expect consumers to carefully evaluate their needs-based boating purchases and continue to reduce spending on large ticket and discretionary items. Wholesale (Port Supply) net sales through our distribution centers decreased $6.1 million, or 28.1%, to $15.7 million in the first half of 2009 compared to 2008, primarily due to lower sales to boat dealers and boat builders. Net sales at our Direct Sales division decreased $3.7 million, or 17.4%, to $17.7 million in the twenty-six weeks of 2009 compared to 2008, primarily due to lower sales to international customers, lower call center volume and lower sales of big ticket discretionary items.

Gross profit decreased by $5.9 million, or 5.8%, to $95.0 million in the twenty-six weeks of 2009, compared to $100.9 million for the same period last year. Gross profit increased as a percentage of net revenues by 30 basis points to 30.0% in the twenty-six weeks of 2009, compared to 29.7% for the same period last year. Gross profit as a percentage of net revenues increased primarily due to a 133 basis point increase in product margin driven by less promotional and clearance activity during the first six months of 2009, as well as a shift in balance of sales to higher margin categories. This improvement was partially offset by buying and distribution costs and occupancy which deleveraged 105 basis points due to the fixed nature of these expenses in relation to the decline in revenues.

Selling, general and administrative expense decreased $18.3 million, or 19.1%, to $77.4 million in the twenty-six weeks of 2009, compared to $95.7 million for the same period last year, and decreased as a percentage of net revenues to 24.5% in the twenty-six weeks of 2009, compared to 28.2% for the same period last year. The decrease in selling, general and administrative expense was primarily due to $9.3 million in lower support and selling overhead and a reduction in costs related to the recently settled SEC investigation, $7.0 million in lower payroll, marketing and other variable expenses reflecting lower revenues and a $2.8 million reduction due to the reduced store count. These decreases were partially offset by a $2.2 million increase in accrued bonus expense reflecting performance ahead of budgeted expectations.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax rate for the six months of 2009 was a provision of 1.21% for state taxes. The change in our effective tax rate was largely due to management’s decision to establish a full valuation allowance on our net deferred tax assets in the second quarter of 2008. For more information, see Note 2 to our condensed consolidated financial statements included in this report.

Net income for the twenty-six weeks of 2009 was $16.7 million compared to net loss of $13.2 million in the twenty-six weeks of 2008.

Liquidity and Capital Resources

We ended the second quarter of 2009 with $17.7 million of cash, an increase from $12.4 million at the end of the second quarter of 2008. Working capital, the excess of current assets over current liabilities, decreased to $175.0 million at the end of the second quarter, compared with $204.1 million for the same period last year. Lower merchandise inventories, down $47.8 million, was the primary driver of the decrease in working capital, partially offset by a $16.5 million decrease in accounts payable.

Operating Activities

During the first six months of 2009, net cash provided by operating activities was $45.3 million, compared to $16.3 million for the same period last year. Net cash provided by operating activities improved year-over-year by $29.0 million and was primarily driven by improved operating results and lower inventory purchases, resulting in lower accounts payable. The decrease in accounts payable was partially offset by increased expense for accruals related to fiscal 2008 store closures and restructuring charges.

 

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Investing Activities

We spent $6.4 million on capital expenditures during the first six months of 2009, a $2.7 million decrease from the prior year, primarily due to lower spending on production improvements at our distribution centers and lower spending on information technology projects, partially offset by investment in our two new prototype flagship stores that launched during the first quarter of 2009. We have opened five stores (including the two flagship stores) and remodeled two stores during the first six months of 2009.

Financing Arrangements

Net cash used in financing activities was $28.6 million for the first six months of 2009, consisting of net repayments under our credit facility.

We have a credit facility with a bank syndicate for up to $225.0 million that expires in December 2010. Borrowing availability is based on a percentage of our inventory (excluding capitalized indirect costs) and certain accounts receivable. At our option, subject to certain conditions and restrictions, our loan agreement provides up to $25.0 million in additional financing during the term. The credit facility is guaranteed by our subsidiaries and is secured by a security interest in all of our accounts receivable and inventory and that of our subsidiaries, certain other assets related thereto, and all proceeds thereof. The credit facility includes a $50.0 million sub-facility available for the issuance of commercial and stand-by letters of credit. The credit facility also includes a sub-limit of up to $20.0 million for same-day advances.

At our election, borrowings under the credit facility will bear interest based upon one of the following rates: the prime rate announced by Wells Fargo Bank, National Association at its principal office in San Francisco, California; or the interest rate per annum at which deposits in U.S. dollars are offered by reference lenders to prime banks in designated markets located outside the United States. In each case, the applicable interest rate is increased by a margin imposed by the loan agreement.

The applicable margin for any date will depend upon the amount of available credit under the revolving facility. The loan agreement also imposes a commitment fee on the unused portion of the revolving loan facility. For the second quarter of 2009 and 2008, the weighted-average interest rate on all of our outstanding borrowings was 1.8% and 4.0%, respectively.

Although our loan agreement contains customary covenants, including but not limited to, restrictions on our ability and that of our subsidiaries to incur debt, grant liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our loan agreement at any given time is determined by the estimated liquidation value of these assets as determined by the lenders’ appraisers. Additional loan covenants include a requirement that we maintain minimum revolving credit availability equal to the lesser of $15.0 million or 7.5% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date. A default under our loan agreement also could significantly and adversely affect our ability to obtain additional or alternative financing. For example, the lenders’ obligation to extend credit is dependent upon our compliance with these covenants. As of July 4, 2009, we were in compliance with our bank covenants.

At July 4, 2009, borrowings under this credit facility were $18.0 million, bearing interest at rates ranging from 1.3% to 3.0%, and $115.3 million was available for future borrowings. At June 28, 2008, borrowings under this credit facility were $51.0 million, bearing interest at rates ranging from 3.7% to 5.0%, and $117.1 million was available to be borrowed. At July 4, 2009 and June 28, 2008, we had $5.4 million and $5.9 million, respectively, of outstanding commercial and stand-by letters of credit. The credit facility does not require a daily sweep lockbox arrangement except in specific circumstances, such as the occurrence of an event of default.

 

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Our borrowing base at July 4, 2009 and June 28, 2008 consisted of the following (in millions):

 

     July 4,
2009
    June 28,
2008
 

Accounts receivable availability

   $ 11.9      $ 12.4   

Inventory availability

     143.9        180.4   

Less: reserves

     (5.9     (4.7
                

Total borrowing base

   $ 149.9      $ 188.1   
                

Our aggregate borrowing base was reduced by the following obligations (in millions):

    

Ending loan balance

   $ 18.0      $ 51.0   

Outstanding letters of credit

     5.4        5.9   
                

Total obligations

   $ 23.4      $ 56.9   
                

Accordingly, our availability as of July 4, 2009 and June 28, 2008, respectively, was (in millions):

  

 

Total borrowing base

   $ 149.9      $ 188.1   

Less: obligations

     (23.4     (56.9

Less: minimum availability

     (11.2     (14.1
                

Total availability

   $ 115.3      $ 117.1   
                

Off-Balance Sheet Arrangements

Substantially all of the real property used in our business is leased under operating lease agreements, as described in Item 2 –Properties and Note 7 to the consolidated financial statements in the 2008 Form 10-K.

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

Seasonality

Historically, our business has been highly seasonal. In 2008, approximately 64% of our net sales and all of our net income occurred during the second and third quarters, principally during the period from April through August, which represents the peak months for boat buying, usage and maintenance in most of our markets.

Business Trends

Our research indicates that the U.S. boating industry continues to experience a down cycle, as evidenced by lower year-over-year sales in each of our business segments, lower new and used boat sales, and declining boat registrations in key states. There are a number of steps we are taking to respond to this challenging industry climate and lower sales expectations to ensure orderly management of the business and preserve our financial strength to survive the current downturn and maximize our opportunity when the marketplace recovers. We remain focused on reducing expenses and maximizing cash flow by:

 

   

controlling our operating expenses through variable expense management, as well as reengineering and streamlining business processes;

 

   

continuing to improve the quality of our inventory by reducing overstocked or discontinued goods;

 

   

executing the conservative budget we created for 2009, which focuses on reduced capital spending, expense control and cash management; and

 

   

further exploring methods and strategies to drive sales and market presence.

While we have seen sales increases in boat usage product categories in some markets during the second quarter of 2009, we expect consumers to carefully evaluate their needs-based boating purchases and continue to reduce spending on large ticket and discretionary items.

 

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We believe current economic conditions and turmoil in the financial markets have adversely impacted discretionary consumer spending and sales to our boat dealer and boat builder customers in an already challenging climate for the boating industry, and we believe that this economic weakness will continue to have a depressing effect on our sales revenue, with corresponding risks to our earnings and cash flow in 2009 (see the “Overview” and “Fiscal 2008 Compared with Fiscal 2007 — Segment revenues” sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2008 Form 10-K).

Internet Address and Access to SEC Filings

Our Internet address is www.westmarine.com. Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, in the “Investor Relations” portion of our website as well as through the Securities and Exchange Commission’s website, www.sec.gov.

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements within the “safe harbor” provisions of the Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” and similar expressions also identify forward-looking statements. These forward-looking statements include, among other things, statements that relate to West Marine’s future plans, expectations, objectives, business strategies, our ability to maintain or gain market share in a challenging economic environment, performance and similar projections, as well as facts and assumptions underlying these statements or projections. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.

West Marine’s operations could be adversely affected if the current economic conditions, the decline in spending in the boating industry and/or the turmoil in the financial markets, continue or worsen, or if unseasonably cold weather, prolonged winter-like conditions, natural disasters such as hurricanes, or extraordinary amounts of rainfall occur during the peak boating season in the second and third quarters. Risk factors that may affect our earnings in the future include the risk factors set forth in the 2008 Form 10-K, and those risks which may be described from time to time in West Marine’s other filings with the Securities and Exchange Commission. Except as required by applicable law, West Marine assumes no responsibility to update any forward-looking statements as a result of new information, future events or otherwise.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not undertake any specific actions to diminish our exposure to interest rate or currency rate risk, and we are not a party to any interest rate or currency rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in the 2008 Form 10-K.

Based on our operating results for the second quarter ended July 4, 2009, an 18 basis point change in the interest rate (10% of our weighted-average interest rate) affecting our floating financial instruments would have an effect of reducing our pre-tax income and cash flows by approximately $0.1 million over the next year (see Note 5 to the notes to consolidated financial statements in the 2008 Form 10-K).

ITEM  4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on our evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of July 4, 2009, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

On July 23, 2009, the SEC approved a final settlement between West Marine and the SEC regarding the previously-disclosed investigation of the Company. The investigation involved the facts and circumstances that gave rise to our 2007 restatement of financial results for fiscal years 2002 through 2005 and for the first three quarters of fiscal year 2006. Under the terms of the settlement, without admitting or denying any of the SEC’s allegations, we agreed to settle the charges by consenting to a permanent injunction against committing or causing any violations or future violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, as amended, and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended. The settlement does not require us to pay a monetary penalty and, therefore, we do not expect the settlement to have a material adverse effect on our future financial position or results of operation. This settlement concludes the SEC’s investigation of West Marine.

In December 2008, we entered into a settlement agreement in connection with a lawsuit filed on March 21, 2008 in the California Superior Court, County of Orange by a former hourly associate, seeking to represent himself and all similarly situated current and former hourly paid associates employed by us in the State of California, alleging, among other things, that we failed to provide meal and rest periods, to provide correct itemized statements, to pay discharged employees, and engaged in unfair business practices in violation of certain applicable sections of the California Labor Code and the California Business and Professions Code (see Item 3 –“Legal Proceedings,” in the 2008 Form 10-K for more information). Following the court’s preliminary approval of the settlement agreement on April 9, 2009, we reviewed the class data and determined that additional class members needed to be included. As a result, on July 1, 2009, the court approved the modified settlement terms agreed to by the parties. We do not expect the settlement, as modified, to have a material adverse effect on our future financial position or results of operations.

West Marine also is party to various legal proceedings and claims arising from normal business activities. Based on the facts currently available, West Marine does not believe that the disposition of matters that are pending or asserted, individually or in the aggregate, will have a material adverse effect on future financial results. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator or a settlement could adversely impact results of operations in any given period.

ITEM 1A – RISK FACTORS

We have included in Part I, Item 1A of our 2008 Form 10-K, a description of certain risks and uncertainties that could affect our business, future performance or financial condition, referred to as “Risk Factors.” These risk factors have not materially changed. Investors should consider these risk factors prior to making an investment decision with respect to our common stock.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

 

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ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

West Marine held its Annual Meeting of Stockholders on May 20, 2009. At this meeting, West Marine’s stockholders elected seven directors, approved an amendment to the West Marine, Inc. Associates Stock Buying Plan and ratified the selection of Deloitte and Touche LLP as West Marine’s independent auditors for the fiscal year ending January 2, 2010.

The following table sets forth the names of the nominees for director and the votes for and withheld with respect to each such nominee:

 

Nominee

   Votes For    Votes Withheld

Randolph K. Repass

   20,857,881    112,446

Geoffrey A. Eisenberg

   20,857,076    113,251

David McComas

   20,694,478    275,849

Alice M. Richter

   20,828,422    141,905

Peter Roy

   20,848,926    121,401

Daniel J. Sweeney

   20,665,086    305,241

William U. Westerfield

   20,856,931    113,396

In connection with the approval of an amendment to the West Marine, Inc. Associates Stock Buying Plan, 15,673,108 shares were voted in favor of the amendment, 39,782 against and 7,257 abstained, and there were 5,250,180 broker non-votes.

In connection with the ratification of the selection of Deloitte and Touche LLP as West Marine’s independent auditors for the year ending January 2, 2010, 20,903,424 shares were voted in favor of the selection, 54,574 against and 12,329 abstained.

ITEM 5 – OTHER INFORMATION

None.

 

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ITEM 6 – EXHIBITS

 

 3.1    Certificate of Incorporation of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to West Marine’s Annual Report on Form 10-K filed March 18, 2004).
 3.2    Bylaws of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to West Marine’s Annual Report on Form 10-K filed March 13, 2007).
 4.1    Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to West Marine’s Registration Statement on Form S-1 (Registration No. 33-69604)).
10.1    Lease Agreement, dated June 26, 1997, by and between Watsonville Freeholders, L.P. and West Marine Products Inc. for the Watsonville, California offices and other agreements thereto (incorporated by reference to Exhibit 10.14 to West Marine’s Quarterly Report on Form 10-Q for the quarter ended June 28, 1997).
10.1.1    First Amendment of Lease, dated July 27, 2005, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.2 to West Marine, Inc.’s Current Report on Form 8-K dated July 27, 2005 and filed with the Commission on July 28, 2005).
10.1.2    Second Amendment of Lease, dated December 22, 2005, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.3 to West Marine, Inc.’s Current Report on Form 8-K dated December 22, 2005 and filed with the Commission on December 29, 2005).
10.1.3    Third Amendment of Lease, dated November 30, 2006, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.4 to West Marine, Inc.’s Current Report on Form 8-K dated July 29, 2009 and filed with the Commission on July 30, 2009).
10.1.4    Fourth Amendment of Lease, dated July 29, 2009, by and between Watsonville Freeholders, L.P. and West Marine Products, Inc. (incorporated by reference to Exhibit 10.5 to West Marine, Inc.’s Current Report on Form 8-K dated July 29, 2009 and filed with the Commission on July 30, 2009).
10.2*    West Marine, Inc. Associates Stock Buying Plan, as amended and restated effective March 2002 (incorporated by reference to Exhibit 10.3 to West Marine’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2002).
10.2.1*    Amendment Number One to the Associates Stock Buying Plan (incorporated by reference to Exhibit 10.2 to West Marine’s Registration Statement on Form S-8 (Registration No. 333-143285)).
10.2.2*    Amendment Number Two to the Associates Stock Buying Plan (incorporated by reference to Exhibit 10.3 to West Marine’s Current Report on Form 8-K dated May 20, 2009 and filed May 21, 2009).
15.1    Letter regarding Unaudited Interim Financial Information.
31.1    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
31.2    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
32.1    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended.

 

* Indicates a management contract or compensatory plan or arrangement within the meaning of Item 601(b)(10)(iii) of Regulation S-K.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: August 10, 2009     WEST MARINE, INC.
    By:  

  /s/ Geoffrey A. Eisenberg

        Geoffrey A. Eisenberg
        Chief Executive Officer
    By:  

  /s/ Thomas R. Moran

        Thomas R. Moran
        Chief Financial Officer

 

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