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EX-10.2 - WEST MARINE, INC. ASSOCIATES STOCK BUYING PLAN, AS AMENDED AND RESTATED - WEST MARINE INCdex102.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO RULE 13A-14(B) - WEST MARINE INCdex321.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) - WEST MARINE INCdex311.htm
EX-15.1 - LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION - WEST MARINE INCdex151.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) - WEST MARINE INCdex312.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended October 3, 2009

OR

 

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

For the transition period from                      to                     

Commission file number 0-22512

 

 

WEST MARINE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   77-0355502

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

500 Westridge Drive

Watsonville, CA 95076-4100

(Address of Principal Executive Offices) (Zip Code)

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

 

 

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

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

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

 

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

(Do not check if a smaller

reporting company)

  

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

At October 31, 2009, the number of shares outstanding of the registrant’s common stock was 22,260,718.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page No.
PART 1 – Financial Information    3

Item 1.

   Financial Statements    3
   Condensed Consolidated Balance Sheets as of October 3, 2009, January 3, 2009 and September 27, 2008    3
  

Condensed Consolidated Statements of Operations for the 13 weeks ended October 3, 2009 and September 27, 2008 and the 39 weeks ended October 3, 2009 and September 27, 2008

   4
  

Condensed Consolidated Statements of Cash Flows for the 39 weeks ended October 3, 2009 and September 27, 2008

   5
   Notes to Condensed Consolidated Financial Statements    6
   Report of Independent Registered Public Accounting Firm    12

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    13

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    18

Item 4.

   Controls and Procedures    18

PART II – Other Information

   19

Item 1.

   Legal Proceedings    19

Item 1A.

   Risk Factors    19

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    19

Item 3.

   Defaults Upon Senior Securities    19

Item 4.

   Submission of Matters to a Vote of Security Holders    19

Item 5.

   Other Information    19

Item 6.

   Exhibits    20


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

WEST MARINE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 3, 2009, JANUARY 3, 2009 AND SEPTEMBER 27, 2008

(Unaudited and in thousands, except share data)

 

     October 3,
2009
    January 3,
2009
    September 27,
2008
 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 22,288      $ 7,473      $ 6,050   

Trade receivables, net

     6,851        5,824        7,891   

Merchandise inventories

     199,739        222,601        245,069   

Other current assets

     15,945        16,369        18,219   
                        

Total current assets

     244,823        252,267        277,229   

Property and equipment, net

     56,161        59,615        62,068   

Intangibles, net

     125        154        163   

Other assets

     3,075        2,556        3,054   
                        

TOTAL ASSETS

   $ 304,184      $ 314,592      $ 342,514   
                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current liabilities:

      

Accounts payable

   $ 31,803      $ 26,788      $ 43,649   

Accrued expenses and other

     45,789        42,256        44,405   
                        

Total current liabilities

     77,592        69,044        88,054   

Long-term debt

     —          47,000        29,300   

Deferred rent and other

     10,307        8,928        8,358   
                        

Total liabilities

     87,899        124,972        125,712   
                        

Stockholders’ equity:

      

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

     —          —          —     

Common stock, $.001 par value: 50,000,000 shares authorized; 22,284,652 shares issued and 22,253,762 shares outstanding at October 3, 2009; 22,142,949 shares issued and 22,115,377 shares outstanding at January 3, 2009; and 22,047,925 shares issued and 22,020,353 shares outstanding at September 27, 2008

     22        22        22   

Treasury stock

     (385     (366 )     (366

Additional paid-in capital

     176,357        173,997        172,978   

Accumulated other comprehensive income (loss)

     (269     590        (210

Retained earnings

     40,560        15,377        44,378   
                        

Total stockholders’ equity

     216,285        189,620        216,802   
                        

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 304,184      $ 314,592      $ 342,514   
                        

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share data)

 

     13 Weeks Ended    39 Weeks Ended  
     October 3,
2009
    September 27,
2008
   October 3,
2009
    September 27,
2008
 

Net revenues

   $ 168,154      $ 180,249    $ 484,490      $ 520,193   

Cost of goods sold

     120,703        130,518      342,035        369,566   
                               

Gross profit

     47,451        49,731      142,455        150,627   

Selling, general and administrative expense

     38,618        43,853      116,031        139,546   

Store closures and other restructuring costs

     (219 )     1,660      (168 )     1,660   

Impairment of long-lived assets

     —          206      —          2,423   
                               

Income from operations

     9,052        4,012      26,592        6,998   

Interest expense

     87        327      720        1,935   
                               

Income before income taxes

     8,965        3,685      25,872        5,063   

Provision for income taxes

     492        264      689        14,862   
                               

Net income (loss)

   $ 8,473      $ 3,421    $ 25,183      $ (9,799 )
                               

Net income (loss) per share:

         

Basic

   $ 0.38      $ 0.16    $ 1.14      $ (0.45 )

Diluted

   $ 0.38      $ 0.16    $ 1.13      $ (0.45 )

Weighted average common and common equivalent shares outstanding:

         

Basic

     22,242        22,020      22,182        21,962   

Diluted

     22,472        22,024      22,283        21,962   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

WEST MARINE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     39 Weeks Ended  
     October 3,
2009
    September 27,
2008
 

OPERATING ACTIVITIES:

    

Net income (loss)

   $ 25,183      $ (9,799 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     12,862        14,170   

Impairment of long-lived assets

     —          2,423   

Share-based compensation

     1,814        1,634   

Tax benefit from equity issuance

     —          (92 )

Excess tax benefit from share-based compensation

     —          (1

Deferred income taxes

     (595     14,782   

Provision for doubtful accounts

     288        399   

Lower of cost or market inventory adjustments

     2,885        2,585   

Loss on asset disposals

     143        246   

Changes in assets and liabilities:

    

Trade receivables

     (1,315     (1,586 )

Merchandise inventories

     19,977        653   

Other current assets

     424        3,266   

Other assets

     (996     417   

Accounts payable

     5,455        8,171   

Accrued expenses and other

     3,533        (3,585 )

Deferred items and other non-current liabilities

     1,379        236   
                

Net cash provided by operating activities

     71,037        33,919   
                

INVESTING ACTIVITIES:

    

Proceeds from sale of property and equipment

     22        40   

Purchases of property and equipment

     (9,659 )     (11,498 )
                

Net cash used in investing activities

     (9,637 )     (11,458 )
                

FINANCING ACTIVITIES:

    

Borrowings on line of credit

     35,238        60,818   

Repayments on line of credit

     (82,238 )     (83,818 )

Proceeds from exercise of stock options

     201        4   

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

     345        444   

Excess tax benefit from share-based compensation

     —          1   

Treasury shares acquired

     (19     (18
                

Net cash used in financing activities

     (46,473     (22,569
                

Effect of exchange rate changes on cash

     (112     32   

NET INCREASE (DECREASE) IN CASH

     14,815        (76 )

CASH AT BEGINNING OF PERIOD

     7,473        6,126   
                

CASH AT END OF PERIOD

   $ 22,288      $ 6,050   
                

Other cash flow information:

    

Cash paid for interest

   $ 740      $ 1,970   

Cash paid (refunded) for income taxes

     440        (2,423 )

Non-cash investing activities

    

Property and equipment additions in accounts payable

     128        716   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

WEST MARINE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Thirteen and Thirty-nine Weeks Ended October 3, 2009 and September 27, 2008

(Unaudited)

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared from the records of West Marine, Inc. and its subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring items, except as discussed in Notes 2 and 7 below) necessary to fairly present the financial position at October 3, 2009 and September 27, 2008, and the interim results of operations for the 13-week and 39-week periods and cash flows for the 39-week periods then ended, have been included.

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

Accounting policies followed by the Company are described in Note 1 in the audited consolidated financial statements for the year ended January 3, 2009. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted for purposes of the condensed consolidated interim financial statements presented herein. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13-week and 39-week periods ended October 3, 2009 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending January 2, 2010. Historically, the Company’s revenues and net income are higher in the second and third quarters and decrease in the first and fourth quarters of the fiscal year. The increase in revenues and earnings, principally during the period from April through August, is representative of the peak months for boat buying, usage and maintenance in most of our retail markets.

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

Subsequent events were evaluated through November 9, 2009, the date these condensed consolidated financial statements were issued.

In June 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“Codification”). The Codification has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification and any accounting literature not included in the Codification will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be the source of authoritative GAAP for SEC registrants. Effective September 30, 2009, all references made to GAAP in the Company’s condensed consolidated financial statements have been removed. The Codification does not change or alter existing GAAP and, therefore, will not have an impact on the Company’s financial position, results of operations or cash flows.

 

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Fair Value of Financial Instruments

In the first quarter of 2008, the Company adopted an accounting standard update related to fair value measurements and disclosures (as codified in ASC Topic 820). This update defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

The fair value hierarchy prescribed under GAAP contains three levels, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.

Level 3 - Unobservable inputs which are supported by little or no market activity.

The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of October 3, 2009, $17.0 million of the Company’s cash equivalents consisted of a money market deposit account and certificates of deposits and are classified within Level 1 because they are valued using quoted market prices.

NOTE 2: INCOME TAXES

The Company calculates its interim income tax provision by estimating the annual effective tax rate and applying that rate to its year-to-date ordinary earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in tax laws, rates or status is recognized in the interim period in which the change occurs.

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

The Company’s income tax rate was a provision for state taxes of 2.7%, resulting in expense of $0.7 million for the thirty-nine weeks ended October 3, 2009, and an effective tax rate of 293.5% resulted in an expense of $14.9 million for the thirty-nine weeks ended September 27, 2008.

During the second quarter of 2008, the Company recorded a full valuation against its net deferred tax assets. This fiscal 2008 adjustment had no impact on the Company’s cash flow or future prospects, nor did it alter the Company’s ability to utilize the underlying tax net operating loss and credit carryforwards in the future, the utilization of which is limited to achieving future taxable income.

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

NOTE 3: SHARE-BASED COMPENSATION

The Company estimates the fair value of stock options under the Omnibus Equity Incentive Plan (the “Incentive Plan”) and shares issued under the Associates Stock Buying Plan (the “Buying Plan”), using a Black-Scholes option-pricing model to calculate share-based compensation. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive stock options.

 

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Table of Contents

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

 

(in thousands)

   13 Weeks Ended
October 3, 2009
   13 Weeks Ended
September 27, 2008
   39 Weeks Ended
October 3, 2009
   39 Weeks Ended
September 27, 2008

Cost of goods sold

   $ 106    $ 115    $ 317    $ 355

Selling, general and administrative expense

     521      436      1,497      1,279
                           

Share-based compensation expense

   $ 627    $ 551    $ 1,814    $ 1,634
                           

Stock Options: The Incentive Plan provides for the granting of stock options to eligible associates employed at the time of the grant, to non-employee directors and to consultants. Such grants represent non-qualified stock options. The exercise price of an option is established at the fair market value of a share of the Company’s common stock on the date of grant. Options awarded to eligible associates under the Incentive Plan generally vest over three years (options awarded under the Incentive Plan in 2006 generally vest over four years) and expire five years following the grant date. Options awarded to non-employee directors under the Incentive Plan vest in six months from the grant date and expire five years following the grant date. As of October 3, 2009, there was $3.0 million of unrecognized share-based compensation expense for stock options, net of expected forfeitures, with a weighted-average future expense recognition period of approximately 1.8 years.

The following table summarizes the activity for stock options for the thirty-nine weeks ended October 3, 2009:

 

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

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

   3,731,583      $ 13.89    3.9

Granted (weighted average grant date fair value of $2.40)

   724,375        5.82    4.7

Exercised

   (44,755 )     4.51   

Forfeited

   (91,723 )     7.67   

Expired

   (196,872 )     16.80   
           

Outstanding at October 3, 2009

   4,122,608        12.54    3.5
           

Vested as of October 3, 2009

   2,434,627        16.58    3.2
           

Restricted Share Awards: The Incentive Plan also provides for awards of shares to eligible associates, non-employee directors and consultants that are subject to restrictions on transfer for a period of time (commonly referred to as “restricted shares”). Compensation expense for restricted shares was less than $0.1 million for the thirteen weeks ended October 3, 2009 and $0.1 million for the thirteen weeks ended September 27, 2008. Compensation expense was $0.1 million for the thirty-nine weeks ended October 3, 2009 and $0.2 million for the thirty-nine weeks ended September 27, 2008.

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

NOTE 4: SEGMENT INFORMATION

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

Revenues are attributed to the segment that processes the orders from the customer. Through the Direct Sales segment, the Company promotes and sells products internationally through its websites and call center. The Company operates primarily in the United States with foreign revenues representing 5% or less of total net revenues during each of the thirteen-week and thirty-nine-week periods ended October 3, 2009 and September 27, 2008, and foreign long-lived assets totaled less than 2% of long-lived assets at each of these dates.

 

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

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

 

     13 Weeks Ended     39 Weeks Ended  
     October 3,
2009
    September 27,
2008
    October 3,
2009
    September 27,
2008
 

Net revenues:

        

Stores

   $ 151,431      $ 159,807      $ 434,407      $ 456,537   

Direct Sales

     9,175        10,476        26,842        31,854   

Port Supply

     7,548        9,966        23,241        31,802   
                                

Consolidated net revenues

   $ 168,154      $ 180,249      $ 484,490      $ 520,193   
                                

Contribution:

        

Stores

   $ 21,971      $ 19,365      $ 64,355      $ 54,556   

Direct Sales

     1,837        1,325        5,769        4,969   

Port Supply

     (437 )     (423 )     (808 )     (726
                                

Consolidated contribution

   $ 23,371      $ 20,267      $ 69,316      $ 58,799   
                                

Reconciliation of consolidated contribution to net income:

        

Consolidated contribution

   $ 23,371      $ 20,267      $ 69,316      $ 58,799   

Less:

        

Indirect costs of goods sold not included in consolidated contribution

     (7,768     (8,209 )     (19,165     (22,489 )

General and administrative expense

     (6,551     (8,046 )     (23,559     (29,312 )

Interest expense

     (87     (327 )     (720     (1,935 )

Provision for income taxes

     (492 )     (264 )     (689     (14,862 )
                                

Net income (loss)

   $ 8,473      $ 3,421      $ 25,183      $ (9,799
                                
     13 Weeks Ended     39 Weeks Ended  
     October 3,
2009
    September 27,
2008
    October 3,
2009
    September 27,
2008
 

Assets:

        

Stores

       $ 33,271      $ 34,453   

Port Supply

         5,894        7,324   

Direct Sales

         650        1,559   

Unallocated

         264,369        299,178   
                    

Total assets

       $ 304,184      $ 342,514   
                    

Capital expenditures:

        

Stores

   $ 2,030      $ 2,060      $ 7,593      $ 6,924   

Port Supply

     —          139        26        866   

Direct Sales

     —          —          —          131   

Unallocated

     1,228        161        2,040        3,577   
                                

Total capital expenditures

   $ 3,258      $ 2,360      $ 9,659      $ 11,498   
                                

Depreciation and amortization:

        

Stores

   $ 2,691      $ 2,688      $ 7,794      $ 8,395   

Port Supply

     41        75        152        247   

Direct Sales

     78        119        254        381   

Unallocated

     1,689        1,828        4,662        5,147   
                                

Total depreciation and amortization

   $ 4,499      $ 4,710      $ 12,862      $ 14,170   
                                

 

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NOTE 5: COMPREHENSIVE INCOME (LOSS)

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

NOTE 6: CONTINGENCIES

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

NOTE 7: STORE CLOSURE AND OTHER RESTRUCTURING COSTS

Restructuring charges include severance costs, lease termination fees, legal and professional fees paid for lease termination negotiations, and other costs associated with the closure of facilities. Severance benefits are detailed in an approved severance plan, which is specific as to number, position, location and timing. Costs are recognized ratably over the period services are rendered, otherwise they are recognized when they are communicated to the employees. Other associated costs, such as legal and professional fees, have been expensed as incurred.

During the thirty-nine weeks ended October 3, 2009, the Company reduced net reserves by $0.2 million for lease contract termination obligations and other store closure costs due to favorable lease negotiations. Accrued liabilities related to store closure costs outstanding as of October 3, 2009 were $6.6 million.

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

 

     Termination
Benefits
and Other
Costs
    Store Lease
Termination
Costs
    Total  

Balance, December 29, 2007

   $ —        $ 1,988      $ 1,988   

Charges

     3,023        7,664        10,687   

Payments

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

Ending balance, January 3, 2009

     1,069        8,000        9,069   

Reduction of charges

     (13 )     (181 )     (194 )

Payments

     (254 )     (1,998 )     (2,252 )
                        

Ending balance, October 3, 2009

   $ 802      $ 5,821      $ 6,623   
                        

NOTE 8: NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution that could occur if unvested restricted shares and outstanding options to purchase common stock were exercised. Options to purchase approximately 2.2 million and 3.0 million shares of common stock that were outstanding for the quarters ended October 3, 2009 and September 27, 2008, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive. Options to purchase approximately 2.6 million and 2.9 million shares of common stock that were outstanding for the first thirty-nine weeks ended October 3, 2009 and September 27, 2008, respectively, have been excluded from the calculation of diluted income (loss) per share because inclusion of such shares would be anti-dilutive.

 

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The following is a reconciliation of the Company’s basic and diluted net income (loss) per share computations (shares in thousands):

 

     13 Weeks Ended  
     October 3, 2009     September 27, 2008  
     Shares    Net Income
Per Share
    Shares    Net Income
Per Share
 

Basic

   22,242    $ 0.38      22,020    $ 0.16   

Effect of dilutive stock options

   230      —        4      —     
                          

Diluted

   22,472    $ 0.38      22,024    $ 0.16   
                          
     39 Weeks Ended  
     October 3, 2009     September 27, 2008  
     Shares    Net Income
Per Share
    Shares    Net Loss
Per Share
 

Basic

   22,182    $ 1.14      21,962    $ (0.45

Effect of dilutive stock options

   101      (0.01   —        —     
                          

Diluted

   22,283    $ 1.13      21,962    $ (0.45
                          

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

West Marine, Inc.

Watsonville, California

We have reviewed the accompanying condensed consolidated balance sheet of West Marine, Inc. and subsidiaries as of October 3, 2009, and the related condensed consolidated statement of income for the 13-week period ended October 3, 2009 and the condensed consolidated statements of income and cash flows for the 39-week period ended October 3, 2009. These interim financial statements are the responsibility of the Company’s management.

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

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

 

/s/ GRANT THORNTON LLP
San Francisco, California
November 9, 2009

 

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

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 3, 2009 (the “2008 Form 10-K”). All references to the third quarter and the first nine months of 2009 mean the thirteen-week and thirty-nine-week periods ended October 3, 2009, respectively, and all references to the third quarter and the first nine months of 2008 mean the thirteen-week and thirty-nine-week periods ended September 27, 2008, respectively. Unless the context otherwise requires, “West Marine,” “we,” “us” and “our” refer to West Marine, Inc. and its subsidiaries.

Overview

West Marine is one of the largest boating supply retailers in the world. We have three reportable segments — Stores, Port Supply (wholesale) and Direct Sales (Internet and call center) — all of which sell aftermarket recreational boating supplies directly to customers. At the end of the third quarter of 2009, we offered our products through 337 company-operated stores in 38 states, Puerto Rico and Canada and two franchised stores located in Turkey, on the Internet and through our call center channel. We also are engaged, through our Port Supply division, in our stores and on the Internet, in the wholesale distribution of boating products to commercial customers. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.

Critical Accounting Policies and Estimates

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

Results of Operations

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

 

     13 Weeks Ended     39 Weeks Ended  
     October 3,
2009
    September 27,
2008
    October 3,
2009
    September 27,
2008
 

Net revenues

   100.0 %   100.0 %   100.0 %   100.0 %

Cost of goods sold

   71.8      72.4      70.6      71.0   
                        

Gross profit

   28.2      27.6      29.4      29.0   

Selling, general and administrative expense

   22.9      24.4      23.9      26.9   

Store closures and other restructuring costs

   (0.1 )   0.9      0.0      0.3   

Impairment of long-lived assets

   0.0      0.1      0.0      0.5   
                        

Income from operations

   5.4      2.2      5.5      1.3   

Interest expense, net

   0.1      0.2      0.2      0.3   
                        

Income before income taxes

   5.3      2.0      5.3      1.0   

Income taxes

   0.3      0.1      0.1      2.9   
                        

Net income (loss)

   5.0 %   1.9 %   5.2 %   (1.9 )%
                        

 

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Thirteen Weeks Ended October 3, 2009 Compared to Thirteen Weeks Ended September 27, 2008

Net revenues for the third quarter of 2009 were $168.2 million, a decrease of $12.1 million, or 6.7%, compared to net revenues of $180.2 million in the third quarter of 2008. Net revenues were unfavorably impacted by $12.4 million related to a fiscal calendar shift. Since our sales typically build week-over-week leading up to the peak of boating season, the fiscal calendar shift from a 53-week fiscal year last year meant that there were fewer peak season days in the third quarter of this year, which negatively affected comparable store sales comparisons. In addition, the move of the Fourth of July holiday from the third fiscal quarter in 2008 to the second fiscal quarter in 2009 further affected the quarter. Apart from these shifts, we experienced some favorable impacts on our business, including continued improvement in boat usage, continued movement towards do-it-yourself projects, favorable results from our product expansions and larger store formats, and favorable weather conditions in most markets. We believe we have also benefited from changes in the competitive landscape and from lower gas prices versus the same period last year. We had 337 company-operated stores and two franchised stores in Turkey open at the end of the third quarter of 2009 compared to 361 company-operated stores and one franchise store in Turkey at the end of the third quarter of 2008.

Net revenues attributable to our Stores division decreased $8.4 million to $151.4 million in the third quarter of 2009, a 5.2% decrease compared to the third quarter of 2008. Comparable store sales declined by $6.3 million, or 4.3%, from last year. Store revenues also decreased by $8.9 million due to store closures during the third and fourth quarters of 2008 and the first three quarters of 2009. However, this sales decrease was partially offset by $5.9 million of revenues from new stores opened during the same period of time. Wholesale (Port Supply) net revenues through our distribution centers decreased $2.4 million, or 24.3%, to $7.5 million in the third quarter of 2009 compared to 2008, primarily due to lower sales to boat dealers and boat builders, which remain very challenged in this economy. Net revenues in our Direct Sales division decreased $1.3 million, or 12.4%, to $9.2 million in the third quarter of 2009 compared to 2008, primarily due to lower revenues from international customers driven by fluctuations in the exchange rates and lower revenues through our call center related to the fiscal calendar shift.

Gross profit decreased by $2.2 million, or 4.6%, to $47.5 million in the third quarter of 2009, compared to $49.7 million for the same period last year. However, gross profit increased as a percentage of net revenues to 28.2% in the third quarter of 2009, compared to 27.6% for the same period last year. Approximately 0.5% of this increase was due to lower unit buying and distribution costs given the reduced inventory levels during the period and approximately 0.4% from improved inventory shrinkage results. These improvements were partially offset by the deleveraging of store occupancy costs, which had an unfavorable gross margin impact of approximately 0.4%, as revenues decreased relative to the fixed nature of these expenses.

Selling, general and administrative expense decreased $5.3 million, or 11.9%, to $38.6 million in the third quarter of 2009, compared to $43.9 million for the same period last year, and decreased as a percentage of net revenues to 22.9% in the third quarter of 2009, compared to 24.4% for the same period last year. The decrease in selling, general and administrative expense primarily was due to a $2.1 million reduction related to reduced store count, $1.6 million in lower payroll, marketing and other variable expenses reflecting lower revenues and $1.5 million in selling and support expense, including a $0.9 million reduction in costs related to the now-settled SEC investigation. These decreases were partially offset by a $1.2 million increase in accrued bonus expense reflecting performance above budgeted expectations.

Store closure and other restructuring charges were adjusted by $0.2 million during the third quarter of 2009 to reflect lease negotiations that resulted in favorable settlements, which essentially resulted in these charges decreasing by $1.9 million compared to the same period last year. During the third quarter of 2008, we recognized restructuring expenses of $1.7 million consisting of charges for store closures, Port Supply restructuring, the closure of our Hagerstown, Maryland distribution center, and severance costs for reductions in force at the Watsonville Support Center.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax rate for the third quarter of 2009 was 5.5% compared with an effective tax rate of 7.2% for the same period last year. The change in our effective tax rate largely was due to the release in the third quarter of 2009 of a $0.4 million reserve for an uncertain tax position because the applicable statute of limitations expired.

Net income for the third quarter of 2009 was $8.5 million compared to net income of $3.4 million in the third quarter of 2008. The improvement in net income was primarily attributable to lower net buying and distribution costs, selling, general and administrative expense reductions and lower store closure and restructuring costs in the current year.

 

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Thirty-Nine Weeks Ended October 3, 2009 Compared to Thirty-Nine Weeks Ended September 27, 2008

Net revenues for the thirty-nine weeks of 2009 were $484.5 million, a decrease of $35.7 million, or 6.9%, compared to net revenues of $520.2 million in the thirty-nine weeks of 2008.

Net revenues attributable to our Stores division decreased $22.1 million to $434.4 million in the first thirty-nine weeks of 2009, a 4.8% decrease compared to the first thirty-nine weeks of 2008. Comparable store sales declined by 3.4% and accounted for $14.4 million of the decrease. The decline in comparable store sales reflects lower sales of discretionary items partially offset by increased sales of core boating parts and accessories. While we have seen increased boat usage in some markets, we expect consumers to carefully evaluate their needs-based boating purchases and continue to reduce spending on discretionary items. Store revenues also decreased by $22.7 million from store closures in 2008 and the first nine months of 2009. However, this decline was partially offset by $13.8 million net revenues from new stores. Wholesale (Port Supply) net revenues through our distribution centers decreased $8.6 million, or 26.9%, to $23.2 million in the first nine months of 2009 compared to 2008, primarily due to lower sales to boat dealers and boat builders, which remain very challenged in this economy. Net revenues at our Direct Sales division decreased $5.0 million, or 15.7%, to $26.8 million in the first thirty-nine weeks of 2009 compared to 2008, primarily due to lower revenues from international customers, lower revenues through our call center and lower revenues from higher-priced discretionary items. Net revenues comparisons for the thirty-nine weeks ended October 3, 2009 were not affected materially by the fiscal calendar shift referenced above.

Gross profit decreased by $8.1 million, or 5.4%, to $142.5 million in the thirty-nine weeks of 2009, compared to $150.6 million for the same period last year. However, gross profit increased as a percentage of net revenues by 0.4% to 29.4% in the first thirty-nine weeks of 2009, compared to 29.0% for the same period last year. Gross profit as a percentage of net revenues increased primarily due to a 0.9% increase in product margin driven by less promotional and clearance activity during the first nine months of 2009 and a shift in sales to higher-margin core boating categories, such as maintenance. Additionally, inventory shrinkage improved by 0.2%. Improvements were partially offset by the deleveraging of buying and distribution costs and occupancy which had an unfavorable impact of 0.7% due to the fixed nature of these expenses in relation to the decline in revenues.

Selling, general and administrative expense decreased $23.6 million, or 16.9%, to $116.0 million in the first thirty-nine weeks of 2009, compared to $139.6 million for the same period last year, and decreased as a percentage of net revenues to 23.9% in the first thirty-nine weeks of 2009, compared to 26.9% for the same period last year. The decrease in selling, general and administrative expense primarily was due to $11.3 million in lower support and selling overhead, including a $3.1 million reduction in costs related to the now-settled SEC investigation, $8.3 million in lower payroll, marketing and other variable expenses reflecting lower revenues and a $5.0 million reduction due to the reduced store count. These decreases were partially offset by a $3.4 million increase in accrued bonus expense reflecting performance above budgeted expectations.

Non-cash impairment of long-lived assets was $2.4 million in the first nine months of 2008, compared to no impairments during the first nine months of 2009. During the third quarter of 2008, management decided to close our distribution center located in Hagerstown, Maryland, and our call center located in Largo, Florida. We recognized restructuring expenses of $1.7 million consisting of charges for store closures, Port Supply restructuring, the distribution center closure, and severance costs for reductions in force at the Watsonville Support Center.

Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary. Our effective income tax rate for the first nine months of 2009 was a provision of 2.7% and related to state taxes and changes in uncertain tax positions. The prior year’s tax provision was significantly higher driven by the valuation allowance established during the second quarter of 2008. For more information, see Note 2 to our condensed consolidated financial statements included in this report.

Net income for the thirty-nine weeks of 2009 was $25.2 million compared to a net loss of $9.8 million in the thirty-nine weeks of 2008. The improvement in net income was primarily attributable to lower net buying and distribution costs and reductions in selling, general and administrative expense.

Liquidity and Capital Resources

We ended the third quarter of 2009 with $22.3 million of cash, an increase from $6.1 million at the end of the third quarter of 2008. Working capital, the excess of current assets over current liabilities, decreased to $167.2 million at the end of the third quarter, compared with $189.2 million for the same period last year. Lower merchandise inventories, down $45.3 million, was the primary driver of the decrease in working capital, partially offset by a decrease of $11.8 million in accounts payable.

 

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Operating Activities

During the first nine months of 2009, net cash provided by operating activities was $71.0 million, compared to $33.9 million for the same period last year. Net cash provided by operating activities improved year-over-year by $37.1 million and primarily was driven by improved operating results and lower inventory purchases, resulting in lower accounts payable. The decrease in accounts payable was partially offset by increased expense for accruals related to fiscal 2008 store closures and restructuring charges and by increased accrued bonus expense reflecting performance above budgeted expectations.

Investing Activities

We spent $9.7 million on capital expenditures during the first nine months of 2009, a $1.8 million decrease from the prior year period, primarily due to lower spending on production improvements at our distribution centers and lower spending on information technology projects, partially offset by investment in our two new prototype flagship stores that launched during the first quarter of 2009. We have opened eight stores (including the two flagship stores) and remodeled two stores during the first nine months of 2009.

Financing Arrangements

Net cash used in financing activities was $46.5 million for the first nine months of 2009, consisting of net repayments under our credit facility.

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

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

The applicable margin for any date will depend upon the amount of available credit under the revolving facility. The loan agreement also imposes a commitment fee on the unused portion of the revolving loan facility. For the third quarter of 2009 and 2008, the weighted-average interest rate on all of our outstanding borrowings was 1.5% and 3.8%, respectively.

Although our loan agreement contains customary covenants, including but not limited to, restrictions on our ability and that of our subsidiaries to incur debt, grant liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain debt or other similar financial covenants, such as maintaining certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our loan agreement at any given time is determined by the estimated liquidation value of these assets as determined by the lenders’ appraisers. Additional loan covenants include a requirement that we maintain minimum revolving credit availability equal to the lesser of $15.0 million or 7.5% of the borrowing base. In addition, there are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date. A default under our loan agreement also could significantly and adversely affect our ability to obtain additional or alternative financing. For example, the lenders’ obligation to extend credit is dependent upon our compliance with these covenants. As of October 3, 2009, we were in compliance with our bank covenants.

At October 3, 2009, there were no amounts outstanding under this credit facility, and $91.9 million was available for future borrowings. At September 27, 2008, borrowings under this credit facility were $29.3 million, bearing interest at rates ranging from 3.5% to 5.0%, and $102.7 million was available to be borrowed. The decrease year-over-year in credit availability primarily was due to lower inventory levels which serve as collateral for the credit facility. At October 3, 2009 and September 27, 2008, we had $7.2 million and $5.7 million, respectively, of outstanding commercial and stand-by letters of credit.

 

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Our borrowing base at October 3, 2009 and September 27, 2008 consisted of the following (in millions):

 

     October 3,
2009
    September 27,
2008
 

Accounts receivable availability

   $ 6.0      $ 6.8   

Inventory availability

     105.8        146.2   

Less: reserves

     (4.7 )     (4.2 )
                

Total borrowing base

   $ 107.1      $ 148.8   
                

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

    

Ending loan balance

   $ —        $ 29.3   

Outstanding letters of credit

     7.2        5.7   
                

Total obligations

   $ 7.2      $ 35.0   
                

Accordingly, our availability as of October 3, 2009 and September 27, 2008, respectively, was (in millions):

    

Total borrowing base

   $ 107.1      $ 148.8   

Less: obligations

     (7.2 )     (35.0 )

Less: minimum availability

     (8.0 )     (11.1 )
                

Total availability

   $ 91.9      $ 102.7   
                

Off-Balance Sheet Arrangements

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

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

Seasonality

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

Business Trends

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

 

   

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

 

   

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

 

   

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

 

   

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

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

 

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

Internet Address and Access to SEC Filings

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

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

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

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

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

At the end of the third quarter, we had no outstanding long-term debt and as such would not be impacted by a change in interest rates. The Company’s interest rate exposure would increase if the Company takes on new debt in the future.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We conducted, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on our evaluation, we concluded that, as of October 3, 2009, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

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

 

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

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

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

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5 – OTHER INFORMATION

None.

 

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ITEM 6 – EXHIBITS

 

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

 

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

 

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SIGNATURES

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

 

Date: November 9, 2009     WEST MARINE, INC.
    By:  

  /s/ Geoffrey A. Eisenberg

        Geoffrey A. Eisenberg
        Chief Executive Officer
    By:  

  /s/ Thomas R. Moran

        Thomas R. Moran
        Chief Financial Officer

 

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