Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 3, 2004

OR

Commission File Number 0-22512

WEST MARINE, INC.

(Exact Name of Registrant as Specified in Its Charter)

500 Westridge Drive, Watsonville, CA 95076-4100

(Address of Principal Executive Offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value

(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 is not contained herein, and will not be contained, to the best of the 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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

At June 27, 2003 the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $223,362,007 based upon the last sale price reported for such date on The Nasdaq National Market. At March 5, 2004, the number of shares outstanding of the registrant’s Common Stock was 20,635,306.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

Table of Contents

WEST MARINE, INC.

2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

2

Table of Contents

PRELIMINARY NOTE

This annual report on Form 10-K is for the year ended January 3, 2004. This annual report modifies and supersedes documents filed prior to this annual report. The Securities and Exchange Commission allows us to “incorporate by reference” information that we file with them, which means that we can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this annual report. In addition, information that we file with the Securities and Exchange Commission in the future automatically will update and supersede information contained in this annual report.

The information contained in this report is based upon information available to us as of January 3, 2004, unless otherwise specified. We undertake no obligation (other than that required by law) to publicly update or revise any disclosures contained in this report, whether as a result of new information, future events or otherwise. Website references throughout this report are for information only, and the content of these websites is not incorporated by reference and should not otherwise be considered a part of this report.

3

Table of Contents

PART I

ITEM 1 - BUSINESS

General

West Marine is the largest boating supplies company in the world. As more fully described below, in January 2003 we acquired 62 BoatU.S. stores. Retail operations, which generate approximately 86% of our net sales, are conducted under two brand names – West Marine and BoatU.S. At year-end 2003, we had a total of 345 stores, of which 283 were West Marine locations and 62 were BoatU.S. locations. Geographically, our stores are located in 38 states, Puerto Rico and Canada. Net sales in 2003 were $660.9 million, including sales from BoatU.S. retail operations since being acquired in January.

Our Port Supply wholesale division, representing approximately 7% of our net sales, is the largest wholesale distributor of marine equipment in the United States, serving boat manufacturers, marine services, commercial vessel operators and government agencies. Our Direct Sales division, which includes Catalog and Internet, accounted for the remaining 7% of our net sales and offers customers all over the world more than 50,000 products – far more than any competitor.

We opened 27 new stores in 2003, of which 26 carry the West Marine name and one is a BoatU.S. location. Twelve of these new stores are in the streamlined West Marine Express store format. In 2003 we also launched a 25,000 square foot West Marine “superstore” in Ft. Lauderdale, Florida.

West Marine has three distribution centers: Rock Hill, South Carolina; Hollister, California; and Hagerstown, Maryland, which joined us when West Marine acquired the BoatU.S. retail operations in early 2003.

By far the most important event in the past year was the successful integration of the BoatU.S. retail operations, which we accomplished on schedule and within budget. Also noteworthy for 2003, enrollment in our free West Advantage customer loyalty program reached almost 1.8 million members, with another 555,000 participating in paid membership programs under the West Advantage Plus and BoatU.S. names.

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”, “we”, “us” and “our” refer to West Marine, Inc. and its subsidiaries. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.

All references to 2003, 2002 and 2001 in this report refer to our fiscal years ended on January 3, 2004, December 28, 2002, and December 29, 2001, respectively. Fiscal year 2003 was a 53-week year while both 2002 and 2001 were 52-week years.

Business Strategy

Our 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. Approximately 80% of our associates with customer contact participate in West Marine’s voluntary technical training program, with more that 15% achieving the highest certification level.

We pursue a growth strategy through geographic diversification. Our planned expansion is subject to a number of factors, including the adequacy of our capital resources, as well as our ability to locate suitable store sites and to negotiate acceptable lease terms, our ability to hire, train and integrate associates, and our ability to adapt our distribution and other operational systems.

In January 2003, we acquired the retail stores, catalog sales and wholesale operations of Boat America Corporation for $72 million in cash and the assumption of certain liabilities. The acquisition provided us with greater operating flexibility and allowed us to achieve synergistic cost savings by immediately expanding our store base. Geographically, the acquisition enhanced our presence in most major boating markets within the United States and allows us to better compete in the marine products aftermarket.

Historically, West Marine and Boat America have maintained different images with their customers. While West Marine’s brand name has long been associated with sail-boating as well as power-boating, many boaters have perceived Boat America’s tradename, BoatU.S., as synonymous with power-boating. Therefore, currently we plan to continue to operate the acquired stores and Direct Sales under the BoatU.S. tradename to capitalize on the brand loyalty of Boat America customers and to foster cross-selling and cross-marketing opportunities.

4

Table of Contents

Stores Division

West Marine operated 345 retail stores in 38 states, Puerto Rico and Canada as of January 3, 2004, compared to 257 stores as of December 28, 2002. Sixty-two of our stores operate under the BoatU.S. name, and the remaining stores are West Marine locations.

Since opening our first store in 1975, we have grown through internal expansion and acquisitions. The following table sets forth, by geographic region, the number of stores open at the end of each of the following years:

To facilitate deeper market penetration, we are testing both larger “superstore” and smaller “Express” store formats. To date, both of these new store formats have been successful, and we will continue to test them in different locations. Our superstores measure approximately 25,000 to 30,000 square feet, with a broader assortment of merchandise than that of a typical store. We are testing the superstore format in the key markets of Southern California and Florida. At year-end 2003, we operated two superstores, one in Ft. Lauderdale, Florida and one in Marina Del Rey, California. Our Marina Del Rey superstore is actually two stores that, when combined, are equivalent to a superstore for the location. We are expanding our San Diego, California store into a superstore, which we expect to launch in mid-2004.

During 2003, we opened twelve smaller format Express stores. Each Express store is approximately 2,500 square feet, compared to approximately 6,000 to 8,000 square feet for a traditional store. Express stores stock a limited range of products, mostly high-demand items, but can be serviced quickly by a nearby larger store with a more extensive product range or by a warehouse.

During 2003, we opened 15 new traditional stores, including two stores in Canada and one in Puerto Rico. We also remodeled six stores and closed one store during the year. We originally intended to open 45 stores in 2003, but the acquisition of 62 stores from Boat America caused us to reconsider our plans and scale back the number of new store additions for the year. During 2004, we plan to open a total of approximately 35 new stores, consisting of approximately 20 Express stores, with the remainder being traditional format stores located in higher volume U.S. coastal markets. We plan to remodel six existing stores during 2004, including the expansion of our San Diego store into a superstore.

Wholesale Division

Port Supply, our wholesale division, was created to expand our market share across a broader customer base and to leverage our purchasing and distribution efficiencies. Our broad retail assortment gives Port Supply an advantage in serving wholesale customers looking for a larger assortment of products than that carried by typical distributors. We serve the wholesale market through 36 commissioned sales associates, our retail stores, our call center and our website.

We distributed marine supplies to over 20,000 wholesale customers in 2003, both domestic and international. Our wholesale customers include businesses involved in boat sales, boat building, boat repair, yacht chartering and commissioning, and marine supply retailers who resell our merchandise. In addition, Port Supply sells to government and industrial customers who use marine-related products.

During 2003, Port Supply converted over 2,500 wholesale division customers acquired from Boat America to West Marine Port Supply accounts. We plan to specifically target this new customer base as one of our 2004 sales initiatives.

Port Supply’s website, www.portsupply.com, is one of the leading business-to-business websites in the marine industry. In 2003 we saw an increased number of customers using our website because of its convenience and its wealth of technical information. We expect this trend to continue in 2004.

In 2004 we plan to grow sales to both new and existing customers and expand our wholesale market share through a comprehensive marketing plan that includes direct mail, email advertising, trade advertising, specialty programs, new business promotions and sales commission incentives.

5

Table of Contents

Direct Sales Division

We process catalog orders at our Watsonville, California and Largo, Florida call centers for fulfillment by one of our three distribution facilities. We plan to distribute, by direct mail and through our stores, over one million copies of our annual merchandise catalog during the first quarter. We design and produce our catalogs at our support center in Watsonville, California utilizing a desktop publishing system. We expanded the BoatU.S. annual catalog by one-third. In addition, we mail smaller, seasonal, full-color catalogs and flyers during the year. Our catalogs and our websites also provide customers with important technical information about our products. This enables us to make both pricing and product changes until shortly before the catalogs are printed. Customer surveys show that our catalogs and our websites also serve as effective marketing and advertising tools for our retail stores.

Our Direct Sales division, formerly called Catalog, will continue to focus on exposing customers to the full range of our product assortment, providing in-depth technical information and assisting with product selection. During 2003, we consolidated our wholesale, retail and special orders call center activities to maximize efficiency and reduce costs. Due to the integration of the BoatU.S. Largo, Florida call center, we also focused on customer service training and implemented systems that automatically route calls to the optimum call center location. During 2004, the Direct Sales division will pursue new customers through targeted marketing campaigns.

Our Direct Sales division websites, www.westmarine.com and www.boatus-store.com, address the growing significance of e-commerce in the marketplace by targeting all segments of boat enthusiasts. Both websites are continuously updated with product, pricing and stocking changes, and both include online product advisors, technical information, consumer product reviews, news, feature stories and other information of interest to boaters. Customers may also get information regarding boat insurance and towing services, apply for boat financing and access membership program information through our websites.

Foreign Sales

We have four stores located in Canada and two stores located in Puerto Rico. We also sell our products in foreign countries through the West Marine catalog and the West Marine website. For each of the years ended 2003, 2002 and 2001, sales outside of the United States represented less than 4% of our net sales.

Merchandising

The merchandise that we sell can be divided into four general categories:

Maintenance. Maintenance products include engine and plumbing parts, paint and electrical supplies. Maintenance products represent the largest share of our sales and tend to have relatively high gross margins. Sales volumes in this category are relatively stable from year to year, since maintenance items are considered a necessity for boat owners. Over the past several years, satisfaction with the quality of our private label products in this category, including such high volume items as batteries, bottom paint and boat cleaning products, has resulted in a loyal base of repeat customers.

Safety. Safety is our second largest category in sales volume, but it is also our category lowest in gross margin. Besides items like life jackets, flares, harnesses and first aid kits, the Safety category also includes electronics products such as global positioning navigational systems, ship-to-shore radios, marine stereos, autopilots, fish finders and radars. We also offer private label VHF radios and other electronics equipment. Private label products and items that we co-brand with manufacturers represent a significant portion of sales in this category. During 2004, we will focus on expanding the electronic navigation and software areas, which show high growth potential.

Hardware. Our focus is on basic marine hardware, where we dominate the market for projects and applications. Hardware products include items like rope, chain, anchors, trailers and deck hardware. Like Maintenance, products in this category tend to produce relatively high gross margins and are considered by boat owners to be more of a necessity than a discretionary purchase.

Powerboat and Lifestyle. This broad category includes fishing and watersports products, small boats and motors, items for the cabin and galley, gift items, footwear and apparel. We substantially increased the number of fishing and watersports products we carry in 2003 and intend to continue to expand these categories in 2004 with more private label products. We also feature a broad selection of high-quality boating apparel and footwear including well-known brands. We also offer a wide selection of foul weather gear, shirts, shorts, jackets, hats, boots and other apparel, a large portion of which are private label.

We strive 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 us but not available in a particular store can be shipped to the customer, usually overnight, from our distribution center. In addition, our special orders department can acquire products that we do not normally stock.

6

Table of Contents

Our policy is to offer our products at prices that are competitive with prices charged by other national and regional marine supply specialty retailers. Our commitment to offering competitive prices is supported by our price protection program where we will either match a competitor’s price or refund the difference between our price and the competitor’s price. Our merchandising group sets prices centrally. Store managers, however, are responsible for assessing the local market and recommending competitive price changes. We believe that our competitive pricing policies, together with our price protection program, are important factors in establishing and maintaining a favorable reputation among our customers.

Sourcing and Purchasing

We purchased merchandise from more than 1,400 vendors during 2003 and realized significant savings through quantity purchases, advance deliveries and direct shipments. We offer many brands that are well known to our customers. In 2003, no one vendor accounted for more than 11% of our merchandise purchases, and our 20 largest vendors accounted for approximately 41% of our merchandise purchases. Generally we purchase merchandise from our suppliers on an order-by-order basis and we have a limited number of long-term purchase contracts or other contractual assurances of continued supply or pricing.

We strive to maintain strong relationships with our vendors. Our buyers meet regularly with major vendors to stay abreast of new products, new technology and new pricing. In addition, we conduct an annual program at which key vendors are encouraged to discuss their business and their relationship with West Marine with our key executives and buyers. We work closely with our vendors, frequently sharing information regarding market research, our sales performance and our mutual goals. We also share forecasts regularly with our top 150 vendors, collaborating closely for optimal fulfillment.

During 2004, we plan to increase our offerings of high-end private label and exclusive merchandise. Our private label merchandise, which we sell under the “West Marine” and “Seafit” brand names, is manufactured to our specifications on a contract basis in the United States, Europe and the Pacific Rim, and typically has higher gross margins than comparable brand name merchandise. In many cases, our private label merchandise is considered by boaters to be the best such product available. We have a limited number of long-term contracts with our manufacturing sources, and we compete with other companies for production facilities and import quota capacity.

Our Senior Vice President/General Merchandise Manager is responsible for the selection of vendors and products for our merchandise. This executive supervises our buyers, who are responsible for judging the quality and arranging delivery of specific product categories, including the manufacture of private label merchandise. Our Senior Vice President of Merchandise Planning and Allocation is responsible for purchasing and for managing inventory levels in the distribution facilities and the stores while minimizing in-store out-of-stocks. Merchandise planners are assisted by a management information system that provides current inventory balance, price and usage information and that recommends purchase quantities, enabling our managers to react quickly to market changes and customer demand.

Customer Service

We are committed to achieving “better than expected” customer satisfaction to encourage repeat business. In order to motivate responsive, well-trained sales associates, we devote significant resources to developing and implementing employee training programs aimed at increasing product knowledge and responsiveness to customer needs. In addition, we provide a price-protection 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, we facilitate classes and offer seminars. We also include an array of informative “West Advisor” sections in our catalogs and on our website. Most store managers are drawn from our sales associates and are avid boating enthusiasts.

Our annual merchandise catalogs provide technical information relating to various boating subjects, thereby providing customers with a higher degree of product knowledge. We place great emphasis on new hire training, on-the-job training, additional self-paced training and field tests to help ensure that sales associates are familiar with the technical elements of our product offerings.

In order to provide customers with easy access to factory authorized repair service, we maintain in-house service centers at our facilities in Hollister, California and Rock Hill, South Carolina. Based upon information received from our customers, both in multiple focus groups conducted by an independent research firm and from our “How Are We Doing” cards at retail stores, we believe we have established a reputation for excellent customer service.

7

Table of Contents

Site Selection and Store Design

In selecting which markets to enter, we evaluate 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, we apply standardized site selection criteria which take into account numerous factors, including the number of boat slips and boats within a certain radius, local demographics and overall retail activity.

Our stores are generally located either near boat marinas or at central locations readily accessible to boaters. Stores are typically open seven days a week, including most holidays. Most stores have large, readily identifiable signage, easy access from major roads and adequate customer parking. While our traditional stores are approximately 6,000 to 8,000 square feet in size, our Express stores are approximately 2,500 square feet and our superstores range from approximately 25,000 to 30,000 square feet.

The format of our 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 portion of the store’s product offerings and to stimulate customer purchases. Eye-catching end-cap displays feature new product offerings or promotional items or focus on a particular product category, such as safety equipment. Our brightly lit, well-organized stores are designed to provide a pleasant and convenient shopping environment.

Store Operations

All of our stores are segregated into three geographic regions with a regional manager responsible for each. Regional Vice Presidents report to the Senior Vice President of Stores. Each region is separated into districts, each with a District Manager responsible for store operations within his or her district. Our District Managers visit the stores within their districts frequently in order to monitor operating performance and to determine compliance with our operating standards. The typical staff for our stores consists of one Store Manager, an Assistant Store Manager and between four and twenty full-time and part-time sales associates. Store Managers make hiring decisions and monitor and respond to local competitive forces and seasonal requirements.

Store Managers and District Managers participate in an incentive plan that ties compensation awards to the achievement of specific store performance goals. We advocate broad-based participation in our stock purchase plans, and most associates are eligible to receive stock option grants.

During 2003, West Marine held a private “boating equipment show” featuring more than 80 of the industry’s most prominent vendors, exclusively for more than 400 of our key associates. This innovative training session is a powerful opportunity for vendors to provide store managers with product information. The equipment show is just one aspect of “West Marine University,” an intensive training program for store managers now in its 19th year. In addition to the equipment show, managers participate in classroom sessions and role-playing exercises and have the opportunity to hear from keynote speakers on subjects ranging from sales and management techniques to current marine industry topics.

See Note 10 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.

Logistics

We operate three full-service distribution centers in support of our supply chain network. We expanded the West Coast distribution center, located in Hollister, California, by nearly 50% during 2003, to 240,000 square feet, in order to accommodate future sales growth in the western United States. The Rock Hill, South Carolina distribution center measures 472,000 square feet. During 2003, in connection with our purchase of certain operations of Boat America, we acquired a third distribution center, a 287,000 square foot facility located in Hagerstown, Maryland.

Vendors ship product to one of the distribution centers, where merchandise is inspected, verified against the original purchase order, packaged and assembled for shipment to stores and customers. Distribution centers utilize advanced material handling technology as well as radio frequency communications to enable real-time management of inventory and production efforts. We use several domestic and international transportation methods, including ground and air freight, as well as company-owned trucks and vans. An inventory purchasing system tracks stock levels for each item in each distribution center. Most store inventories are replenished once each week. During peak seasonal periods, however, many stores receive a second weekly replenishment. Large volume stores may receive multiple shipments each week throughout the year.

During 2003, a number of productivity-enhancing initiatives were implemented in our distribution centers, such as increased direct to store deliveries, which have reduced costs while enhancing fill rates. Several new productivity initiatives are planned for 2004 under our continuous improvement strategy, including engineered standards programs and performance-based pay incentives in the distribution centers.

8

Table of Contents

Information Systems

We use automated business systems that provide our management with advanced tools and daily information on sales, gross margins and inventory levels. We utilize an integrated software system that runs on multiple IBM iSeries computers. This system has been designed to support all aspects of the business sales units, including Stores, Direct Sales (catalog and Internet) and Port Supply, with emphasis on improved productivity and reduced costs. Specific programs have focused on the accuracy and safety of data and materials. All purchasing functions, including planning, are fully integrated and provide a high level of automatic replenishment to our stores. This is further enhanced by our implementation of an Electronic Data Interchange network with our key vendors. By using the Electronic Data Interchange solution to share information electronically, we are able to generate savings, increase efficiency and better manage inventories.

Each of our stores is linked to our support headquarters through a dedicated frame relay network that provides access to up-to-the-minute information and 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.

We believe that the systems we use provide a competitive advantage and enable us to continually improve customer service, operational efficiency and provide our management with the ability to monitor critical performance factors.

Marketing

Our overall marketing objective is to communicate the attributes of our brand while creating a compelling “value equation” for our customers. We position our brands to stand for superior selection, friendly and knowledgeable service, competitive prices and shopping convenience.

We market our products and services through direct mail catalogs and flyers, email, space advertisements in boating specialty publications, cable television, newspapers and on the Internet.

We also participate in a number of boat shows and sponsor a number of boating-related events each year, ranging from sailing regattas and fishing derbies to waterway clean-up and environmental-quality campaigns. We also sponsor the biennial West Marine Pacific Cup race from San Francisco to Oahu, as well as a series of youth regattas held annually around the country. These events are designed to encourage participation in boating and increase the number of people enjoying the boating lifestyle, while promoting environmental responsibility.

During 2003 our free customer loyalty program, West Advantage, reached over 1.8 million members, while participation in our paid membership programs, under the West Advantage Plus and BoatU.S. names, reached another half million boaters. These programs are the largest boating membership programs in the United States. We continue to promote our private-label credit card which features extended payment options.

Competition

The retail market for marine supplies is highly competitive and our stores compete with other specialty supply stores. Many of these competitors have stores in markets where we now operate and in which we plan to expand. We also compete with a wide variety of local and regional specialty stores, sporting goods stores and mass merchants. We also have a number of competitors in the catalog and wholesale distribution of marine products.

The principal factors of competition in our marketplace are quality, availability, price, customer service, convenience and access to a variety of merchandise. We believe that we compete successfully on the basis of all such factors.

Trademarks and Service Marks

We own the trademarks and service marks “West Marine” and “E&B Marine,” among others. These marks and a number of others 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. In January 2003, we acquired rights to use the name “BoatU.S.” in our retail and wholesale operations.

9

Table of Contents

Associates

As of February 28, 2004, we had 4,326 associates, of whom 2,151 were full-time and 2,175 were part-time or temporary. A significant number of temporary associates are hired during our peak selling seasons.

Available Information

West Marine’s Internet address is www.westmarine.com. We make available, free of charge through the “Investor Relations” portion of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Forms 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission.

Executive Officers

The following table sets forth information regarding our executive officers:

John H. Edmondson has served as Chief Executive Officer of West Marine since November 1998 and also served as President from November 1998 through August 2003. Mr. Edmondson was also elected a director of West Marine in November 1998. From 1992 to November 1998, Mr. Edmondson served initially 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, 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 was promoted to President of West Marine in August 2003 while continuing as Chief Operating Officer, a position he has held since 1995. He has served as a director of West Marine since 1994. Mr. Everett currently oversees Merchandising, Marketing, Replenishment, Real Estate and Visual Merchandising. From 2001 to 2002, Mr. Everett served as President of Retail, which included the Stores and worldwide Catalog & Internet divisions. From 1998 to 2001, Mr. Everett was President of Stores, directing the day-to-day operations and expansion of West Marine’s nationwide retail store network. From 1996 to 1998, he served as Executive Vice President and has held various other positions since joining West Marine in 1981.

Eric S. Nelson has served as Senior Vice President of Finance, Chief Financial Officer and Secretary since May 2003. Mr. Nelson joined West Marine in March 2000 as Vice President of Finance and Controller. He served as CFO for Dental Components International from 1999 to 2000, CFO for Fluid Air Components from 1995 to 1999 and CFO for Etcetera Retail Chain Stores, Inc. from 1989 to 1994. He worked as a “troubled company” turnaround specialist from 1994 to 1995 and was an Assistant Controller with May Department Stores from 1979 to 1989.

West Marine also has adopted a code of ethics for its senior financial officers (including our principal executive officer, principal financial officer and controller). A copy of this code of ethics is available on West Marine’s website at www.westmarine.com, or a printed copy can be obtained by writing to the Secretary, West Marine, Inc., 500 Westridge Drive, Watsonville, California 95076. Any amendments to this code of ethics, as well as any waivers that are required to be disclosed under the rules of the Securities and Exchange Commission or the Nasdaq Stock Market, will be posted on West Marine’s website.

ITEM 2 – PROPERTIES

Our executive offices and support center are located in a 90,000 square foot facility in Watsonville, California, which we occupy under a lease that expires in 2006. We operate a 240,000 square foot distribution center located in Hollister, California, under a lease that expires in 2011, a 472,000 square foot distribution center located in Rock Hill, South Carolina, under a lease that expires in 2007, a 287,000 square foot distribution center located in Hagerstown, Maryland, under a lease that expires in 2006, and a 7,000 square foot call center for processing catalog and Internet orders located in Largo, Florida, under a lease that expires in January 2005.

At January 3, 2004, our 345 stores included an aggregate of approximately 2.7 million square feet of space. All of our stores except three are leased, typically for a five-year term, with options to renew for additional terms. In most cases, we pay a fixed rent. Substantially all of the leases require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses.

10

Table of Contents

ITEM 3 – LEGAL PROCEEDINGS

We are not a party to any material litigation.

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

None.

11

Table of Contents

PART II

ITEM 5 – MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

West Marine’s 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 our common stock, as reported by the Nasdaq Stock Market.

As of March 5, 2004, there were approximately 6,611 holders of record of our common stock and the last sale price reported on the Nasdaq National Market was $31.28 per share.

West Marine has not paid any cash dividends on its common stock, and we do not anticipate doing so in the foreseeable future.

ITEM 6 – SELECTED CONSOLIDATED FINANCIAL DATA

The following selected historical consolidated financial data for each of the five years in the period ended January 3, 2004 has been derived from and should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the Financial Statements and Supplementary Data and notes thereto in Item 8.

12

Table of Contents

ITEM 7 - 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 Supplementary Data and notes thereto found in Item 8.

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

The statements in this Form 10-K 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. These forward-looking statements include, among other things, statements that relate to West Marine’s future plans, expectations, objectives, performance and similar projections, as well as facts and assumptions underlying these statements or projections. You should not place undue reliance on such forward-looking statements as they speak only as of the date they are made, and we assume no obligation to publicly update or revise any forward-looking statement even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.

Set forth below are certain important factors that could cause our 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 changes in consumer confidence and spending habits. A slowdown in the domestic economy or an increase in interest rates may adversely affect sales volumes, as well as our ability to maintain current gross profit levels.

Our operations could be adversely affected if unseasonably cold weather, prolonged winter conditions or extraordinary amounts of rainfall occur during the peak boating season in the second and third quarters.

Our Direct Sales division has faced market share erosion in areas where either we or our competitors have opened stores. Management expects this trend to continue.

As West Marine expands into new ventures, concepts and acquisitions, such as boat services and Express stores, we face additional challenges including those related to hiring personnel and our unfamiliarity with local demographics. New markets may also have competitive conditions, consumer tastes and discretionary spending patterns that are different from our existing markets. Our acquisition of Boat America operations involves a number of risks, including reduced BoatU.S. store sales (“cannibalization”) in locations served by existing West Marine stores as we enhance service levels, gain incremental sales and increase market penetration, unanticipated costs and challenges that could result from integrating the operations and personnel of BoatU.S. into our operations and a decline in the economy that could threaten the economic assumptions of the transaction.

Our growth has been principally related to our Stores’ operations. Our continued growth depends to a significant degree on our ability to continue to expand our operations through the opening and profitable operation of new stores, as well as our ability to increase net sales at our existing stores. Our planned expansion is subject to a number of factors, including the adequacy of our capital resources, our ability to locate suitable store sites and negotiate acceptable lease terms, to hire, train and integrate employees and to adapt our distribution and other operations systems.

The markets for recreational watersports and boating supplies are highly competitive. Competitive pressures resulting from competitors’ pricing policies are expected to continue.

The cost of insurance has increased substantially in the past couple of years. We believe that insurance coverage is prudent for risk management and anticipate that our insurance costs will continue to increase. For certain types or levels of risk, we might determine that we cannot obtain commercial insurance at acceptable prices. Therefore, we might choose to forego or limit our

13

Table of Contents

purchase of relevant insurance, choosing instead to self-insure one or more types or levels of risk. If we suffer a substantial loss that is not covered by commercial insurance, the loss and attendant expenses could have a material adverse effect on our business and operating results.

The price of our common stock may be subject to volatile fluctuations based on general economic and market conditions and by our ability to meet analysts’ expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. Variations in the market price of our common stock may be the result of changes in the trading characteristics that prevail in the market for our common stock including low trading volumes, trading volume fluctuations and other similar factors. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

Additional factors which may affect our financial results include inventory management issues, the impact of the Internet and e-commerce on the supply chain, fluctuations in consumer spending on recreational boating supplies, environmental regulations, demand for and acceptance of our products and other risk factors disclosed from time to time in our filings with the Securities and Exchange Commission.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of West Marine’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate.

Our accounting policies are more fully described in Note 1 to the financial statements, located elsewhere in this Form 10-K. We have identified certain critical accounting policies, which are described below.

Revenue recognition. We record sales, net of estimated returns, when merchandise is purchased by customers at retail locations. When merchandise is shipped from a warehouse directly to a customer, we record sales when such merchandise is received by the customer. Return allowances, which reduce net sales by our best estimate of expected product returns, are estimated using historical experience.

Comparable store sales. We define comparable store sales as sales from stores that have been open at least 13 months and where selling square footage did not change by more than 40% in the previous 13 months. Sales from the 62 BoatU.S. stores acquired in January 2003 from Boat America will be included in comparable store sales statistics beginning in March 2004.

Merchandise inventories. Our merchandise inventories are carried at the lower of cost or market on a first-in, first-out basis. Inventory cost includes certain indirect costs related to the purchasing, transportation and warehousing of merchandise. We make certain assumptions to adjust inventory value based upon historical experience and current information in order to determine that inventory is recorded properly at the lower of cost or market.

Potentially obsolete inventories are marked down based upon current levels of discontinued product and historical analysis of the liquidation of discontinued inventory below cost. The nature of our inventory is such that the risk of obsolescence is minimal.

Vendor allowances. We receive allowances from vendors through a variety of programs and arrangements, including cash discounts and purchase quantity discounts. We recognize such allowances as a reduction to cost of goods sold as the related products are sold.

Long-lived assets. We review long-lived assets for impairment whenever events or changes in circumstances, such as store closures, indicate that the carrying value of an asset may not be recoverable. At the time a decision is made to close a store, we record an impairment charge, if appropriate, and accelerate depreciation over the revised useful life. We believe at this time that the long-lived assets’ carrying values and useful lives continue to be appropriate.

14

Table of Contents

Income taxes. We record a valuation allowance to reduce our deferred tax assets to the amount we believe is more likely than not to be realized. While we have considered future taxable income, state tax apportionment and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should we determine that we would be able to realize our deferred tax assets in the future in excess of our recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination was made.

Foreign currency translation. In the preparation of consolidated financial statements, the assets and liabilities of West Marine’s Canadian subsidiary are denominated in Canadian dollars and translated to U.S. dollars at the rate of exchange in effect at the balance sheet date; income and expenses are translated at average rates of exchange prevailing during the reporting period. The related translation adjustments are reflected in the other comprehensive income section of the consolidated statements of stockholders’ equity. Almost all of the revenues and expenditures of West Marine are denominated in U.S. dollars. However, foreign currency gains and losses from transactions denominated in foreign currencies, including inter-company transactions, are included in operating results and have not been significant to date.

Results of Operations

The following table sets forth certain income statement components expressed as a percent of net sales:

2003 Compared to 2002

In 2003, West Marine had net sales of $660.9 million, an increase of $130.3 million, or 24.6%, over net sales of $530.6 million in 2002. Net income was $20.1 million, or $0.99 per diluted share, in 2003 compared to net income of $18.9 million, or $0.97 per diluted share, in 2002. Fiscal 2003 was a 53-week year, compared to a 52-week year in 2002.

Net sales attributable to our Stores division increased $119.1 million, or 26.7%, to $566.1 million in 2003, mostly due to the addition of 27 new stores, which contributed $14.3 million, and 62 stores purchased from Boat America, which contributed $95.1 million to net sales growth. Other contributing sources include boat shares, tent sales and remodeled stores.

Comparable store sales are a key performance metric for our management. The war in Iraq, the soft economy, unseasonably cold and wet weather nationwide and higher fuel prices all contributed to a decrease in our comparable store sales of $10.4 million, or 2.5%, in 2003. The largest decreases were in sales of discretionary items, such as electronics, and in boating-frequency related items, such as maintenance products. Comparable store sales by region for 2003 were as follows: Southeast –1.0%; Northeast –2.8%; West Coast –4.7%. Management believes that the soft economy had a larger impact on 2003 sales in the West Coast region. During the first quarter of 2003, approximately 85 of our stores in the Northeast region were closed for up to three days due to inclement weather, adversely affecting sales. The Southeast region contributed approximately 50 percent of our total sales in 2003. Comparable store sales for 2003 are based on a similar 53-week period last year.

Port Supply sales through our distribution centers increased $2.8 million, or 6.2%, to $47.6 million in 2003, primarily as a result of increased government sales during the year. Direct Sales net sales increased $8.4 million, or 21.6%, to $47.3 million, primarily due to gains in international sales aided by favorable foreign exchange rates.

Gross profit is another key performance metric for our management. Gross profit increased $43.4 million, or 26.6%, in 2003 compared to 2002. Gross profit as a percentage of net sales increased to 31.3% in 2003 from 30.7% in 2002, primarily due to

15

Table of Contents

lower product costs, supply chain efficiencies and increased sales volume of higher-margin private label products compared to a decline in sales of lower-margin products, such as electronics. Management expects the upward trends in additional supply chain efficiencies and increased proportion of private label merchandise in our sales mix to continue.

Selling, general and administrative expenses increased $36.9 million, or 28.8%, in 2003, primarily due to expenses related to the operations of the 62 BoatU.S. stores acquired, including $0.9 million expended during the first quarter for incremental integration costs. Selling, general and administrative expenses, as a percentage of net sales, increased to 25.0% in 2003 from 24.1% in 2002. Non-capital expenditures incurred in preparation for the opening of new retail stores (also called pre-opening costs) are expensed as incurred. The future profitability of our company is largely dependent on our ability to increase sales and gross profit while containing selling, general and administrative expenses.

Income from operations increased $6.5 million, or 18.6%, in 2003 compared to 2002. Income from operations, as a percentage of net sales, decreased to 6.2% in 2003, from 6.6% in 2002, primarily due to increases in selling, general and administrative expenses related to the acquisition of BoatU.S. retail operations.

Interest expense increased $3.4 million, or 96.1%, in 2003 compared to 2002, primarily as a result of financing the acquisition of BoatU.S. retail operations, for which we also incurred a $1.9 million charge for extinguishment of then-existing debt.

Our 2003 income tax rate of 38% of pre-tax income decreased from 39.5% in the prior year, primarily due to an income tax benefit of approximately $0.3 million related to the recognition of state tax credits.

2002 Compared to 2001

In 2002, West Marine had net sales of $530.6 million, an increase of $17.7 million, or 3.5%, over net sales of $512.9 million in 2001. Net income was $18.9 million, or $0.97 per diluted share, in 2002 compared to net income of $13.9 million, or $0.77 per diluted share, in 2001. Both 2002 and 2001 were 52-week years.

Net sales attributable to our Stores division increased $19.3 million, or 4.5%, to $446.9 million in 2002, mostly due to the addition of 19 new stores, which contributed $12.5 million to net sales growth. Comparable store net sales increased $3.6 million, or 0.9%, in 2002. Port Supply sales through our distribution centers decreased $0.2 million, or 0.5%, to $44.8 million in 2002, primarily as a result of increased sales to Port Supply customers through retail stores. Direct Sales net sales decreased $1.4 million, or 3.4%, to $38.9 million, primarily due to the increase in the number of store locations.

Gross profit increased $13.6 million, or 9.1%, in 2002 compared to 2001. Gross profit as a percentage of net sales increased to 30.7% in 2002 from 29.1% in 2001, primarily due to lower product costs, supply chain efficiencies, increased sales volume of higher margin private label products and a reduction in inventory shrinkage losses.

Selling, general and administrative expenses increased $6.8 million, or 5.6%, in 2002, primarily due to increases in direct expenses related to the addition of new stores. Non-capital expenditures incurred in preparation for opening new retail stores are expensed as incurred. Selling, general and administrative expenses as a percentage of net sales increased to 24.1% in 2002 from 23.6% in 2001.

Income from operations increased $6.8 million, or 24.2%, in 2002 compared to 2001. Income from operations, as a percentage of net sales, increased to 6.6% in 2002, from 5.5% in 2001.

Interest expense decreased $1.3 million, or 26.5%, in 2002 compared to 2001, as a result of lower average borrowings and lower interest rates.

Our 2002 income tax rate of 39.5% of pre-tax income decreased from 40.0% in the prior year, primarily due to the impact of no longer amortizing goodwill.

Liquidity and Capital Resources

Our cash needs are primarily for working capital to support our inventory requirements and capital expenditures, pre-opening expenses and beginning inventory for new stores and for remodeling or relocating older stores. We may also require additional capital in the event we choose to pursue acquisition opportunities. We believe existing credit facilities and cash flows from operations will be sufficient to satisfy our liquidity needs through 2004.

16

Table of Contents

Operating activities

During 2003, our primary sources of liquidity were cash flow from operations and proceeds from the exercise of stock options. Net cash provided by operations during 2003 was $22.1 million, consisting primarily of net income, excluding depreciation and amortization, of $44.5 million, $5.9 million in deferred taxes and tax benefits and a $16.0 million increase in accounts payable, offset by a $38.6 million increase in inventory and a $6.5 million increase in prepaid expenses and other assets. The inventory increase reflects the increase in the number of stores, including the acquisition of 62 stores from Boat America, as well as our commitment to increasing fill rates and advanced stocking of merchandise at stores in preparation for the peak boating season. Net cash provided by financing activities was $76.5 million, consisting primarily of $128.9 million of net borrowings under our line of credit and $8.2 million received from the exercise of stock options and the net sales of common stock pursuant to our associate stock purchase plan, offset by $16.6 million in repayment of a term loan and $40.7 million used to payoff of our former line of credit.

Capital Growth

In 2003, we spent $98.6 million on capital expenditures, including $74.5 million in cash for the acquisition of the retail stores, catalog and wholesale operations of Boat America. We expect to spend from $24 million to $26 million on capital expenditures during 2004, mainly for new stores. We intend to fund our expansion through cash generated from operations and bank borrowings.

Financing Arrangements

At the end of fiscal 2003, we had a $175.0 million credit line expiring in January 2006, and borrowings under this credit line were $128.9 million, bearing interest at rates ranging from 3.6% to 5.0%. From January 15, 2004 until May 15, 2004, the borrowing limit is raised to $180.0 million for peak seasonal inventory financing needs. The credit line is guaranteed by West Marine and its subsidiaries and is secured by a security interest in substantially all of the assets of West Marine and its subsidiaries. The credit line includes a $20.0 million sub-facility for standby and commercial letters of credit, of which up to $15.0 million is available for the issuance of commercial letters of credit and up to $5.0 million is available for standby letters of credit. The credit line also includes a sub-limit of up to $10.0 million for same day advances. At the end of 2002, borrowings under a previous credit line were $40.7 million, bearing interest at rates ranging from 2.51% to 4.25%.

Depending on our election at the time of borrowing, our credit line bears interest at either (a) the higher of (i) the bank’s prime rate plus 1.0% or (ii) the federal funds rate plus 0.5% or (b) LIBOR plus 2.5%.

The credit line contains various covenants which require us to maintain certain financial ratios, including debt service coverage, debt to earnings and current ratios. The covenants also require us to maintain minimum levels of net worth and place limitations on the levels of certain investments. These covenants also restrict the repurchase or redemption of our common stock and payment of dividends, investments in subsidiaries and annual capital expenditures. As of January 3, 2004, we were in compliance with all such covenants.

At the end of 2003, we had $4.0 million of outstanding stand-by letters of credit, compared to $2.3 million at year-end 2002. At the end of 2003 and 2002, we had $1.7 million and $4.1 million, respectively, of outstanding commercial letters of credit.

For both 2003 and 2002, the weighted average interest rate on all of our outstanding borrowings was 4.9%.

Contractual obligations

Aggregated information about our unconditional contractual obligations as of January 3, 2004 is presented in the following table (dollars in thousands).

17

Table of Contents

We are a party to various arrangements that are conditional in nature and obligate us to make payments only upon the occurrence of certain events, such as delivery of functioning software products. Because it is not possible to predict the timing or amounts that may be due under these conditional arrangements, no such amounts have been included in the table above. In addition, virtually all of our purchase commitments are cancelable by us without payment, and we have excluded such commitments, along with all associate employment commitments.

Off-Balance Sheet Arrangements

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. As of January 3, 2004, we are not involved in any unconsolidated special purpose entities or variable interest entities.

Seasonality

Historically, our business has been highly seasonal. In 2003, 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 July, which represents the peak months for boat buying, usage and maintenance in most of our markets. Management expects the seasonal fluctuation in net sales to become more pronounced as we continue to expand our operations.

Business Trends

The health of our business is directly related to the number of domestic boat owners and the frequency of boating activities. According to the National Marine Manufacturers Association, new boat sales increased approximately 11% in the ten years from 1993 to 2002. However, new boat sales declined in both 2001 and 2002 from a ten-year high in 2000, corresponding with general softening of the U.S. economy during the same period. This trend may continue in the future. However, management believes that the improved boat show attendance and heightened consumer confidence experienced during 2003 may indicate a coming reversal of this two-year decline.

After September 11, 2001, consumers began spending more time with family and stayed closer to home during vacation periods. We believe this trend may favor a general increase in the frequency of boating activities. Weather, however, affects boating frequency more than any other factor.

For the long-term, demographics appear to favor the boating industry through the end of the decade. According to the U.S. Census Bureau, the portion of the population aged 45 to 54, which represents a key component of boat owners and our customer base, is expected to grow significantly before peaking in 2010.

Our growth has been principally fueled by geographic expansion through the opening of new stores and the acquisition of Boat America’s retail operations in January 2003. Future net sales and profit growth, if any, will be increasingly dependent on our ability to open new profitable stores. Our Direct Sales division continues to face market share erosion in markets where either we or our competitors have opened new stores. We expect this trend to continue.

We operate in a highly competitive industry, and we expect competition to increase in the future. An increase in competition in our markets may result in pressure on our pricing policies.

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) or 15(d) of the Securities Exchange Act of 1934, as amended, in the “About West Marine” portion of our website as well as through the Securities and Exchange Commission’s website, www.sec.gov.

ITEM 7A – Quantitative and Qualitative Disclosures about Market Risk

We do not undertake any specific actions to diminish our exposure to interest rate risk, and we are not a party to any interest rate risk management transactions. We do not purchase or hold any derivative financial instruments.

18

Table of Contents

A 49 basis point change in the interest rate (10% of our weighted-average interest rate) affecting our floating financial instruments would have an effect of approximately $0.7 million on our pretax income and cash flows over the next year, and would have an immaterial effect on the fair value of our fixed-rate financial instruments (see Note 4 to the Notes to Consolidated Financial Statements set forth in Item 8 – Financial Statements and Supplementary Data).

19

Table of Contents

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of

West Marine, Inc.

We have audited the accompanying consolidated balance sheets of West Marine, Inc. and subsidiaries as of January 3, 2004 and December 28, 2002 and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended January 3, 2004. 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 as 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 West Marine, Inc. and subsidiaries at January 3, 2004 and December 28, 2002 and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2004 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

March 18 , 2004

20

Table of Contents

WEST MARINE, INC.

CONSOLIDATED BALANCE SHEETS

JANUARY 3, 2004 AND DECEMBER 28, 2002

(in thousands, except share data)

See notes to consolidated financial statements.

21

Table of Contents

WEST MARINE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

See notes to consolidated financial statements.

22

Table of Contents

WEST MARINE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

See notes to consolidated financial statements.

23

Table of Contents

WEST MARINE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

See notes to consolidated financial statements.

24

Table of Contents

WEST MARINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS – West Marine, Inc. (“West Marine” or “the Company”) is the largest specialty retailer of boating supplies and apparel in the world. The Company has three divisions - Stores, Port Supply (wholesale) and Direct Sales (catalog and Internet) - which all sell aftermarket recreational boating supplies directly to customers. At year-end 2003, West Marine offered its products through 345 stores in 38 states, Puerto Rico and Canada, through our catalog and on the Internet. The Company is also engaged, through its Port Supply division 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. The Company’s principal executive offices are located in Watsonville, California.

PRINCIPLES OF CONSOLIDATION – The consolidated financial statements include the accounts of West Marine, Inc. and its subsidiaries, all of which are wholly-owned, directly or indirectly. Intercompany balances and transactions are eliminated in consolidation.

YEAR-END – The Company’s fiscal year ends on the Saturday closest to December 31 based on a 52- or 53-week year. The year 2003 ended on January 3, 2004 and was a 53-week year while the years 2002 and 2001 ended on December 28, 2002 and December 29, 2001, respectively, and were both 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.

INVENTORIES – Merchandise inventories are stated at the lower of cost or market (first-in, first-out method). 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 a catalog is mailed, over the expected net sales period, which is generally from two months to ten months. Deferred catalog costs were $0.02 million and $1.2 million at year-end 2003 and 2002, respectively. Advertising costs, which are expensed as incurred, were $19.6 million, $14.4 million and $13.6 million in 2003, 2002 and 2001, respectively.

PROPERTY AND EQUIPMENT – 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 seven years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives, usually ten years, of the improvements.

CAPITALIZED INTEREST – The Company capitalizes interest on major capital projects. During 2003, 2002 and 2001, the Company capitalized approximately $0.4 million, $0.4 million and $0.7 million, respectively.

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.”

25

Table of Contents

GOODWILL AND OTHER INTANGIBLE ASSETS – The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” beginning December 30, 2001. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, SFAS 142 includes provisions for the reclassification of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for purposes of assessing potential future impairments of goodwill. A reconciliation for the impact of the adoption of SFAS 142 to net income and earnings per share is as follows:

Intangibles represent the value of a marketing agreement between West Marine and BoatU.S. and are being amortized on a straight-line basis over ten years. Amortization expense for this intangible asset was $0.3 million for 2003. Accumulated amortization at the end of 2003 was $0.3 million.

Amortization expense for the next five years is estimated at $0.3 million per year.

The changes in the carrying amount of goodwill for the year ended January 3, 2004 are as follows (in thousands):

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. No impairment charges were recorded during 2003, 2002 or 2001.