10-K405 1 0001.txt WEST MARINE - FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-22515 WEST MARINE, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 77-0355502 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 500 Westridge Drive Watsonville, CA 95076-4100 (Address of Principal Executive Offices) (Zip Code) Telephone Number: (831) 728-2700 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock ------------ (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At February 28, 2001, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $53,618,721. At February 28, 2001, the number of shares outstanding of registrant's Common Stock was 17,584,656. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for the Company's 2001 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K. TABLE OF CONTENTS
PART I Item 1. Business 3 Item 2. Properties 10 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 34 PART III Item 10. Directors and Executive Officers of the Registrant 34 Item 11. Executive Compensation 34 Item 12. Security Ownership of Certain Beneficial Owners and Management 34 Item 13. Certain Relationships and Related Transactions 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34 Signatures 35 Exhibit Index 37
PART I 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 aftermarket recreational boating supplies directly to customers. At year-end 2000, the Company offered its products through 233 stores in 38 states and in Puerto Rico, on the Internet (westmarine.com) 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 2000, opening nine new stores, and entered into the Caribbean market. Most of the new stores are located in year- round, coastal markets. The Company also remodeled thirteen stores, including four major expansions. All of the remodels incorporate features of the new prototype store opened last year 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 selectively closed three stores during 2000. The Company continues to strengthen its offerings to powerboaters by more fully addressing on-water activities, including fishing. In 2000, some stores were equipped with Internet access to the Company's web site, which offers almost 50,000 merchandise products focused on all boating segments. In addition, the Company believes the web 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 product, pricing and inventory changes. 3 Expansion strategy Since opening its first store in 1975, the Company has grown through internal expansion and acquisitions, and operated 233 stores in 38 states at year-end 2000. 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:
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- West 44 43 39 35 27 Great Lakes 32 33 29 24 18 Gulf Coast 23 22 20 11 7 Northeast 50 50 45 44 44 Mid-Atlantic 34 33 33 24 11 Southeast 50 46 46 46 44 ---- ---- ---- ---- ---- Total 233 227 212 184 151 ==== ==== ==== ==== ====
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 (which includes Internet) business lines. Port Supply added new delivery routes and hired additional field sales personnel and telemarketing associates to boost sales. Port Supply also opened its B2B Internet web site (portsupply.com) in June 2000. Catalog continues to focus marketing efforts in geographic areas not served by the Company's stores, domestically as well as in Canada and certain other international locations. The Company has one store located in Puerto Rico and has sales in other foreign countries through its catalog and the Internet. For the years ended 2000, 1999 and 1998, total sales outside of the United States represented less than three percent of net sales. Merchandising Merchandise sold by the Company can be divided into four general 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. During 2001, the Company plans to increase its merchandising efforts on these core categories, especially maintenance, electrical and plumbing supplies. 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, Fishing and Powerboating. West Marine continues to expand its selection of water sports, fishing, and powerboating categories. It is believed that this segment of the market represents a growth opportunity for the Company. West Marine substantially increased the number of water sports products in 2000, and plans to continue to adjust the category in 2001, including fishing and water sports. 4 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, usually overnight, from either the distribution center or from the vendor. 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 1,000 vendors during 2000 and achieved significant efficiencies through quantity purchases, advance deliveries and direct orders. West Marine offers many of the brands best known to its target customers. In 2000, no vendor accounted for more than 8% of the Company's merchandise purchases and the Company's 20 largest vendors accounted for approximately 39% 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 an annual 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 Senior Vice President of Merchandising oversees the purchasing of the Company's merchandise. This person supervises the Company's buyers, who are responsible for specific product categories, as well as for contracting the manufacture of private label merchandise and assuring its 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 5 satisfaction to encourage repeat business. To develop responsive, well-trained sales associates, the Company devotes 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 an item for 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 and are avid boating enthusiasts, 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 In conjunction with a leading retail architecture and design group, the Company has developed a new concept store that further advances the art and science of marine retailing. This new prototype presents both merchandise and information in a visually exciting way that is 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 incorporated many of the features of this prototype store into the nine new stores and thirteen stores remodeled in 2000, and will continue to implement this concept in key markets where the design could have an impact on local competitors. During 2001, the Company plans to open seven new stores in higher volume coastal markets and remodel ten stores, including six expansions. 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. Stores are generally open seven days a week, including most holidays. 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. During 2001, the Company plans to open two destination superstores in the key markets of Southern California and Florida, one of which will feature over 24,000 square feet. 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. 6 Store operations The Company's stores are organized into three geographic regions with a regional manager responsible for each region. Regional managers report to the Chief Operating Officer. Each region is separated 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. During 2000, West Marine hosted a private "boating equipment show" put on by 35 of the industry's most prominent vendors exclusively for more than 300 of the Company's key store management personnel. A first for the industry, this innovative training session provided a powerful opportunity for store management and vendors to provide customers with product information. The boat show is just one aspect of "West Marine University", an intensive training program for store managers now in its 16th year. In addition to the Boat Show, managers participate in classroom sessions, role-playing exercises and have the opportunity to hear from speakers who have made significant contributions to the marine industry. See Note 9 of the Notes to Consolidated Financial Statements set forth in "Item 8 -- Financial Statements and Supplementary Data" for certain financial information regarding the Stores business segment. 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 its master merchandise catalog throughout the world. This year, for the first time, the catalog consists of over 1,000 pages. In addition, smaller seasonal full-color catalogs and flyers are mailed monthly. The catalogs also provide technical information regarding product offerings. The Company rents mailing lists from boating magazines and other industry sources to better target customers with its catalog. 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 22,000 wholesale customers in 2000, 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 with an Internet web site that targets all segments of boat enthusiasts. During 2000, the Company streamlined the layout and enhanced the visual appeal of its web site, and also dramatically increased the download speed. The web site is updated on a daily basis with any product, pricing and inventory changes. Orders are filled in the same manner as catalog orders. The web site includes online advisors, technical information areas, news, feature stories and other information of interest to boaters. 7 Additional service-oriented programs were implemented in 2000 to complement the Company's successful Boat Insurance program. The Company introduced an on-water Boat Towing program as well as a Boat Financing program. These services provide a complete one-stop source for customers. All three programs are featured on the Company's web site and supported by in-store merchandising displays. During 2001, the Company plans to introduce an extended service plan, which is expected to contribute significant revenue growth. Distribution The Company has two distribution centers. 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: Stores, Catalog (including Internet) 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 most activities. Various methods of transportation are used to ship products, including truck and air freight, as well as Company-owned trucks and vans. An 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 receive more than one shipment per week. Information systems West Marine has deployed automated 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 Stores, Catalog (which includes Internet) and Port Supply sales with emphasis on improved productivity and reduced cost. Specific programs have focused on features to ensure 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 the Internet. The Company believes that the systems it has deployed provide a competitive advantage and enable it to continually improve customer service, operational efficiency and management's ability to monitor critical performance factors. During 2000, the Company reached agreement with a leading vendor of retail business-to-business exchange services to implement an Electronic Data Interchange (EDI) network with its vendors. By using the EDI solution to share information electronically, the Company and its vendors will be able to generate significant savings, increase efficiency and better manage inventories. 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. 8 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. During 2000, the Company successfully launched a new customer loyalty points program. The West Advantage program enables customers to earn incentives in the form of Company gift certificates based on their purchase activity. The Company also successfully introduced a private-label credit card to its customers in 2000. This program rewards loyal customers and attracts new customers by offering the option of deferred billing on major purchases. The card is issued through a major bank and West Marine assumes minimal credit risk. 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, 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 and in certain foreign countries. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal. As of December 30, 2000, the Company had 3,376 associates, of whom some 2,066 were full-time and 1,310 were part-time or temporary. A significant number of temporary 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:
Name Age Position ---- --- -------- John Edmondson 56 President and Chief Executive Officer Richard E Everett 48 Chief Operating Officer Russell Solt 53 Executive Vice President, Chief Financial Officer and Secretary
9 John Edmondson joined West Marine as President and Chief Executive Officer in November 1998. Mr. Edmondson was also elected a director of West Marine in November 1998. From 1992 to November 1998, Mr. Edmondson served first as Corporate Chief Operating Officer, and then as President and Chief Executive Officer, of World Duty Free Americas, Inc., a duty free retailer. Prior to joining World Duty Free Americas, Inc., Mr. Edmondson was General Manager of Marriott's Host Airport Merchandise and its Sports and Entertainment division. Mr. Edmondson began his career with Allied Stores' Maas. Bros./Jordan Marsh in 1965 and has held various senior management positions with several retailers. Richard E Everett joined West Marine in 1980 and has served as Chief Operating Officer of the Company since 1995. Mr. Everett was elected President of Stores Division in 1998. He has also served as a director of West Marine since 1994. Prior to joining West Marine, Mr. Everett founded and operated a sailboat rigging company. Russell Solt joined West Marine in January 2000 as Senior Vice President, Chief Financial Officer and Secretary. Mr. Solt was elected an Executive Vice President of the Company in March 2001. From 1995 to May 1999, Mr. Solt served first as Executive Vice President of Finance and Administration, and then as President, of Venture Stores, Inc., a discount retailer that filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in January 1998. From 1994 to 1995, Mr. Solt served as Chief Financial Officer of Williams- Sonoma, Inc., a specialty retailer. 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 December 30, 2000, the Company's 233 stores included an aggregate of approximately 1.8 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 - LEGAL PROCEEDINGS The Company is not a party to any material litigation. From time to time, the Company has received notices alleging violations of California state environmental regulations relating to product warning label requirements. The Company has responded to these notices and does not believe that the resolution of these allegations will have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II 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 periods indicated, the high and low closing sales prices for the Company's common stock, as reported by the Nasdaq Stock Market.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- --------- -------- ------- 2000 Stock trade price: High $10 1/2 $ 9 15/16 $ 9 1/2 $ 8 1/2 Low $ 8 3/8 $ 6 1/2 $ 6 9/16 $ 3 1/2 1999 Stock trade price: High $13 1/16 $14 15/16 $13 7/8 $ 9 Low $ 8 1/2 $ 8 5/16 $ 8 $ 7 9/16
As of February 28, 2001, there were approximately 6,603 holders of record of the Company's common stock. West Marine has not paid any cash dividends on its common stock during the last two years and does not anticipate doing so in the foreseeable future. ITEM 6 - SELECTED FINANCIAL DATA
(in thousands, except per share and operating data) ------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------- Consolidated Income Statement Data: Net sales (1) $508,364 $491,905 $454,115 $420,511 $327,777 Income from operations 18,266(2) 20,395 8,665 29,116 21,156 Income before income taxes 12,304(2) 14,765 2,594(3) 25,487 19,490(4) Net income 7,391(2) 8,711 1,098(3) 15,173 11,566(4) Net income per share: Basic $ 0.43(2) $ 0.51 $ 0.06(3) $ 0.91 $ 0.73(4) Diluted $ 0.42(2) $ 0.50 $ 0.06(3) $ 0.86 $ 0.68(4) Consolidated Balance Sheet Data: Working capital $129,255 $130,539 $143,974 $149,242 $ 92,948 Total assets 307,782 286,860 279,545 275,888 211,514 Long-term debt, net of current portion 66,500 71,843 94,367 92,960 37,997 Operating Data: Stores open at year-end 233 227 212 184 151 Comparable stores net sales increase 2.3% 1.8% 1.2% 5.0% 5.4% -------------------------------------------------------------------------------------------------------------------------------
(1) Shipping and handling charges billed to customers were reclassified from Cost of Goods Sold to Net Sales in order to comply with the recently issued Financial Accounting Standards Board EITF 00-10: Accounting for Shipping and Handling Charges. (2) Includes a $2.4 million pre-tax charge for costs related to uncollectible vendor receivables. The impact of this charge represents $0.08 per basic and diluted share. (3) 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. (4) 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. 11 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), Catalog (retail and Internet), and Port Supply (wholesale). West Marine operated 233 stores in 38 states and in Puerto Rico as of December 30, 2000, compared to 227 stores in 38 states as of January 1, 2000. All references to 2000, 1999, and 1998 refer to the Company's fiscal years ended on December 30, 2000, January 1, 2000, and January 2, 1999, respectively. 2000, 1999 and 1998 were 52-week years. Results of Operations The following table sets forth certain income statement components expressed as a percent of sales:
2000 1999 1998 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of goods sold including buying and occupancy 73.0% 73.5% 75.0% ----- ----- ----- Gross profit 27.0% 26.5% 25.0% Selling, general and administrative expenses 23.4% 22.4% 22.4% Expenses related to distribution center move - - 0.7% ----- ----- ----- Income from operations 3.6% 4.1% 1.9% Interest expense 1.2% 1.1% 1.3% ----- ----- ----- Income before income taxes 2.4% 3.0% 0.6% Provision for income taxes 0.9% 1.2% 0.4% ----- ----- ----- Net income 1.5% 1.8% 0.2% ===== ===== =====
2000 Compared to 1999 West Marine's fiscal 2000 results reflect the initial success of some of the market development initiatives started two years ago. In 2000, West Marine achieved record net sales of $508.4 million, an increase of $16.5 million, or 3.3%, over net sales of $491.9 million in 1999. Net income of $7.4 million, or $0.42 per diluted share, in 2000 compares to net income of $8.7 million, or $0.50 per diluted share, in 1999. Results of operations for 2000 include a $2.4 million pre-tax charge ($1.5 million after-tax, or $0.08 per share) related to the writeoff of vendor receivables that were deemed uncollectible. Net sales attributable to the Company's Stores division increased $22.3 million, or 5.6%, to $417.8 million in 2000, due to the launching of market development initiatives, including The West Advantage Program, a customer loyalty program, and a private-label credit card, and the addition of nine new stores, which contributed $8.8 million to net sales growth. Three stores were closed in 2000. Comparable store net sales increased $8.6 million, or 2.3%, in 2000. Port Supply net sales decreased $0.4 million, or 0.9%, in 2000 primarily as a result of increased sales to Port Supply customers through retail stores. Catalog net sales decreased $5.2 million, or 11.7%, to $39.2 million, primarily due to a decrease in the number of catalogs circulated, the increase in the number of store locations and the erosion of sales in some international markets as a result of unfavorable changes in exchange rates. During the fourth quarter of 2000, West Marine reclassified shipping and handling charges billed to customers of $5.0 million, $5.4 million and $4.8 million in 2000, 1999 and 1998, respectively, from Cost of Goods Sold to Net Sales in order to comply with the recently issued Financial Accounting Standards Board EITF 00-10: Accounting for Shipping and Handling Charges. 12 Gross profit increased 5.3% in 2000 compared to 1999. Gross profit as a percentage of net sales increased to 27.0% in 2000 from 26.5% in 1999, primarily reflecting reduced shrinkage and lower shipping costs, as well as a shift to a more profitable product mix, offset by the $2.4 million writeoff of vendor receivables. Selling, general and administrative expenses increased $9.0 million, or 8.2%, in 2000, primarily due to increases in direct expenses related to the growth in Stores, costs related to launching market development initiatives and consulting costs related to process improvements. Selling, general and administrative expenses as a percentage of net sales increased to 23.4% in 2000 from 22.4% in 1999. Income from operations decreased $2.1 million, or 10.4%, from 1999 to 2000, including the $2.4 million charge for the writeoff of vendor receivables. As a percentage of net sales, income from operations decreased to 3.6% in 2000, from 4.1% in 1999. Interest expense increased $332,000, or 5.9%, in 2000 compared to 1999, primarily as a result of higher interest rates. 1999 Compared to 1998 In 1999, net sales were $491.9 million, an increase of $37.8 million, or 8.3%, over net sales of $454.1 million in 1998. Net income of $8.7 million, or $0.50 per diluted share, in 1999 compared 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 $10.7 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. Gross profit increased 14.9% in 1999 compared to 1998. Gross profit as a percentage of net sales increased to 26.5% in 1999 from 25.0% 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, excluding the impact of expenses related to the distribution center move. 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 4.1% 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. Liquidity and Capital Resources During 2000, the Company's primary sources of liquidity were cash flows from operations and bank borrowings. Net cash provided by operations during 2000 was $26.3 million, consisting primarily of net income after tax, excluding depreciation and amortization, of $22.6 million and a $17.5 million increase in accounts payable and accrued expenses, offset by a $14.7 million increase in inventory. The inventory increase reflects the Company's commitment to increasing fill rates, which enhance sales, as well as advanced stocking of 13 merchandise at stores in preparation for the peak boating season. Net cash used in financing activity was $6.1 million, consisting of $8.8 million repayment of the Company's long-term debt offset by $1.6 million borrowed on a line of credit and $0.9 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 and remodeling existing stores, including leasehold improvement costs and fixtures, and information systems enhancements, and for merchandise inventory for stores. In 2000, the Company spent $20.8 million on capital expenditures. The Company expects to spend between $18.0 to $20.0 million on capital expenditures during 2001. The Company intends to pay for its expansion through cash generated from operations and bank borrowings. At the end of 2000, the Company had outstanding a $32.0 million senior guarantee note which matures on December 23, 2004, and requires annual principal payments of $8.0 million. The note 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 requirements. The Company has an $80.0 million credit line which expires on 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 ranging from 1.0% to 2.25%. At the end of 2000, borrowings from the credit line were $41.1 million bearing interest at rates ranging from 8.1% to 9.5%. At the end of 1999, borrowings from the credit line were $39.5 million, bearing interest at rates ranging from 7.8% to 9.0%. 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 (9.50% at the end of 2000) and has a ten-day paydown requirement. At the end of 2000 and 1999, 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 2000, the Company had $490,000 of outstanding stand-by letters of credit, compared to $364,000 at year-end 1999. At the end of 2000 and 1999, the Company had $484,000 and $520,000, respectively, of outstanding commercial letters of credit. During 2000 and 1999, the weighted average interest rate on all outstanding borrowings was 7.9% and 6.9%, respectively. The Company believes existing credit facilities and cash flows from operations will be sufficient to satisfy liquidity needs through 2002. 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 2000, 63.8% 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. 14 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 its competitors. Management expects this trend to continue. The Company experienced a sales slowdown at the end of 2000 which continued into early 2001 and could adversely affect future product pricing and gross profit. 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. An 82 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 $339,000 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 - Lines of Credit and Long-Term Debt"). "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 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. Because consumers often consider boats to be luxury items, the market is subject to change in consumer confidence and spending habits. Recent slowing of the domestic economy may adversely affect sales volumes, as well as the Company's ability to maintain current gross profit levels. 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. The Company's Catalog division has faced market share erosion in areas where stores have been opened 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 water sports 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. 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. 15 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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 December 30, 2000 and January 1, 2000 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 30, 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 auditing standards generally accepted in the United States of America. 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 December 30, 2000 and January 1, 2000 and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche San Francisco, California March 14, 2001 16 WEST MARINE, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 30, 2000 AND JANUARY 1, 2000 (in thousands, except share data)
Year-End ------------------ 2000 1999 -------- -------- ASSETS Current assets: Cash $ 2,654 $ 3,231 Accounts receivable, net 4,964 5,101 Merchandise inventories, net 180,563 165,838 Prepaid expenses and other current assets 9,879 9,029 -------- -------- Total current assets 198,060 183,199 Property and equipment, net 73,481 66,036 Intangibles and other assets, net 36,241 37,625 -------- -------- TOTAL ASSETS $307,782 $286,860 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 42,341 $ 29,622 Accrued expenses 15,641 11,016 Deferred current liabilities 2,094 3,333 Current portion of long-term debt 8,729 8,689 -------- -------- Total current liabilities 68,805 52,660 Long-term debt 66,500 71,843 Deferred items and other non-current obligations 4,217 2,460 -------- -------- Total liabilities 139,522 126,963 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; issued and outstanding: 17,321,521 at December 30, 2000 and 17,190,274 at January 1, 2000 17 17 Additional paid-in capital 107,987 107,015 Retained earnings 60,256 52,865 -------- -------- Total stockholders' equity 168,260 159,897 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $307,782 $286,860 ======== ========
See notes to consolidated financial statements. 17 WEST MARINE, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share and store data)
2000 1999 1998 -------- -------- -------- Net sales $508,364 $491,905 $454,115 Cost of goods sold, including buying and occupancy 371,241 361,629 340,775 -------- -------- -------- Gross profit 137,123 130,276 113,340 Selling, general and administrative expense 118,857 109,881 101,391 Expenses related to distribution center move - - 3,284 -------- -------- -------- Income from operations 18,266 20,395 8,665 Interest expense, net 5,962 5,630 6,071 -------- -------- -------- Income before taxes 12,304 14,765 2,594 Provision for income taxes 4,913 6,054 1,496 -------- -------- -------- Net income $ 7,391 $ 8,711 $ 1,098 ======== ======== ======== Net income per share: Basic $0.43 $0.51 $0.06 ======== ======== ======== Diluted $0.42 $0.50 $0.06 ======== ======== ======== Weighted average common and common equivalent shares outstanding: Basic 17,250 17,086 16,893 ======== ======== ======== Diluted 17,558 17,557 17,520 ======== ======== ======== Stores open at end of period 233 227 212 ======== ======== ========
See notes to consolidated financial statements. 18 WEST MARINE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data)
Common Stock Additional Total ------------------- Paid-in Retained Stockholders' Shares Amount Capital Earnings Equity ---------- ------- ---------- -------- ------------- Balance at year-end, 1997 16,786,068 $ 17 $103,245 $43,056 $146,318 Net income 1,098 1,098 Exercise of stock options 122,821 933 933 Tax benefit from exercise of non-qualified stock options 677 677 Sale of common stock pursuant to associate stock purchase plan 75,639 744 744 ---------- ------- ---------- -------- ------------- Balance at year-end, 1998 16,984,528 17 105,599 44,154 149,770 Net income 8,711 8,711 Exercise of stock options 67,599 276 276 Restricted stock award 138 138 Tax benefit from exercise of non-qualified stock options 113 113 Sale of common stock pursuant to associate stock purchase plan 138,147 889 889 ---------- ------- ---------- -------- ------------- Balance at year-end, 1999 17,190,274 17 107,015 52,865 159,897 Net income 7,391 7,391 Exercise of stock options 29,465 183 183 Tax benefit from exercise of non-qualified stock options 112 112 Sale of common stock pursuant to associate stock purchase plan 101,782 677 677 ---------- ------- ---------- -------- ------------- Balance at year-end, 2000 17,321,521 $ 17 $107,987 $60,256 $168,260 ========== ======= ========== ======== =============
See notes to consolidated financial statements. 19 WEST MARINE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
2000 1999 1998 -------- -------- -------- OPERATING ACTIVITIES: Net income $ 7,391 $ 8,711 $ 1,098 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,193 14,075 11,926 Provision for deferred income taxes 593 3,092 298 Provision for doubtful accounts 189 533 586 Loss on asset disposals 1,208 - - Non-cash compensation expense - 138 - Changes in assets and liabilities: Accounts receivable (52) (974) (243) Merchandise inventories (14,725) (5,769) 6,221 Prepaid expenses and other current assets (850) 2,545 86 Other assets (307) 141 (10) Accounts payable 12,719 7,051 (2,870) Accrued expenses 4,808 5,393 (231) Deferred items 112 405 166 -------- -------- -------- Net cash provided by operating activities 26,279 35,341 17,027 -------- -------- -------- INVESTING ACTIVITY - Purchases of property and equipment (20,769) (18,681) (17,487) -------- -------- -------- FINANCING ACTIVITIES: Net borrowings (repayments) on line of credit 1,600 (13,500) 950 Proceeds from long-term borrowings 278 - - Repayments on long-term debt and capital leases (8,825) (2,118) (2,153) Sale of common stock pursuant to associate stock purchase plan 677 889 744 Exercise of stock options 183 276 933 -------- -------- -------- Net cash provided by (used in) financing activities (6,087) (14,453) 474 -------- -------- -------- NET INCREASE (DECREASE) IN CASH (577) 2,207 14 CASH AT BEGINNING OF PERIOD 3,231 1,024 1,010 -------- -------- -------- CASH AT END OF PERIOD $ 2,654 $ 3,231 $ 1,024 ======== ======== ======== Other cash flow information: Cash paid for interest $ 6,028 $ 5,836 $ 5,903 Cash paid for income taxes 3,970 4,302 4,918 Equipment acquired through non-cash capital lease transactions 2,200 - 2,545
See notes to consolidated financial statements. 20 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 233 retail stores in the United States and Puerto Rico, online and mail order catalogs. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of West Marine, Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions are eliminated in consolidation. YEAR-END - The Company's year ends on the Saturday closest to December 31 based on a 52- or 53-week year. The years 2000, 1999, and 1998 ended on December 30, 2000, January 1, 2000, and January 2, 1999, respectively. 2000, 1999 and 1998 were 52-week years. ACCOUNTING ESTIMATES - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 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 were $227,000 and $110,000 at year-end 2000 and 1999, respectively. Advertising costs, which are expensed as incurred, were $12.7 million, $14.0 million and $12.6 million in 2000, 1999 and 1998, 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. 21 CAPITALIZED INTEREST - The Company's policy is to capitalize interest on major capital projects. During 2000, 1999 and 1998, the Company incurred approximately $6.8 million, $6.1 million and $6.7 million, respectively, of interest, of which approximately $833,000, $423,000 and $576,000, respectively, was capitalized. CAPITALIZED SOFTWARE COSTS - Capitalized computer software, included in property and equipment, reflects costs related to internally developed or purchased software that are capitalized and amortized on a straight-line basis, generally over a three-to-five year period. Internally developed software costs are capitalized in accordance with Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." 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. Amortization expense was $1,155,000, $1,211,000 and $1,290,000 for 2000, 1999 and 1998, respectively. Accumulated amortization at the end of 2000 and 1999 was $6.7 million and $5.2 million, respectively. IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the long-lived asset are less than the carrying value, a loss equal to the difference between carrying value and the fair market value of the asset is recorded. DEFERRED RENT - Certain of the Company's operating leases contain predetermined fixed increases in 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 - Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. 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. REVENUE RECOGNITION - Sales, net of estimated returns, are recorded when merchandise is shipped from a warehouse directly to customers, or when purchased by customers at retail locations. COMPREHENSIVE INCOME - Comprehensive income equals net income for all periods presented. NET INCOME PER SHARE - Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if options to issue common stock were exercised. The following is a reconciliation of the Company's basic and diluted net income per share computations (shares in thousands): 22
2000 1999 1998 ------------------- ------------------- ------------------- Per Share Per Share Per Share Shares Amount Shares Amount Shares Amount ------------------- ------------------- ------------------- Basic 17,250 $ 0.43 17,086 $ 0.51 16,893 $0.06 Effect of dilutive stock options 308 (0.01) 471 (0.01) 627 0.00 ------------------- ------------------- ------------------- Diluted 17,558 $ 0.42 17,557 $ 0.50 17,520 $0.06 =================== =================== ===================
Excluded from the above computations of diluted net income per share were options to purchase 3,174,000, 2,703,000 and 1,895,000 shares of common stock for 2000, 1999 and 1998, respectively, as these shares were anti-dilutive. DERIVATIVE INSTRUMENTS - Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective December 31, 2000. The adoption of SFAS 133, as amended, did not have a material impact on the financial position, results of operations or cash flows of the Company. RECLASSIFICATIONS - Certain 1999 and 1998 amounts have been reclassified to conform with the 2000 presentation. Shipping and handling charges billed to customers of $5.0 million, $5.4 million and $4.8 million in 2000, 1999 and 1998, respectively, were reclassified from Cost of Goods Sold to Net Sales in order to comply with the recently issued Financial Accounting Standards Board EITF 00-10: Accounting for Shipping and Handling Charges. NOTE 2: PROPERTY AND EQUIPMENT Property and equipment consisted of the following at year-end 2000 and 1999 (in thousands):
At Year-End ---------------------- 2000 1999 Furniture and equipment $ 36,574 $ 37,540 Computer equipment 57,289 44,388 Leasehold improvements 33,172 29,857 Land and building 1,081 806 -------- -------- Total, at cost 128,116 112,591 Accumulated depreciation and amortization (54,635) (46,555) -------- -------- Total property and equipment, net $ 73,481 $ 66,036 ======== ========
23 NOTE 3: LINES OF CREDIT AND LONG-TERM DEBT At the end of 2000, the Company had outstanding a $32.0 million senior note which matures on December 23, 2004, and requires annual principal payments of $8.0 million. The note 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 requirements. The Company has an $80.0 million credit line, which expires on 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 ranging from 1.0% to 2.25%. At the end of 2000, borrowings from the credit line were $41.1 million bearing interest at rates ranging from 8.1% to 9.5%. 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 (9.50% at the end of 2000) and has a ten-day paydown requirement. At the end of 2000 and 1999, 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 2000, the Company had $490,000 of outstanding stand-by letters of credit and $484,000 of outstanding commercial letters of credit. During 2000 and 1999, the weighted average interest rate on all outstanding borrowings was 7.9% and 6.9%, respectively. At year-end 2000 and 1999, long-term debt consisted of the following (in thousands):
At Year-End --------------------- 2000 1999 ------- ------- Lines of credit $41,100 $39,500 Note payable 32,000 40,000 Capital lease obligations (interest at 4.6% to 6.5%) 2,129 1,032 ------- ------- 75,229 80,532 Less current portion of long-term debt (8,729) (8,689) ------- ------- $66,500 $71,843 ======= =======
24 At year-end 2000, future minimum principal payments on long-term debt were as follows (in thousands):.
2001 $ 8,729 2002 8,774 2003 49,726 2004 8,000 --------- $75,229 =========
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 sales during 2000, 1999, and 1998 included $6.8 million, $7.2 million and $6.4 million, respectively, related to purchases from such related party. Accounts payable to the supplier at year-end 2000 and 1999 were $113,000 and $215,000, 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: COMMITMENTS AND CONTINGENCIES 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 contractual rent increases. 25 The aggregate minimum annual contractual payments and sublease income under Noncancelable leases in effect at year-end 2000 were as follows (in thousands):
Capital Operating Sublease Net Lease Leases Leases Income Commitments ---------- --------- -------- ----------- 2001 $ 845 $ 23,175 $ 35 $ 23,985 2002 843 21,755 15 22,583 2003 644 20,451 16 21,079 2004 17,769 5 17,764 2005 14,345 14,345 Thereafter 16,631 16,631 ---------- --------- -------- ----------- Total minimum lease commitment 2,332 $ 114,126 $ 71 $ 116,387 ========= ======== =========== Less amount representing interest (203) ---------- Present value of obligations under capital leases 2,129 Less current portion (729) ---------- Long-term obligations under capital leases $ 1,400 ==========
The cost and related accumulated amortization of assets under capital leases aggregated $3.8 million and $1.1 million, respectively, at year-end 2000, and $5.5 million and $2.1 million, respectively, at year-end 1999. A summary of rent expense by component for 2000, 1999 and 1998 follows (in thousands):
2000 1999 1998 ------- ------- ------- Minimum rent $21,309 $20,027 $19,219 Percent rent 231 176 178 Sublease income (147) (161) (159) Rent paid to related parties 1,323 1,253 1,161 ------- ------- ------- $22,716 $21,295 $20,399 ======= ======= =======
The Company is party to various legal proceedings arising from normal business activities. Management believes that the resolution of these matters will not have a material effect on the Company's financial statements taken as a whole. 26 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. Options under this plan are generally exercisable over ten years from the date of the grant, or within one year after a termination of services as a director occurs. A summary of stock option transactions under the fixed stock option plans for the years 2000, 1999 and 1998 follows:
Weighted Average Number of Exercise Shares Price ---------- -------- Outstanding at year-end 1997 (1,384,874 exercisable at a weighted average price of $9.89) 2,753,381 $13.72 Granted (weighted average fair value at grant date: $ 9.16) 1,452,906 $13.71 Exercised (122,821) $ 7.49 Canceled (563,357) $18.68 ----------------------------------------------------------------------------------------- Outstanding at year-end 1998 (1,563,633 exercisable at a weighted average price of $10.90) 3,520,109 $13.14 Granted (weighted average fair value at grant date: $ 6.03) 739,236 $ 8.87 Exercised (67,599) $ 4.14 Canceled (113,344) $16.93 ----------------------------------------------------------------------------------------- Outstanding at year-end 1999 (2,184,843 exercisable at a weighted average price of $11.74) 4,078,402 $12.24 Granted (weighted average fair value at grant date: $ 5.90) 933,405 $ 8.44 Exercised (29,465) $ 6.09 Canceled (536,721) $13.43 ----------------------------------------------------------------------------------------- Outstanding at year-end 2000 (2,545,137 exercisable at a weighted average price of $11.86) 4,445,621 $11.34 =========================================================================================
27 Additional information regarding options outstanding at year-end 2000 is as follows:
Outstanding Options Exercisable Options ------------------------------------------------------------------------------------------------------ Weighted Average Weighted Weighted Remaining Average Average Range of Shares Contractual Exercise Exercise Exercise Prices Outstanding Life (Years) Price Shares Price ------------------------------------------------------------------------------------------------------ $ 0.43 - $ 7.81 1,263,628 5.66 $ 5.77 748,352 $ 4.42 $ 8.06 - $ 12.50 2,206,201 6.87 $ 9.87 1,123,604 $10.92 $ 14.75 - $ 34.50 975,792 6.19 $21.87 673,181 $21.67 ------------------------------------------------------------------------------------------------------ $ 0.43 - $ 34.50 4,445,621 6.38 $11.34 2,545,137 $11.86 ======================================================================================================
Associate Stock Purchase Plan The Company has a stock purchase 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 lower of the closing price of the Company's common stock on the grant date or the purchase date. In 2000, 1999 and 1998, respectively, 101,782, 138,121 and 75,639 shares were issued under the plan. At the end of 2000, 360,257 shares were reserved for future issuance under the stock purchase plan. At year-end 2000, 989,094 shares were available for future grants under the 1993 Plan, and 45,708 shares were available under the Director Plan. The Company does not intend to grant any additional options under the 1990 Plan. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") requires the disclosure of pro forma net income and net income 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 76%, 56% and 63%, respectively, in 2000, 1999, and 1998; risk-free interest rates of 6.19% to 6.37% in 2000, 4.96% to 5.59% in 1999, and 5.03% to 5.27% in 1998; 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 2000, 1999 and 1998 awards had been amortized to expense over the vesting period of the awards, pro forma net income would have been $5.7 million in 2000 ($0.33 per basic and diluted share), $7.2 million in 1999 ($0.42 per basic share and $0.41 per diluted share) and $0.1 million in 1998 ($0.01 per basic and diluted share). However, the impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the proforma calculations; accordingly, the proforma adjustments may not be indicative of future period proforma adjustments. 28 NOTE 7: INCOME TAXES The components of the provision for income taxes for 2000, 1999 and 1998 are as follows (in thousands):
2000 1999 1998 ------ ------ ------ Currently payable: Federal $3,689 $2,646 $ 998 State 631 316 200 ------ ------ ------ Total current 4,320 2,962 1,198 ------ ------ ------ Deferred: Federal 861 2,791 633 State (268) 301 (335) ------ ------ ------ Total deferred 593 3,092 298 ------ ------ ------ Total current and deferred $4,913 $6,054 $1,496 ====== ====== ======
The difference between the effective income tax rate and the statutory federal income tax rate is summarized as follows:
2000 1999 1998 ----- ----- ----- Statutory federal tax rate 35.0% 35.0% 35.0% Non-deductible permanent items 3.4 3.1 18.1 State income taxes, net of federal tax benefit 1.9 2.7 (3.4) Settlement of prior year's taxes -- -- 7.1 Other (0.3) 0.2 0.9 ----- ----- ----- Effective tax rate 40.0% 41.0% 57.7% ===== ===== =====
29 Deferred tax assets (liabilities) consisted of the following (in thousands):
2000 1999 ------- ------- Current: Reserves $ 1,162 $ 604 Net operating loss carryforwards 138 139 Paid time off 554 649 State tax benefit (226) (137) Deferred catalog costs (710) (823) Capitalized inventory costs (3,122) (3,020) Cash discounts (913) (921) Other 167 176 ------- ------- Total current (2,950) (3,333) ------- ------- Noncurrent: Deferred rent 809 671 Depreciation (3,602) (2,155) Reserves 195 195 Net operating loss carryforward 1,283 1,402 State tax credits 1,186 - Other 90 72 ------- ------- Total noncurrent (39) 185 ------- ------- Valuation allowance (751) - ------- ------- Total $(3,740) $(3,148) ======= =======
Net deferred current tax liabilities at year-end 2000 and 1999 are included in Deferred Current Liabilities. Net non-current tax liabilities at year-end 2000 are included in Deferred Items and Other Non-Current Obligations. Net non- current tax assets at year-end 1999 are included in Intangibles and Other Assets. At year-end 2000 for federal tax purposes, the Company has net operating loss carryforwards of approximately $725,000, which expire in 2002 and 2003. At year- end 2000 for state tax purposes, the Company has net loss carryforwards of approximately $17.5 million, which expire in the years 2002 through 2019. In addition, the Company has enterprise zone credits of $370,000 which may be used for an indefinite period of time, and South Carolina tax credits of $816,000 which expire in the years 2010 through 2015. These carryforwards are available to offset future taxable income and have been reduced by $751,000 for amounts not expected to be fully utilized. 30 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 2000, 1999 and 1998 were $400,000, $391,000 and $366,000, respectively. 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 5.75% and 6.75% and a rate of return on assets of 8% were used by the actuary in determining the Defined Benefit Plan status at year-end 2000 and 1999, respectively. The Defined Benefit Plan invests primarily in publicly traded stocks and bonds. The actuarial present value of the benefit obligations for 2000 and 1999 was (in thousands):
2000 1999 ------ ------- Changes in Benefit Obligation Benefit obligation at beginning of year $3,223 $ 3,892 Interest cost 217 211 Actuarial loss (gain) 644 (824) Benefits paid (308) (56) ------ ------- Benefit obligation at end of year $3,776 $ 3,223 ====== ======= Change in Plan Assets Fair value of plan assets at beginning of year $3,797 $ 3,138 Actual return on plan assets 101 715 Employer contribution - - Benefits paid (308) (56) ------ ------- Fair value of plan assets at end of year $3,590 $ 3,797 ====== ======= Funded status $ (186) $ 574 Unrecognized net actuarial gain (441) (1,352) ------ ------- Accrued pension liability $ (627) $ (778) ====== ======= Components of Net Periodic Pension Cost Interest cost $ 217 $ 211 Expected return on plan assets (301) (248) Recognized net actuarial gain (67) - ------ ------- Net periodic benefit $ (151) $ (37) ====== =======
31 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):
2000 1999 1998 -------- -------- -------- Net sales: Stores $417,806 $395,519 $369,781 Other 90,558 96,386 84,334 -------- -------- -------- Consolidated net sales $508,364 $491,905 $454,115 ======== ======== ======== Contribution: Stores $ 57,905 $ 50,184 $ 45,754 Other 11,950 13,951 9,943 -------- -------- -------- Consolidated contribution $ 69,855 $ 64,135 $ 55,697 ======== ======== ======== Reconciliation of consolidated contribution to net income: Consolidated contribution $ 69,855 $ 64,135 $ 55,697 Less: Cost of goods sold not included in consolidated contribution (27,834) (26,609) (28,431) General and administrative expenses (23,755) (17,131) (15,317) Expenses related to distribution center move - - (3,284) Interest expense (5,962) (5,630) (6,071) Income tax expense (4,913) (6,054) (1,496) -------- -------- -------- Net income $ 7,391 $ 8,711 $ 1,098 ======== ======== ========
32 NOTE 10: QUARTERLY FINANCIAL DATA (Unaudited, in thousands, except per share data)
Fiscal 2000 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter(1) ------------------------------------------------------- Net sales (2) $ 96,275 $ 185,062 $139,065 $87,962 Gross profit 23,223 57,041 38,268 18,591 Income (loss) from operations (2,723) 20,824 8,270 (8,105) Net income (loss) (2,620) 11,354 4,192 (5,535) Net income (loss) per share: Basic $ (0.15) $ 0.66 $ 0.24 $ (0.32) Diluted (0.15) 0.65 0.24 (0.32) Stock trade price: High $ 10 1/2 $ 9 15/16 $ 9 1/2 $ 8 1/2 Low 8 3/8 6 1/2 6 9/16 3 1/2 Fiscal 1999 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------- Net sales (2) $ 94,551 $ 178,960 $130,259 $88,135 Gross profit 22,128 53,041 35,511 19,596 Income (loss) from operations (2,997) 19,354 6,347 (2,309) Net income (loss) (2,778) 10,505 3,085 (2,101) Net income (loss) per share: Basic $ (0.16) $ 0.61 $ 0.18 $ (0.12) Diluted (0.16) 0.60 0.18 (0.12) Stock trade price: High $13 1/16 $14 15/16 $ 13 7/8 $9 Low 8 1/2 8 5/16 8 7 9/16
(1) Results of operations for the fourth quarter include a $2.4 million pre-tax charge ($1.5 million after-tax, or $0.08 per share), related to the writeoff of vendor receivables deemed uncollectible. (2) Net Sales includes the reclassification of shipping and handling charges billed to customers which were previously reported in Cost of Goods Sold. West Marine, Inc. common stock trades on the NASDAQ National Market System under the symbol WMAR. 33 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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 2001 Annual Meeting of Stockholders under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." See also Item I above, for information about executive officers. ITEM 11 - EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement for the 2001 Annual Meeting of Stockholders under the captions "Further Information Concerning the Board of Directors" and "Executive Compensation". 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 2001 Annual Meeting of Stockholders under the caption "Ownership of Management and Principal Stockholders." 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 2001 Annual Meeting of Stockholders under the caption "Executive Compensation." PART IV 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 Auditors' Report Consolidated Balance Sheets as of year end 2000 and 1999 Consolidated Statements of Income for years 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for years 2000, 1999 and 1998. Consolidated Statements of Cash Flows for years 2000, 1999 and 1998 Notes to Consolidated Financial Statements Quarterly Financial Data 3. Exhibits: See attached Exhibit Index on pages 37-39 of this Form 10-K. (b) Reports on Form 8-K None. 34 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 29, 2001 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 29, 2001. Signature Capacity /s/ John Edmondson ------------------------------- (John Edmondson) President, Chief Executive Officer and Director /s/ Richard E Everett ------------------------------- (Richard E Everett) Chief Operating Officer and Director /s/ Russell Solt ------------------------------- (Russell Solt) Executive Vice President and Chief Financial Officer /s/ Eric Nelson ------------------------------- (Eric Nelson) Vice President, Finance and Chief Accounting Officer 35 /s/ Randolph K. Repass ------------------------------- (Randolph K. Repass) Director /s/ James P. Curley ------------------------------- (James P. Curley) Director /s/ Geoff Eisenberg ------------------------------- (Geoff Eisenberg) Director /s/ David McComas ------------------------------- (David McComas) Director /s/ Walter Scott ------------------------------- (Walter Scott) Director /s/ Henry Wendt ------------------------------- (Henry Wendt) Director /s/ William U. Westerfield ------------------------------- (William U. Westerfield) Director 36 Exhibit Number Exhibit ------- ------- 2.1 Agreement and Plan of Merger dated as of April 2, 1996 among the Company, WM Merger Sub, Inc. and E&B Marine Inc. ("E&B Marine") (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated April 2, 1996). 2.2 Stockholders Agreement dated as of April 2, 1996 by and between the Company and certain stockholders of E&B Marine (incorporated by reference to Exhibit 2.2 to the Company's Current Report of Form 8-K dated April 2, 1996). 2.3 Letter Amendment of Stockholders Agreement dated May 10, 1996 between the Company and certain stockholders of E&B Marine (incorporated by reference to Exhibit 2.3 to the Company's Registration Statement on Form S-4 (Registration No. 333-02903)). 3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-69604)). 3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (Registration No. 33-69604)). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-69604)). 10.1 Credit Agreement dated as of November 2, 1995 among West Marine Products, Inc., Bank of America National Trust and Savings Association, Nations Bank of Texas, National Association and the other financial institutions party thereto (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 30, 1995). 10.1.1 Amendment to Credit Agreement dated February 20, 1997 among West Marine Products, Inc., Bank of America National Trust and Savings Association and other financial institutions party thereto (incorporated by reference to Exhibit 10.1.1 to the Company's Annual Report on Form 10-K for the year ended December 28, 1996). 10.1.2 Second Amendment to Credit Agreement dated March 28, 1997 among West Marine Products, Inc., Bank of America National Trust and Savings Association and other financial institutions party thereto (incorporated by reference to Exhibit 10.1.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997). 10.1.3 Third Amendment to Credit Agreement dated June 27, 1997 among West Marine Products, Inc., Bank of America National Trust and Savings Association and other financial institutions party thereto (incorporated by reference to Exhibit 10.1.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997). 10.1.4 Fourth Amendment to Credit Agreement dated September 24, 1997 among West Marine Products, Inc., Bank of America National Trust and Savings Association and other financial institutions party thereto (incorporated by reference to Exhibit 10.1.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 1997). 10.2 Guaranty entered into as of November 2, 1995 by the Company in favor of Bank of America National Trust and Savings Association (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 30, 1995). 37 Exhibit Number Exhibit ------- ------- 10.3* 1990 Stock Option Plan and form of Incentive Stock Option Agreement (incorporated by reference to Exhibits 4.2 and 4.4, respectively, to the Company's Registration Statement on Form S-8 (Registration No. 33-72956)). 10.4 Form of Indemnification Agreement between the Company and its directors and officers (incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (Registration No. 33- 69604)). 10.5* 1993 Omnibus Equity Incentive Plan and form of Stock Option Agreement (incorporated by reference to Exhibits 4.1 and 4.3, respectively, to the Company's Registration Statement on Form S-8 (Registration No. 33-72956)). 10.6* 401(k) Plan (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 33- 69604)). 10.7 Sublease Agreement dated August 31, 1992 between Holtzman's LittleFolk Shop, Inc. and West Marine Products, Inc. for the Charlotte, North Carolina distribution facilities (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 33-69604)). 10.8 Lease dated June 15, 1995 between John E. Van Valkenburgh and Carl D. Panattoni and West Marine Products, Inc. for the Hollister, California distribution facility (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year ended December 30, 1995). 10.9 Lease dated December 20, 1985 between Randolph K. Repass and West Marine Products, Inc. for the Palo Alto, CA store (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (Registration No. 33-69604)). 10.10 Lease dated December 30, 1992 between Braintree Freeholders and West Marine Products, Inc. for the Braintree, MA store (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (Registration No. 33-69604)). 10.11 Lease dated July 28, 1982 between Santa Cruz Freeholders and West Marine Products, Inc. for the Santa Cruz, CA store (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (Registration No. 33-69604)). 10.12* Nonemployee Director Stock Option Plan and form of Option Agreement (incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 2, 1994). 10.12.1* Amendment to the Nonemployee Director Stock Option Plan dated as of November 8, 2000. 10.14 Lease dated March 11, 1997 between W/H No. 31 L.L.C. and West Marine, Inc. for Rock Hill, SC Distribution facility and other agreements thereto (incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 29, 1997). 10.15 Lease dated June 26, 1997 between Watsonville Freeholders and West Marine Products Inc. for the Watsonville, CA offices and other agreements thereto (incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997). 38 Exhibit Number Exhibit ------- ------- 10.16 Note Purchase Agreement dated December 23, 1997 by and between the Company's wholly owned subsidiary, West Marine Finance Company, Inc. and five insurance investors for Forty Million Dollars ($40,000,000) of an unsecured 6.85% Senior Guaranteed Note due December 23, 2004 (incorporated by reference to Exhibit A to the Company's Current Report on Form 8-K dated December 23, 1997). 10.16.1 First Amendment to the Guaranty Agreement dated December 29, 1998 among West Marine, Inc. and other financial institutions party thereto (incorporated by reference to Exhibit 10.16.1 to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10.16.2 First Amendment to the Note Purchase Agreement and Second Amendment to the Guaranty Agreement, both dated February 15, 1999 among West Marine Finance Company, Inc., West Marine, Inc., and other financial institutions party thereto (incorporated by reference to Exhibit 10.16.2 to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10.17 Credit Agreement dated as of November 24, 1997 among West Marine Finance Company, Inc., Bank of America National Trust and Savings Association, Nations Bank of Texas, National Association and Fleet National Bank (incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 4, 1998). 10.17.1 First Amendment to Credit Agreement dated April 10, 1998 among West Marine Finance Company, Inc., Bank of America National Trust and Savings Association, and other financial institutions party thereto (incorporated by reference to Exhibit 10.16.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 4, 1998). 10.17.2 Second Amendment to Credit Agreement dated September 30, 1998 among West Marine Finance Company, Inc., Bank of America National Trust and Savings Association, and other financial institutions party thereto (incorporated by reference to Exhibit 10.17.2 to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10.17.3 Third Amendment to Credit Agreement dated February 23, 1999 among West Marine Finance Company, Inc., Bank of America National Trust and Savings Association, and other financial institutions party thereto (incorporated by reference to Exhibit 10.17.3 to the Company's Annual Report on Form 10-K for the year ended January 2, 1999). 10.18 Credit Agreement dated January 13, 2000 among West Marine Finance Company, Inc., Bank of America, N.A., Fleet National Bank and Union Bank of California, N.A. (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended January 1, 2000). 10.19* General Release dated January 30, 2001 between West Marine Products, Inc. and Michael Edwards. 10.20* Executive Termination Compensation Agreement dated August 24, 1999 between West Marine, Inc. and Richard Everett. 10.21* Executive Termination Compensation Agreement dated January 24, 2000 between West Marine, Inc. and Russell Solt. 21.1 List of Subsidiaries. 23.1 Consent of Deloitte & Touche LLP. -------------------------- * Indicates, as required by Item 14(a)(3), a management contract or compensatory plan required to be filed as an exhibit to this Form 10-K. 39