ITEM 1 - BUSINESS
General
West Marine, Inc. ("West Marine" or the "Company") is the largest specialty retailer of recreational and commercial boating supplies and apparel in the United States. The Company has three divisions (Stores, Wholesale ("Port Supply"), and Catalog), which all sell after-market recreational boating supplies directly to customers. At year-end 1999, the Company offered its products through 227 stores in 38 states under the names West Marine and E&B Marine and through catalogs which it distributes several times each year. The Company's business strategy is to offer an extensive selection of high quality marine supplies and apparel to the recreational aftermarket for both sailboats and powerboats at competitive prices in a convenient, one-stop shopping environment emphasizing customer service and technical assistance. The Company is also engaged, through its Port Supply business line and its stores, in the wholesale distribution of products to commercial customers and other retailers.
West Marine was incorporated in Delaware in September 1993 as the holding company for West Marine Products, Inc., which was incorporated in California in 1976. Unless the context otherwise requires, "West Marine" and "the Company" refer to West Marine, Inc. and its subsidiaries. The Company's principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100 and its telephone number is (831) 728-2700.
Recent developments
The Company expanded its operations during 1999, opening 17 new stores and entering into new geographic markets in Alaska, Delaware, Nevada, Tennessee, and Utah. The Company opened a new prototype store in Point Richmond, California, which presents both merchandise and information visually for the consumer while enabling the stores' staff to efficiently serve a large volume of customers. Merchandise is arranged to enable customers to select everything needed to complete a project. The Company plans to incorporate many of the features of this prototype store in the 24 stores planned for remodeling in 2000.
The Company has transformed the marine supply industry to become the largest specialty retailer of recreational and commercial boating supplies and apparel. The Company continues to strengthen its offerings to powerboaters by more fully addressing on-water activities. Early in 2000 the Company plans to aggressively expand their water sports selection throughout the chain, and introduce a leading brand of outboard motors.
During 1999, West Marine formed a dedicated Internet team which rolled out a new international website in July. Since going "live" with this site, domestic and international sales through year-end have dramatically increased over the same period a year ago. In 2000, it is expected that all stores will have internet access to the website which offers more than 40,000 merchandise products focused on all boating segments. In addition, the Company believes the site drives business to both the retail stores through the store locator and through the catalog. The site is dynamically updated on a daily basis with any product, pricing and inventory changes.
Expansion strategy
Since opening its first store in 1975, the Company has grown through internal expansion and acquisitions, and operated 227 stores in 38 states at year-end 1999. As shown in the table below, the Company has achieved increasing geographic diversification within the United States in recent years. The following table sets forth, by geographic region, the number of stores open at the end of each of the following years:
The Company intends to pursue a growth strategy through geographic diversification and by pursuing acquisition opportunities that complement or expand its existing business. The Company's planned expansion is subject to a number of factors, including the adequacy of the Company's capital resources, as well as the Company's ability to locate suitable store sites and negotiate acceptable lease terms, its ability to hire, train and integrate associates, and to adapt its distribution and other operational systems. Acquisitions involve a number of risks, including potential adverse short-term effects on the Company's operating results, costs associated with the amortization of acquired intangible assets, and the risk that the attention of management will be diverted to the assimilation of the operations and personnel of the acquired business.
While the expansion plans of the Company are focused primarily on store operations, growth is also expected in the Port Supply and Catalog business lines. Port Supply has increased its customer base to include governmental and industrial businesses. Port Supply also added new delivery routes on the East Coast and in Northern California and hired additional sales personnel and telemarketing associates to boost sales. Catalog continues to focus marketing efforts in geographic areas not served by the Company's stores, including Canada and certain other international locations.
Merchandising
Merchandise sold by the Company can be divided into four general merchandise categories:
Marine Supplies and Sail Hardware. These products range from maintenance products to galley supplies and include brand name offerings, as well as "West Marine" private label merchandise. The Company will focus on basic marine hardware where it dominates in projects and applications. These are the largest combined categories in volume and gross profit dollars.
Electronics and Marine Technology. The Company carries a broad selection of the most current electronics equipment. The selection includes global positioning navigational systems, as well as other electronic equipment such as ship-to- shore radios, marine stereos, autopilots, fish finders and radars. The Company also offers private label VHF radios and other electronic equipment. The Company will also focus on expanding the Software and Navigation areas, which show high growth potential.
Soft goods. West Marine features a broad selection of high quality boating apparel and footwear including well-known brands. The Company also offers a selection of foul weather gear, shirts, shorts, jackets, hats, boots, and other apparel bearing the Company's private label.
Water Sports and Power Boating. West Marine continues to expand its selection of water sports, fishing, and power boating categories. It is believed that this segment of the market represents a growth opportunity for the Company. The Company plans to substantially increase the number of products in the water sports market it offers in 2000, and is currently providing such merchandise to 160 stores to expand the water sports category.
The Company strives to maintain consistent in-stock availability of merchandise. An individual store's merchandise mix is tailored to respond to local market conditions and buying preferences. Any items stocked by the Company but not available in a particular store can be shipped to the customer from the distribution centers. In addition, the Company's special orders department can acquire products that the Company does not normally stock. The Company has implemented extensive planning systems to provide forecasts to each of its key vendors.
The Company's policy is to offer its products at prices that are competitive with the prices charged by other national and regional marine supply specialty retailers and prices that are generally lower than prices charged by local independent operators. Replaceable price signage is clearly posted on shelving instead of directly on each item, enabling rapid price changes on items in the stores. The Company's commitment to offering competitive prices is supported by its price matching program where the Company will, for a period of 30 days, either match a competitor's price or refund the difference between the Company's price and the competitor's price. The Company's merchandising group makes most pricing decisions centrally. Store managers, however, are responsible for monitoring local competition and adjusting prices to remain competitive. The Company believes that its competitive pricing policy, together with its price matching program, are important factors in establishing and maintaining a favorable reputation among customers.
Sourcing and purchasing
The Company purchased merchandise from more than 950 vendors during 1999 and achieved significant efficiencies through quantity purchases and direct orders. West Marine offers many of the brands best known to its target customers. In 1999, no vendor accounted for more than 8% of the Company's merchandise purchases and the Company's 20 largest vendors accounted for approximately 40% of the Company's merchandise purchases. The Company deals with its suppliers on an order-by-order basis and has minimal long-term purchase contracts or other contractual assurances of continued supply or pricing.
The Company strives to maintain strong relationships with its vendors. The Company's buyers meet regularly with major vendors to stay abreast of new products, new technology and new pricing. In addition, West Marine conducts a yearly program at which key vendors are encouraged to discuss their business and their relationship with the Company's key executives and buyers. The Company works closely with its vendors, frequently sharing information regarding market research and the Company's performance and goals. The Company also receives cooperative advertising allowances from certain vendors.
The Company's private label merchandise is manufactured to the Company's specifications on a contract basis domestically, and to a lesser extent, in Europe and the Pacific Rim, and typically has higher gross margins than comparable brand name merchandise. The Company has no long-term contracts with its manufacturing sources and competes with other companies for production facilities and import quota capacity.
The Company's Executive Vice President of Merchandising oversees the purchasing of the Company's merchandise. This person supervises a Senior Vice President of Replenishment, Senior Vice President of Marketing, Vice President of Technical Product information and development, and a Vice President Merchandise Manager who supervise a group of buyers. Each buyer is responsible for specified product categories. The Company's buyers are also responsible for specifying private label merchandise and for contracting the manufacture of these goods and assuring their quality and delivery. The Company's Senior Vice President of Merchandise Planning and Allocation oversees a staff responsible for managing inventory levels in the distribution facilities and the stores, and for minimizing in-store out-of-stocks. Inventory managers are assisted by a sophisticated management information system that provides them with current inventory, price and volume information by SKU and recommended purchase quantities, allowing them to react quickly to market changes.
Customer service
The Company is committed to achieving "better than expected" customer satisfaction to encourage repeat business. To develop responsive, well-trained sales associates, the Company has devoted significant resources to developing and implementing extensive employee training programs aimed at increasing product knowledge and responsiveness to customer needs. In addition, the Company provides a price-matching program, special order capabilities and a "no hassle" satisfaction guarantee that permits customers who are not completely satisfied to return any items for an exchange, credit or refund. To educate customers on the latest developments in boating and product offerings, the Company conducts classes and seminars. Store managers, most of whom are drawn from the Company's sales associates, complete an intensive training program. The Company's master catalog also provides technical information relating to various marine subjects. The Company places great emphasis on new hire training, associate training, on-the-job training, additional self-paced training and field tests to help ensure that sales associates are thoroughly familiar with the technical elements of the Company's product offerings. To provide customers easy access to factory authorized repair service, the Company maintains an in-house service center at its facility in Hollister, California. Based on information received from its customers, the Company believes it has established a reputation for excellent customer service.
Site selection and store design
This year, in conjuction with a leading retail architecture and design group, the Company developed a new concept store in Point Richmond, California that further advances the art and science of marine retailing. This new store presents both merchandise and information in a visually exciting way that's designed to make the shopping experience fun while enabling a minimal store staff to efficiently serve a large volume of customers. Key areas of the store feature signage, displays and detailed step-by-step instructions to lead customers through a logical selection process with or without a sales associate's assistance. The Company plans to incorporate many of the features of this prototype store in the 24 stores slated for remodeling in 2000.
In selecting which markets to enter, the Company evaluates a number of criteria, including proximity to existing operations and the performance of catalog sales in that market, as well as the size and strength of potential competitors. In choosing specific sites within a market, the Company applies standardized site selection criteria which takes into account numerous factors including the number of boat slips and boats within a certain radius, local demographics and overall retail activity.
The Company's stores are conveniently located either near boat marinas or at central locations accessible to boaters. Most stores have large, readily identifiable signage, easy access from major roads and adequate customer parking. The stores currently range in size from approximately 3,000 to 15,000 square feet. Stores are generally open seven days a week, including most holidays.
The format of West Marine stores depends on the size of the store and the buying patterns of the local markets. Merchandise is displayed in functional product groupings clearly identified by signs hanging in each aisle. The layout of the store is designed to expose each customer to a large proportion of the store's product offerings and to stimulate customer purchases. For example, frequently purchased items such as rope, varnish and other maintenance supplies are generally displayed at the rear of the store, whereas items that are higher margin and have a strong impulse purchasing orientation are displayed in the front of the store. Eye-catching end-cap displays feature new product offerings or promotional items or focus on a particular product category, such as safety equipment. The Company's brightly lit, well-organized stores are designed to provide a convenient shopping environment.
Store operations
The Company's stores are organized into geographic regions with a regional manager responsible for each region. Regional managers report to the President of the Stores Division. Each region is organized into districts, each with a district manager responsible for the store operations within his or her district. The Company's district managers frequently visit the stores within their respective geographic areas to monitor financial performance and ensure adherence to the Company's operating standards. The typical staff for a West Marine store consists of one store manager, an assistant store manager and between four and twenty additional hourly sales associates, many of whom work part-time. Store managers make all hiring decisions, monitor and respond to local competitive forces.
Store and district managers participate in an incentive plan that ties compensation awards to the achievement of specified store profits, group performance goals and overall Company profits. The Company advocates broad- based participation in its stock option plans and all associates and managers are eligible to receive option grants.
Other business lines
The Company believes that its Catalog business line has served as an effective marketing and advertising tool for the Company's store operations. The Company mails several versions of a master merchandise catalog throughout the world. These versions are based on boat size and type and range from 604 to 892 pages. In addition, smaller seasonal full-color catalogs and flyers are mailed monthly. The catalogs also provide technical information regarding product offerings. The Company also rents mailing lists from boating magazines and other industry sources to better target its customers with its Catalog versions.
The Company designs and produces its catalogs at its executive offices in Watsonville, California, utilizing a desktop publishing system. This enables the Company to make both pricing and product changes until shortly before the catalogs are printed.
The Company receives all catalog orders by mail, fax, Internet or telephone at its Watsonville, California call center. Merchandise is then distributed to customers from one of the Company's distribution facilities. The Hollister, California distribution facility services primarily the West Coast while the Rock Hill, South Carolina distribution facility services customers east of the Rockies.
Port Supply was created to address a broader customer base and to take advantage of the Company's purchasing and distribution efficiencies. The Company distributed marine supplies to approximately 20,000 wholesale customers in 1999, including customers involved in boat sales, boat building, boat repair, yacht chartering and marine supply retailers who resell the items. In addition, Port Supply sells to industrial and government customers who use marine related products.
The Company has addressed the growing significance of e-commerce in the marketplace, and has redesigned its website
to target all segments of boating enthusiasts. The site was made available in July 1999 and is updated on a daily basis with any product, pricing and inventory changes. Orders are filled in the same manner as catalog orders. In mid-2000, Port Supply expects to launch its business-to-business e-commerce website, and projected for completion in 2000, all stores will have Internet access to the website. The website includes online advisors, technical information areas, news, feature stories and other information of interest to boaters.
The Company's Boat Insurance program experienced significant revenue growth in 1999. Additional services-oriented programs were developed in late 1999 to better serve customers as well as to support the growth of the Insurance program. In early 2000, the Company anticipates introducing an on-water boat towing program as well as a boat financing program. These services provide a complete one-stop source for customers, and will contribute to significant revenue growth in 2000.
Distribution
The Company has two distribution centers located on the West and East Coasts. The West Coast distribution center is approximately 162,000 square feet and is located in Hollister, California. The East Coast distribution center is approximately 457,000 square feet and is located in Rock Hill, South Carolina. The Distribution Centers support all of West Marine's business units; Retail Stores, Catalog and Port Supply.
Vendors ship products to one of the distribution centers where the merchandise is inspected, verified against the original purchase order, ticketed and repackaged for shipment to stores and customers. Both distribution centers use radio frequency devices for managing a majority of the distribution centers procedures. Various methods of transportation are used to ship products, including truck and air freight, as well as the Company's owned trucks and vans. The inventory purchasing system maintains stock levels for each SKU in each distribution center. Normally, merchandise is sent to stores once a week, however, during certain seasonal periods, many stores may receive more than one shipment per week.
Information systems
West Marine has deployed state-of-the-art business systems that provide Company management with advanced tools and daily information on sales, gross margins and inventory levels. The Company utilizes an integrated software system that runs on multiple IBM AS/400 computers. This system has been designed to support all aspects of the business including Retail, Catalog and Port Supply sales with emphasis on improved productivity and reduced cost. Specific programs have focused on features to insure accuracy and safeguard both data and material. All purchasing functions including planning are processed through a secondary software application that is fully integrated with the core system.
Each of the Company's stores is linked to the Company's headquarters through a proven, dedicated network that provides access to up-to-the-minute information and secure bi-directional communication for voice, inventory, pricing, credit card approval, sales and customer service functions. The point-of-sale system keeps a record, updated daily, of each merchandise item from receipt to sale. The system is designed to support the convergence of technologies supporting all areas of the Company's operations, including Internet.
The Company believes that the systems it has deployed will provide a competitive advantage and enable it to continue to improve customer service, operational efficiency and management's ability to monitor critical performance factors.
Marketing
The Company's overall marketing objective is to communicate the attributes of its brand while creating a compelling "value equation" for its customers. The West Marine brand stands for superior selection, friendly and knowledgeable service, competitive prices and shopping convenience.
The Company markets its products and services through direct mail catalogs and flyers, space advertisements in boating specialty publications, cable television, newspapers and the internet.
The Company also sponsors a number of boating-related events, ranging from sailing regattas and fishing derbies, to waterway clean-up campaigns. These events are designed to encourage participation in boating and to increase the number of people enjoying the boating lifestyle.
The Company rolled out a new customer affinity points program in March of 2000 after successful pilot testing was
completed in 1999. The West Advantage program enables customers to earn incentives in the form of Company gift certificates based on their purchase activity. The Company also plans to offer a private label credit card to its customers in 2000. This program will reward loyal customers and attract new customers by offering the option of deferred billing on major purchases.
Competition
The retail market for marine supplies is highly competitive and the Company expects the level of competition to increase. The Company's stores compete with other national specialty marine supply stores such as Boat/U.S. and Boater's World. Many of these competitors have stores in the markets in which the Company now operates and in which it plans to expand. The Company also competes with a wide variety of local and regional specialty stores and, to a lesser extent, sporting good stores and mass merchants. The Company also has a number of competitors in the Catalog and wholesale distribution of marine products. Certain of the Company's competitors have greater financial, marketing and other resources than the Company.
The principal factors of competition in the Company's marketplace are quality, availability, price, customer service, convenience, and access to a variety of merchandise. The Company believes that it competes successfully on the basis of all such factors.
Trademarks and service marks
The Company is the owner in the United States of the trademarks and service marks "West Marine" and "E&B Marine", among others. These marks are registered with the United States Patent and Trademark Office. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal.
As of January 1, 2000, the Company had 3,576 associates, of whom approximately 2,066 were full-time and approximately 1,510 were part-time and temporary. In addition, a significant number of seasonal associates were hired during the Company's peak selling seasons.
Executive officers
The following table sets forth information regarding the executive officers of the Company:
Randolph K. Repass has been Chairman of the Board of the Company since founding the Company in 1968 and was the Company's Chief Executive Officer from 1968 until April 1995 and August 1998 to November 1998. He served as President from 1968 to 1990 and from August 1993 to March 1994. Mr. Repass began his career in engineering and marketing with Fairchild Semiconductor in 1966. He is President of Sail America, a sailing industry association. Mr. Repass is also Chairman of New England Ropes. He received a B.S. degree in electrical engineering from Duke University.
John Edmondson joined West Marine as President and Chief Executive Officer and a director effective November 13, 1998. Since 1992, Mr. Edmondson held the roles of Corporate Chief Operating Officer as well as President and Chief Executive Officer of Duty Free International Inc. Mr. Edmondson began his career with Allied Store's Maas Bros./Jordan Marsh division and has held various senior management positions with several retailers. Prior to joining Duty Free International, Inc., Mr. Edmondson was General Manager of Marriott's Host Airport Merchandise and their Sports and Entertainment divisions.
Richard E Everett joined West Marine in 1980 and became President of Stores Division in August 1998. Mr. Everett has been Chief Operating Officer and has served as a director since 1994. Prior to his current position in West Marine, Mr. Everett was Executive Vice President of Store Operations. He currently oversees the Company's store operations,
visual merchandising, real estate, store planning, and construction. During his career with West Marine, Mr. Everett has held various positions since joining the Company in 1983. He founded and operated a sailboat rigging company prior to joining West Marine. Mr. Everett received a B.S. degree from the University of California, Berkeley.
Mike Edwards joined the Company in July 1999 as Executive Vice President of Merchandising. Prior to that, Mr. Edwards was Vice President of General Merchandise Manager of Golf Smith, a specialty retailer, from Sept. 1998 to May 1999. Also, Mr. Edwards was Senior Vice President and General Merchandise Manager for CompUSA, a specialty retailer, from 1990 to 1998. He holds a B.S. degree in Business and Marketing from Drexel University.
Russell Solt joined the Company in January 2000 as Senior Vice President, Chief Financial Officer and Secretary. Prior to that, Mr. Solt was President of Venture Stores, a discount retailer, from 1998 to 1999 and Executive Vice President of Finance and Administration from 1995 to 1998. Also, Mr. Solt was Chief Financial Officer for Williams Sonoma, a specialty retailer, from 1994 to 1995. He holds a B.S. in Business Administration from California State University, Northridge and is a CPA.
Patrick Murphy joined the Company in March 1999 as Senior Vice President, Distribution and Logistics. Prior to that, Mr. Murphy was Vice President of Logistics for Borders Group, Inc., a specialty retailer, from 1993 to 1999. Mr. Murphy holds a B.S. degree in Marketing and Economics from the University of Missouri-Kansas City.
ITEM 2
ITEM 2 - PROPERTIES
The Company's corporate offices are located in a 90,000 square foot facility in Watsonville, California, which the Company occupies under a lease expiring in 2006. The Company operates a 162,000 square foot distribution center located in Hollister, California with a lease that expires in 2011. The Company operates a 457,000 square foot distribution center located in Rock Hill, South Carolina with a lease that expires in 2007.
At January 1, 2000, the Company's 227 stores included an aggregate of approximately 1.6 million square feet of space. The Company's stores are all leased, typically for a ten-year term, with options to renew for additional terms. In most cases, the Company pays a fixed rent. Substantially all of the leases require the Company to pay insurance, utilities, real estate taxes and repair and maintenance expenses.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
West Marine, Inc. common stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol WMAR. The following table sets forth for the period indicated, the high and low closing sales prices for the Company's common stock, as reported by the Nasdaq Stock Market.
As of February 29, 2000, there were approximately 1,491 holders of record of the Company's common stock.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA (in thousands, except per share and operating data)
(1) Includes a $3.3 million pre-tax charge for expenses related to the distribution center move in 1998. The impact of this charge represents $0.08 per basic and diluted share. (2) Includes a $3.0 million pre-tax charge for expenses related to the integration of E&B Marine, Inc. in 1996. The impact of this charge represents $0.11 and $0.10 per basic and diluted share, respectively.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company Overview
West Marine distributes its merchandise through three divisions, Stores (retail and wholesale), under the names of West Marine and E&B Marine, and Catalog (retail and Internet) as well as Port Supply (wholesale). West Marine operated 227 stores in 38 states as of January 1, 2000, compared to 212 stores in 34 states as of January 2, 1999. All references to 1999, 1998, and 1997 refer to the Company's fiscal years ended on January 1, 2000, January 2, 1999, and January 3, 1998, respectively. 1999 and 1998 were 52-week years. 1997 was a 53-week year.
Results of Operations
The following table sets forth certain income statement components expressed as a percent of sales:
1999 Compared to 1998
West Marine's fiscal 1999 results reflect continuing progress in the implementation of the Company's strategic plan to improve operating fundamentals and execute initiatives to stimulate growth. In 1999, West Marine achieved record net sales of $486.5 million, an increase of $37.2 million, or 8.3%, over net sales of $449.3 million in 1998. Net income of $8.7 million, or $0.50 per diluted share, in 1999 compares to net income of $1.1 million, or $0.06 per diluted share, in 1998. Results of operations for 1998 included $3.3 million of expenses incurred by the Company for the relocation and consolidation of West Marine's two East Coast distribution facilities into a single facility located in Rock Hill, South Carolina.
Net sales attributable to the Company's Stores division increased $25.7 million, or 7.0%, to $395.5 million in 1999, primarily due to the addition of 17 new stores, which contributed $18.8 million to net sales growth. Comparable store net sales increased $6.9 million, or 1.8%, in 1999. Port Supply net sales increased $8.6 million, or 23.1%, in 1999 primarily as a result of the Company's continued territory expansion, new sales marketing programs, and significant improvements in the Company's distribution center fill rates and merchandise shipment rates. Catalog net sales increased $2.7 million, or 6.5%, to $44.4 million. Catalog net sales included Internet sales of $2.3 million and $0.6 million, respectively, in 1999 and 1998.
Gross profit increased 14.9% in 1999 compared to 1998. Gross profit as a percentage of net sales increased to 26.8% in 1999 from 25.2% in 1998, primarily reflecting reduced distribution and shipping costs, as well as a shift to a more profitable product mix.
Selling, general and administrative expenses increased $8.5 million, or 8.4%, in 1999, primarily due to increases in direct expenses related to the growth in Stores, consulting costs related to process improvements, and higher marketing costs. Selling, general and administrative expenses as a percentage of net sales were unchanged from 1998.
Income from operations increased $11.7 million, or 135.4%, from 1998 to 1999. As a percentage of net sales, income from operations increased to 4.2% in 1999, from 1.9% in 1998.
Interest expense declined $441,000, or 7.3%, in 1999 compared to 1998, primarily as a result of a lower average borrowings partially offset by a rise in interest rates.
1998 Compared to 1997
Net sales for 1998 increased 8.2% to $449.3 million, compared to $415.2 million in 1997. This increase was primarily attributable to the increase in net sales from the Company's Stores. Stores net sales increased 10.5% to $369.8 million. The increase in Stores net sales was primarily due to 28 additional West Marine Stores opened in 1998. Net sales from comparable West Marine Stores increased 1.2% and contributed $3.8 million, or 10.9% of the increase. The E&B Marine locations entered the Company's comparable Stores net sales base in August 1997. Catalog net sales decreased 7.8% to $41.7 million. The Company believes that the decrease in Catalog net sales was attributable to new Store
openings by the Company and its competitors, in addition to service problems related to the distribution center. Port Supply net sales increased 5.6% to $37.3 million, resulting primarily from the Company's continued territory expansion and additional van delivery routes.
Gross profit decreased 7.7% in 1998 compared to 1997. Gross profit as a percentage of net sales decreased to 25.2% in 1998 from 29.6% in 1997, primarily reflecting increased payroll, equipment rental and supply expenses at the Rock Hill distribution center as well as increased inventory shrink.
Selling, general and administrative expenses increased $7.7 million, or 8.2%, in 1998, primarily due to increases in direct expenses related to the growth in Stores. Stores direct expense represented approximately 72.1% of the $7.2 million increase. As a percentage of net sales, selling, general and administrative expenses remained relatively flat due to the Company's advertising and promotional cost reduction efforts.
In the first quarter of 1998, the Company incurred $3.3 million of expenses for the relocation and consolidation of West Marine's two East Coast distribution facilities into a single facility located in Rock Hill, South Carolina.
Income from operations decreased $20.5 million, or 70.2%, from 1997 to 1998. As a percentage of net sales, income from operations decreased to 1.9% in 1998 from 7.0% in 1997.
Interest expense increased $2.4 million or 67.3%, in 1998 compared to 1997, primarily as a result of higher average borrowings under the Company's line of credit during 1998.
Liquidity and Capital Resources
During 1999, the Company's primary sources of capital have been income from operations and bank borrowings. Net cash provided by operations during 1999 was $35.3, consisting primarily of earnings after tax of $22.8 million excluding depreciation and amortization, a $12.4 million increase in accounts payable and accrued expenses, a $3.1 million increase in provision for deferred income taxes and a $2.5 decrease in prepaid expenses and other current assets offset by a $5.8 million increase in inventory. The inventory increase was attributable to a contingency plan for possible Y2K issues. Net cash used in financing activity was $14.5 million, consisting of $15.6 repayment of the Company's line of credit and long-term debt offset by $1.2 million received from the exercise of stock options and the net sales of common stock pursuant to the associate stock purchase plan.
West Marine's primary cash requirements are related to capital expenditures for new Stores, including leasehold improvement costs and fixtures, and merchandise inventory for Stores. The Company expects to spend between $13.0 to $15.0 million on capital expenditures during 2000. The Company intends to pay for its expansion through cash generated from operations and bank borrowings. The Company believes that cash from operations together with the current credit line will be sufficient to fund the Company throughout 2000.
At the end of 1999, the Company had outstanding a $40.0 million senior guarantee note which matures on December 23, 2004, with the first annual principal payment due on December 23, 2000. During 1999, the note was amended to bear interest at 7.6%. The note is unsecured, and contains certain restrictive covenants including fixed charge coverage and debt to capitalization ratios, and minimum net worth.
The Company has an $80.0 million credit line. In January 2000, the line was replaced with a credit line that extends the due date to January 2, 2003. Depending on the Company's election at the time of borrowing, the line bears interest at either the bank's reference rate or LIBOR plus a factor of up to 1.0% to 2.25%. At the end of 1999, borrowings from the credit line were $39.5 million bearing interest at rates ranging from 7.78% to 9.0%. At the end of 1998, borrowings from the credit line were $53.0 million bearing interest at rates ranging from 6.1% to 7.4%.
In addition, The Company has available a $2.0 million revolving line of credit with a bank, expiring January 2, 2003. The line bears interest at the bank's reference rate (8.50% at the end of 1999) and has a ten-day paydown requirement. At the end of 1999 and 1998, no amounts were outstanding under the revolving line of credit.
Both of the aforementioned credit lines are unsecured and contain various covenants which require maintaining certain financial ratios, including debt to earnings and current ratios. The covenants include minimum levels of net worth and limitations on levels of certain investments. These covenants also restrict the repurchase or redemption of the Company's common stock and payment of dividends, investments in subsidiaries and annual capital expenditures.
At the end of 1999, the Company had $364,000 of outstanding stand-by letters of credit, compared to $100,000 at year-
end 1998. At the end of 1999 and 1998, the Company had $520,000 and $613,000, respectively, of outstanding commercial letters of credit.
During 1999 and 1998, the weighted average interest rates in effect were 6.9% and 6.4% respectively.
Year 2000 and Other System Enhancements
During 1999, the Company implemented a plan to ensure its computer systems and applications were compliant for the year 2000 ("Y2K"). Systems programming and testing of the modifications were completed during the first six months of 1999, and final integration testing and conversions to new systems were completed and implemented in the third quarter of 1999. The Company did not experience any significant adverse effects of Year 2000 system modifications.
Due to the Company's focus on Y2K issues during 1999, certain other planned systems enhancement and improvement projects were deferred until 2000. The deferral of these projects is not expected to have a material adverse effect on the Company's results of operations, financial condition, or liquidity.
As of January 1, 2000, the Company had incurred a total of $280,000 to convert systems to Y2K compliance. In the opinion of management, no additional expenses will be incurred related to the Y2K systems conversion.
Also during 1999, the Company successfully upgraded certain systems to improve operational efficiencies, improve services to customers, and provide better information to management. System upgrades in 1999 included the point of sale (POS) system, the wholesale sales system, the warehouse management, and the basic operating systems on the AS400 system.
Seasonality
Historically, the Company's business has been highly seasonal. The Company's expansion into new markets has made it even more susceptible to seasonality, as an increasing percentage of Stores sales occur in the second and third quarters of each year. In 1999, 62.8% of the Company's net sales and all of its net income occurred during the second and third quarters, principally during the period from April through July, which represents the peak boating months in most of the Company's markets. Management expects net sales to become more susceptible to seasonality and weather as the Company continues to expand its operations.
Business Trends
West Marine's growth in net sales has been principally fueled by geographic expansion through the opening of new stores and, to a lesser extent, by comparable stores net sales increases. Although the Company believes that the Catalog and Port Supply divisions will continue to grow, future Company net sales and profit growth, if any, will be increasingly dependent on the opening and profitability of new stores. The Company's Catalog division continues to face market share erosion in markets where stores have been opened by either the company or competitors. Management expects that this trend may continue. To address the growing significance of e-commerce in the marketplace, the Company redesigned its website to target all segments of boating enthusiasts. Since launching the site, sales have dramatically increased over 1998 sales. The Company has allocated resources to further develop the website to generate increases in international and domestic sales.
In most of the Company's product categories, prices have remained stable or have declined over the last three years, a trend which management expects is likely to continue. As a result, net sales increases during such periods have not been attributable to increases in prices. In recent years, competition has increased which has adversely affected the Company's gross profits. These competitive and pricing pressures are likely to continue.
ITEM 7A
ITEM 7A - Quantitative and Qualitative Disclosures about Market Risk
The Company does not undertake any specific actions to cover its exposure to interest rate risk and is not a party to any interest rate risk management transactions. The Company does not purchase or hold any derivative financial instruments.
A 69 basis point change in interest rate (10% of the Company's weighted average interest rate) affecting the Company's floating financial instruments would have an effect of approximately $280,000 on the Company's pretax income and
cash flows over the next year, and would have an immaterial effect on the fair value of the Company's fixed rate financial instruments (see "Notes to Consolidated Financial Statements - Line of Credit and Long-Term Debt").
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of
The statements in this filing that relate to future plans, events, expectations, objectives, or performance (or assumptions underlying such matters) are forward- looking statements that involve a number of risks and uncertainties. Set forth below are certain important factors that could cause the Company's actual results to differ materially from those expressed in any forward-looking statements.
The Company's Catalog division has faced market share erosion in areas where Stores have been open by either the Company or its competitors. Management expects this trend to continue. The Company's growth has been fueled principally by the Company's Stores operations. The Company's continued growth depends to a significant degree on its ability to continue to expand its operations through the opening of new Stores and to operate these Stores profitably, as well as increasing net sales at its existing Stores. The Company's planned expansion is subject to a number of factors, including the adequacy of the Company's capital resources and the Company's ability to locate suitable store sites and negotiate acceptable lease terms, to hire, train and integrate employees and to adapt its distribution and other operations systems. In addition, acquisitions involve a number of risks, including the diversion of management's attention to the assimilation of the operations and personnel of the acquired business, potential adverse short-term effects on the Company's operating results, and amortization of acquired intangible assets.
The markets for recreational watersports and boating supplies are highly competitive. Competitive pressures resulting from competitors' pricing policies have adversely affected the Company's gross profit and such pressures are expected to continue. In addition, the Company's operations could be adversely affected if unseasonably cold weather, prolonged winter conditions or extraordinary amounts of rainfall were to occur during the peak boating season in the second and third quarters.
Additional factors which may affect the Company's financial results include inventory management issues, the impact of e-commerce, fluctuations in consumer spending on recreational boating supplies, environmental regulations, demand for and acceptance of the Company's products and other risk factors disclosed from time to time in the Company's SEC filings.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
[Deloitte & Touche Letterhead]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
West Marine, Inc.,
We have audited the accompanying consolidated balance sheets of West Marine, Inc. and subsidiaries (the "Company") as of January 1, 2000 and January 2, 1999 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 1, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 1, 2000 and January 2, 1999 and the results of it operations and its cash flows for each of the three fiscal years in the period ended January 1, 2000 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California February 17, 2000
WEST MARINE, INC.
CONSOLIDATED BALANCE SHEETS JANUARY 1, 2000 AND JANUARY 2, 1999 (in thousands, except share data)
WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share and store data)
WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
See notes to consolidated financial statements.
WEST MARINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
WEST MARINE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - West Marine, Inc. (the "Company"), a Delaware corporation, is a specialty retailer and wholesaler of boating supplies and apparel, which it markets through 227 retail stores in the United States and mail order catalogs.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of West Marine, Inc. and its subsidiaries. Intercompany balances and transactions are eliminated in consolidation.
FISCAL YEAR - The Company's fiscal year-ends on the Saturday closest to December 31 based on a 52- or 53-week year. The years 1999, 1998, and 1997 ended on January 1, 2000, January 2, 1999, and January 3, 1998, respectively. 1999 and 1998 were 52-week years. 1997 was a 53-week year.
ACCOUNTING ESTIMATES - The preparation of consolidated financial statements in conformity with generally accepted accounting principles 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
MERCHANDISE INVENTORIES are stated at the lower of cost (first-in, first-out method) or market. Cost includes acquisition and distribution costs that have been capitalized in merchandise inventories in order to better match net sales with these related costs.
DEFERRED CATALOG AND ADVERTISING COSTS - The Company capitalizes the direct cost of producing and distributing its catalogs. Capitalized catalog costs are amortized, once the catalog is mailed, over the expected net sales period, which is generally six months. Deferred catalog costs amounted to $110,000 and $1,893,000 at year-end 1999 and 1998, respectively. Advertising costs, which are expensed as incurred, amounted to $14.0 million, $12.6 million, and $13.8 million in 1999, 1998 and 1997, respectively.
PROPERTY AND EQUIPMENT is stated at cost. Furniture and equipment is depreciated using the straight-line method over the estimated useful lives of the various assets, which range from three to five years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. Whenever events or changes in circumstances have indicated that the carrying amount of its assets might not be recoverable, the Company, using its best estimates based on reasonable and supportable assumptions and projections, has reviewed for impairment the carrying value of long-lived assets.
PRE-OPENING COSTS are expensed as incurred.
INTANGIBLES AND OTHER ASSETS - The excess of cost over tangible net assets acquired is amortized over periods ranging from 5 to 40 years. Debt issuance costs are amortized over the terms of the related credit agreements. The Company periodically assesses the recoverability of the carrying value of its goodwill based on a review of projected undiscounted cash flows of the related operations. Accumulated amortization at the end of 1999 and 1998 was $5.0 million and $3.7 million, respectively.
DEFERRED RENT - Certain of the Company's operating leases contain predetermined fixed increases of the minimum rental rate during the lease term. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amount charged to rent expense and the rent paid as deferred rent.
INCOME TAXES - The Company's income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires the asset and liability method of accounting.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of cash, accounts receivable, accounts payable and long-term debt approximates the estimated fair values.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no compensation cost has been recognized for its fixed cost stock option plans or its associate stock purchase plan. In 1999, the Company recognized $138,000 of compensation expense related to a restricted stock award.
RECLASSIFICATIONS - Certain 1998 and 1997 amounts have been reclassified to conform with the 1999 presentation.
COMPREHENSIVE INCOME - Comprehensive income consists of net income or loss for the current period and other comprehensive income (incomes, expenses, gains and losses that currently bypass the income statement and are reported directly as a separate component of equity). The Company's comprehensive net income equals net income for all periods presented.
CAPITALIZED INTEREST - The Company's policy is to capitalize interest on debt incurred that is directly related to major construction projects. During 1999, 1998, and 1997, the Company incurred approximately $6.1 million, $6.7 million, and $4.2 million, respectively, of interest, of which approximately $423,000, $576,000, and $587,000, respectively, was capitalized.
NET INCOME PER SHARE - Basic net income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if options to issue common stock were exercised into common stock.
The following is a reconciliation of the Company's basic and diluted net income per share computations (shares in thousands):
The following options were not included in the computation of diluted EPS because such options' exercise price was greater than the average market price of the common shares (shares in thousands):
NEW ACCOUNTING PRONOUNCEMENTS - In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 137, "Accounting for Derivative Instruments." SFAS 137 extends the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. As amended by SFAS 137, SFAS 133 is effective for fiscal years beginning after June 15, 2000 and is not to be applied retroactively. In the opinion of management, SFAS No. 133 will not have a material effect on the Company's financial position or results of operations.
NOTE 2: PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at year-end 1999 and 1998 (in thousands):
NOTE 3: LINES OF CREDIT AND LONG-TERM DEBT
At the end of 1999, the Company had outstanding a $40.0 million senior guarantee note which matures on December 23, 2004, with the first annual principal payment due on December 23, 2000. During 1999, the note was amended and bears interest at 7.6%. The note is unsecured, and contains certain restrictive covenants including fixed charge coverage and debt to capitalization ratios, and minimum net worth.
The Company has an $80.0 million credit line. In January 2000, the line was amended to extend the due date to January 2, 2003. Depending on the Company's election at the time of borrowing, the line bears interest at either the bank's reference rate or LIBOR plus a factor of up to 1.0% to 2.25%. At the end of 1999, borrowings from the credit line were $39.5 million bearing interest at rates ranging from 7.78% to 9.0%. At the end of 1998, borrowings from the credit line were $53.0 million bearing interest at rates ranging from 6.1% to 7.4%.
In addition, the Company has available a $2.0 million revolving line of credit with a bank, expiring January 2, 2003. The line bears interest at the bank's reference rate (8.50% at the end of 1999) and has a ten-day paydown requirement. At the end of 1999 and 1998, no amounts were outstanding under the revolving line of credit.
Both of the aforementioned credit lines are unsecured and contain various covenants which require maintaining certain financial ratios, including debt to earnings and current ratios. The covenants include minimum levels of net worth and limitations on levels of certain investments. These covenants also restrict the repurchase or redemption of the Company's common stock and payment of dividends, investments in subsidiaries and annual capital expenditures.
At the end of 1999, the Company had $364,000 of outstanding stand-by letters of credit, compared to $100,000 at year-end 1998. At the end of 1999 and 1998, the Company had $520,000 and $613,000, respectively, of outstanding commercial letters of credit.
During 1999 and 1998, the weighted average interest rates in effect were 6.9% and 6.4% respectively.
At year-end 1999 and 1998, long-term debt consisted of the following (in thousands):
At year-end 1999, future minimum principal payments on long-term debt were as follows (in thousands):.
NOTE 4: RELATED PARTY TRANSACTIONS
The Company purchases merchandise from a supplier in which the Company's Principal Stockholder owns stock and is a member of the board of directors. Additionally, the Principal Stockholder's brother is the president and his father is a member of the board of directors and a major stockholder of the supplier. The Company's cost of net sales during 1999, 1998, and 1997 included $7.2 million, $6.4 million, and $5.2 million, respectively, related to purchases from such related party. Accounts payable to the supplier at year-end 1999 and 1998 were $215,000 and $384,000, respectively.
The Company leases its corporate headquarters and two retail stores from three partnerships in which the Company's Principal Stockholder is the general partner (see Note 5). In addition, one retail Store is leased directly from the Principal Stockholder.
NOTE 5: LEASES
The Company leases certain equipment, retail stores, its distribution centers and its corporate headquarters. The Company also sublets space at various locations with both month-to-month and noncancelable sublease agreements. The operating leases of certain Stores provide for rent adjustments based on the consumer price index and planned rent increases.
The aggregate minimum annual rental payments and sublease income under noncancelable leases in effect at year-end 1999 were as follows (in thousands):
The cost and related accumulated amortization of assets under capital leases aggregated $5.5 million and $2.1 million, respectively, at year-end 1999 and $5.5 million and $1.1 million, respectively, at year-end 1998.
A summary of rent expense by component for 1999, 1998, and 1997 follows (in thousands):
NOTE 6: STOCK OPTION PLANS
Fixed Stock Option Plans
The Company's 1990 Stock Option Plan ("the 1990 Plan") provides for options to be granted to employees and directors for the purchase of an aggregate of 2.1 million shares of common stock at prices not less than 100% of the fair market value at the date of grant. Options under this plan are generally exercisable equally over five years from the date of the grant, unless otherwise provided.
The Company's 1993 Omnibus Equity Incentive Plan as amended (the "1993 Plan") provides for options to be granted for the purchase of an aggregate of 5.2 million shares of common stock at prices not less than 85% of fair market value at the date of the grant. Options under this plan are generally exercisable equally over five years from the date of the grant, unless otherwise provided.
The Company's Non-employee Director Stock Option Plan ("the Director Plan") has reserved 200,000 shares of common stock for issuance to non-employee directors of the Company. Options are granted at 100% of fair market value at the date of the grant, and are generally exercisable six months after the grant date.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method of accounting for stock-based compensation as of the beginning of 1995. Under SFAS 123, the fair value of stock-based awards is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: four to eight year expected life from date of grant; stock volatility of 56%, 63%, and 62%, respectively, in 1999, 1998, and 1997; risk-free interest rates of 4.96% to 5.59% in 1999, 5.03% to 5.27% in 1998, and 5.65% to 6.44% in 1997; and no dividends during the expected term. The Company's calculations are based on a single option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the 1999, 1998, and 1997 awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been $7.2 million in 1999 ($0.42 per basic share and $0.41 per diluted share), $0.1 million in 1998 ($0.01 per basic and diluted share), and $14.4 million in 1997 ($0.86 per basic share and $0.82 per diluted share). The impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation. Accordingly, the 1999, 1998, and 1997 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all future applicable stock options.
A summary of stock option transactions under the fixed stock option plans for the years 1999, 1998, and 1997 follows:
Additional information regarding options outstanding at year-end 1999 is as follows:
At year-end 1999, 1,372,468 shares were available for future grants under the 1993 Plan, and 61,208 shares were available under the Director Plan. The Company does not intend to grant any additional options under the 1990 Plan.
Associate Stock Purchase Plan
The Company has a stock-buying plan, covering all eligible associates. Participants in the plan may purchase West
Marine stock through regular payroll deductions. The stock is purchased on the last business day of April and October at 85% of the fair market value. In 1999, 1998, and 1997, respectively, 138,121, 75,639 and 46,025 shares were issued under the plan at weighted average prices of $6.53, $9.85, and $17.74, respectively. The weighted average fair value of the 1999, 1998, and 1997 awards was $9.22, $13.12 and $22.95, respectively. At the end of 1999, 62,039 shares were reserved for future issuances under the stock-buying plan.
NOTE 7: INCOME TAXES
The components of the provision for income taxes for 1999, 1998, and 1997 are as follows (in thousands):
The provision of income taxes consisted of the following:
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts measured by tax laws. Temporary differences that give rise to deferred tax assets (liabilities) are as follows (in thousands):
At year-end 1999, the Company had unused federal tax net operating loss carryforwards, attributable to E&B Marine, of approximately $6.2 million, which expire in the years 2002 through 2003. The utilization of the tax loss carryforwards may be limited in subsequent years as a result of prior ownership changes as required under sections 381 and 382 of the Internal Revenue Code.
NOTE 8: EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan covering all eligible associates. The Company matches 33% of an employee's contribution up to 5% of the employee's annual compensation. The Company's contributions to the plan for 1999, 1998, and 1997 were $391,000, $366,000, and $330,000, respectively.
In 1998, the Company adopted SFAS 132, "Employer's Disclosures about Pensions and Other Post-Retirement Benefits." SFAS 132 standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable.
The Company has a suspended defined benefit plan ("the Defined Benefit Plan"), under which the minimum benefit contribution is calculated by the plan actuaries. The Defined Benefit Plan provides an existing participant with the excess, if any, of amounts required under the Company's pension formula over the value of the retiree's account balance as of the date the Defined Benefit Plan was suspended (January 28, 1994). A discount rate of 6.75% and 5.25% and a rate of return on assets of 8% were used by the actuary in determining the Defined Benefit Plan status at year-end 1999 and 1998, respectively. The Defined Benefit Plan invests primarily in publicly traded stocks and bonds.
The actuarial present value of the benefit obligations for 1999 and 1998 was (in thousands):
NOTE 9: SEGMENT INFORMATION
The Company has three divisions (Stores, Catalog, and Wholesale ("Port Supply")) which all sell after-market recreational boating supplies directly to customers. The customer base overlaps between its Stores and Port Supply divisions, and between Stores and Catalog divisions. All processes for the three divisions within the supply chain are commingled, including purchases from merchandise vendors, distribution center activity, and customer delivery.
The Stores division qualifies as a reportable segment under SFAS 131 as it is the only division that represents 10% or more of the combined revenue of all operating segments when viewed on an annual basis. Segment assets are not presented, as the Company's assets are commingled and are not available by segment. Contribution is defined as net sales, less product costs and direct expenses. Following is financial information related to the Company's business segments (in thousands):
QUARTERLY FINANCIAL DATA (Unaudited, in thousands, except per share data)
1. Loss from operations and net loss for the first quarter of 1998 is net of a $3.3 million pre-tax charge for expenses related to the distribution center move in 1998.
West Marine, Inc. common stock trades on the NASDAQ National Market System under the symbol WMAR.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders under the captions "Election of Directors" and "Section 16(a) Information." see also Item I above, for information about executive officers.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders under the captions "Further Information Concerning the Board of Directors" and "Executive Compensation".
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders under the captions "Election of Directors" and "Ownership of Management and Principal Stockholders."
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders under the caption "Executive Compensation".
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1 & 2. Independent Auditor's Report
Consolidated Balance Sheets as of year end 1999 and 1998 Consolidated Statements of Income for years 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for years 1997, 1998, and 1999
Consolidated Statements of Cash Flows for years 1999, 1998 and
Notes to Consolidated Financial Statements
Quarterly Financial Data
3. Exhibits:
See attached Exhibit Index on pages 34-36 of this Form 10-K.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 31, 2000 WEST MARINE, INC.
By: /s/ John Edmondson ------------------ John Edmondson President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 2000.
Signature Capacity
/s/ Randolph K. Repass ------------------------------- (Randolph K. Repass) Chairman of the Board
/s/ John Edmondson ------------------------------- (John Edmondson) President and Chief Executive Officer
/s/ Richard E Everett ------------------------------- (Richard E Everett) President of Stores Division and Chief Operating Officer
/s/ Russell Solt ------------------------------- (Russell Solt) Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ James P. Curley ------------------------------- (James P. Curley) Director
/s/ Geoff Eisenberg ------------------------------- (Geoff Eisenberg) Director
/s/ Jeanne Jackson ------------------------------- (Jeanne Jackson) Director (resigned February, 2000)
/s/ David McComas ------------------------------- (David McComas)
Director
/s/ Walter Scott ------------------------------- (Walter Scott) Director
/s/ Henry Wendt ------------------------------- (Henry Wendt) Director
EXHIBIT INDEX