10QSB 1 d10qsb.htm FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 2003 Form 10-Q for the fiscal quarter ended March 31, 2003

 


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-QSB

 

(Mark One)

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

 

For the fiscal quarter ended March 31, 2003

 

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: 000-1138724

 


 

DICKIE WALKER MARINE, INC.

(Exact name of small business issuer as specified in its charter)

 

Delaware

 

33-0931599

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1405 South Coast Highway

   

Oceanside, CA

 

92054

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (760) 450-0360

 

Indicate by 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  ¨

 

The number of shares outstanding of the Registrant’s Common Stock as of March 31, 2003, was 3,680,000.

 


 


DICKIE WALKER MARINE, INC.

 

INDEX

 

         

Page


PART I—FINANCIAL INFORMATION

    

Item 1.

  

Financial Statements (unaudited)

    
    

Balance Sheets

  

1

    

Statements of Operations

  

2

    

Statements of Cash Flows

  

3

    

Notes to Financial Statements

  

4

Item 2.

  

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

  

5

Item 3.

  

Controls and Procedures

  

11

PART II—OTHER INFORMATION

    

Item 1.

  

Legal Proceedings

  

12

Item 2.

  

Changes in Securities and Use of Proceeds

  

12

Item 3.

  

Defaults upon Senior Securities

  

12

Item 4.

  

Submission of Matters to a Vote of Security Holders

  

12

Item 5.

  

Other Information

  

12

Item 6.

  

Exhibits and Reports on Form 8-K

  

13

Signatures

  

13

 

 

i


PART I—FINANCIAL INFORMATION

 

Item 1    Financial Statements

 

Dickie Walker Marine, Inc.

 

Balance Sheets

 

    

March 31, 2003


    

September 30, 2002


 
    

(Unaudited)

        

ASSETS

                 

Current Assets:

                 

Cash and cash equivalents

  

$

3,556,105

 

  

$

4,971,001

 

Accounts receivable, net

  

 

274,144

 

  

 

156,785

 

Inventories, net

  

 

753,967

 

  

 

727,304

 

Prepaid expenses and other current assets

  

 

293,272

 

  

 

215,932

 

    


  


Total current assets

  

 

4,877,488

 

  

 

6,071,022

 

Property and equipment, net

  

 

1,071,197

 

  

 

483,044

 

Deferred financing costs, net

  

 

17,157

 

  

 

21,447

 

Other assets

  

 

57,558

 

  

 

45,590

 

    


  


Total Assets

  

$

6,023,400

 

  

$

6,621,103

 

    


  


LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

Current Liabilities:

                 

Accounts payable

  

$

360,670

 

  

$

175,211

 

Accrued expenses

  

 

223,936

 

  

 

139,853

 

Deferred revenue

  

 

530,340

 

  

 

—  

 

Customer advances

  

 

—  

 

  

 

725,336

 

Accrued interest on notes payable to stockholders

  

 

10,500

 

  

 

10,500

 

Current portion of capital lease obligation

  

 

41,201

 

  

 

38,953

 

    


  


Total current liabilities

  

 

1,166,647

 

  

 

1,089,853

 

Notes Payable to Stockholders

  

 

900,000

 

  

 

900,000

 

Capital Lease Obligation, less Current Portion

  

 

93,146

 

  

 

114,324

 

Commitments and Contingencies

                 

Stockholders’ Equity:

                 

Preferred stock—$.001 par value, 2,000,000 shares authorized and no shares issued and outstanding

  

 

—  

 

  

 

—  

 

Common stock—$.001 par value, 50,000,000 shares authorized: 3,680,000 shares issued and outstanding at March 31, 2003 and September 30, 2002

  

 

3,680

 

  

 

3,680

 

Warrant

  

 

6,075

 

  

 

6,075

 

Additional paid-in capital

  

 

6,951,550

 

  

 

6,951,550

 

Accumulated deficit

  

 

(3,097,698

)

  

 

(2,444,379

)

    


  


Total stockholders’ equity

  

 

3,863,607

 

  

 

4,516,926

 

    


  


Total Liabilities and Stockholders’ Equity

  

$

6,023,400

 

  

$

6,621,103

 

    


  


 

See accompanying notes.

 

1


Dickie Walker Marine, Inc.

 

Statements of Operations

(Unaudited)

 

    

Three months ended

March 31,


    

Six months ended

March 31,


 
    

2003


    

2002


    

2003


    

2002


 

Net sales

  

$

1,821,719

 

  

$

993,248

 

  

$

2,447,843

 

  

$

1,324,008

 

Cost of sales

  

 

1,219,692

 

  

 

653,693

 

  

 

1,764,469

 

  

 

921,296

 

    


  


  


  


Gross profit

  

 

602,027

 

  

 

339,555

 

  

 

683,374

 

  

 

402,712

 

Selling, general and administrative expenses

  

 

705,706

 

  

 

313,344

 

  

 

1,302,639

 

  

 

623,761

 

    


  


  


  


Income (loss) from operations

  

 

(103,679

)

  

 

26,211

 

  

 

(619,265

)

  

 

(221,049

)

Other income (expense):

                                   

Interest expense

  

 

(22,122

)

  

 

(24,610

)

  

 

(44,250

)

  

 

(47,927

)

Interest income

  

 

7,204

 

  

 

413

 

  

 

24,907

 

  

 

2,412

 

Other expense

  

 

(14,711

)

  

 

—  

 

  

 

(14,711

)

  

 

—  

 

    


  


  


  


Total other income (expense)

  

 

(29,629

)

  

 

(24,197

)

  

 

(34,054

)

  

 

(45,515

)

    


  


  


  


Net income (loss)

  

$

(133,308

)

  

$

2,014

 

  

$

(653,319

)

  

$

(266,564

)

    


  


  


  


Net income (loss) per share: Basic and diluted

  

$

(0.04

)

  

$

—  

 

  

$

(0.18

)

  

$

(0.12

)

    


  


  


  


Weighted average shares outstanding:

                                   

Basic and diluted

  

 

3,680,000

 

  

 

2,300,000

 

  

 

3,680,000

 

  

 

2,300,000

 

    


  


  


  


 

 

See accompanying notes.

 

2


Dickie Walker Marine, Inc.

 

Statements of Cash Flows

(Unaudited)

 

    

Six months ended March 31,


 
    

2003


    

2002


 

Operating Activities:

                 

Net loss

  

$

(653,319

)

  

$

(266,564

)

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

                 

Depreciation and amortization

  

 

155,913

 

  

 

153,641

 

Inventory reserves

  

 

35,000

 

  

 

61,206

 

Allowance for doubtful accounts

  

 

(30,000

)

  

 

—  

 

Amortization of deferred financing costs

  

 

4,290

 

  

 

4,469

 

Changes in operating assets and liabilities:

                 

Accounts receivable

  

 

(87,359

)

  

 

78,150

 

Inventories

  

 

(61,663

)

  

 

(324,526

)

Prepaid expenses and other current assets

  

 

(77,340

)

  

 

(411,388

)

Accounts payable

  

 

185,459

 

  

 

306,072

 

Accrued expenses

  

 

84,083

 

  

 

40,591

 

Customer advances

  

 

(725,336

)

  

 

418,408

 

Deferred revenue

  

 

530,340

 

  

 

—  

 

Accrued interest on notes payable to stockholders

  

 

—  

 

  

 

(914

)

    


  


Net cash (used in) provided by operating activities

  

 

(639,932

)

  

 

59,145

 

    


  


Investing Activities:

                 

Purchases of property and equipment

  

 

(743,034

)

  

 

(131,840

)

Other assets

  

 

(13,000

)

  

 

(8,683

)

    


  


Net cash used by investing activities

  

 

(756,034

)

  

 

(140,523

)

    


  


Financing Activities:

                 

Proceeds from short term borrowings from officer

  

 

—  

 

  

 

95,000

 

Repayment of short term borrowings from officer

  

 

—  

 

  

 

(95,000

)

Payments on capital lease obligation

  

 

(18,930

)

  

 

(16,919

)

    


  


Net cash used in financing activities

  

 

(18,930

)

  

 

(16,919

)

    


  


Decrease in cash and cash equivalents

  

 

(1,414,896

)

  

 

(98,297

)

Cash and cash equivalents at beginning of period

  

 

4,971,001

 

  

 

364,729

 

    


  


Cash and cash equivalents at end of period

  

$

3,556,105

 

  

$

266,432

 

    


  


Supplemental disclosure of cash flow information:

                 

Interest paid

  

$

39,961

 

  

$

44,371

 

    


  


 

See accompanying notes.

 

3


 

Dickie Walker Marine, Inc.

 

Notes to Financial Statements – Unaudited

 

1.   The Company – Dickie Walker Marine, Inc. (the “Company” or “Dickie Walker”) is a Delaware corporation that was incorporated in October 2000 in California under the name Montiel Marketing Group, Inc. The Company changed its name in February 2001 and filed for reincorporation in the State of Delaware in February 2002. The Company designs, markets and distributes nautically themed apparel, accessories and decorative items and operates in one segment.

 

2.   Basis of Presentation – The accompanying financial statements of Dickie Walker are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These financial statements should be read in conjunction with the financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations for the year ended September 30, 2002, contained in the Company’s Form 10-KSB. The results of operations for the interim periods are not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year. The Company experiences seasonal fluctuations in sales and income with a substantial portion of sales occurring in the second and third quarter of the fiscal year.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and the accompanying notes and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

 

3.   Recent Accounting Pronouncements In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The transition and disclosure requirements of SFAS No. 148 are effective for financial reports containing financial statements for periods beginning after December 31, 2002. The Company has chosen not to adopt the voluntary change for the fair value method of accounting for employee stock-based compensation. If the Company should choose to adopt such a method, its implementation pursuant to SFAS No. 148 could have a material effect on the Company’s financial position and results of operations.

 

4.   Employee Stock-Based Compensation SFAS No. 123, “Accounting for Stock-Based Compensation” establishes the use of the fair value method of accounting for employee stock-based compensation arrangements, under which expense is recognized over the vesting period and is determined based on the fair value of all stock-based awards on the date of grant. SFAS No. 123 also allows companies to apply the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and provide pro forma net income and pro forma income per share disclosures for employee stock option grants. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

 

Pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the dates of grant using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, a risk-free interest rate ranging from 3%-5%, volatility of 110% and an expected life of five years.

 

Had compensation expense been determined on the basis of fair value pursuant to SFAS No. 123, net loss for the three and six month periods ended March 31, 2003 would have been $188,668 and $746,723 respectively, and net loss per share for those periods would have been $0.05 and $0.20, respectively. As no

 

4


 

stock options were granted during the three and six month periods ended March 31, 2002, there is no change to reported net loss or net loss per share.

 

5.   Allowance for Doubtful Accounts The Company evaluates the collectibility of its trade receivables based on a combination of factors. The Company regularly analyzes its significant customer accounts, and, when the Company becomes aware of a specific customer’s inability to meet its financial obligations to it, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, the Company records a specific reserve for bad debt to reduce the related receivable to the amount reasonably believed to be collectible. The Company also records reserves for bad debt for all other customers based on a variety of factors including the length of time the receivables are past due, the financial health of the customer, macroeconomic considerations and historical experience. If circumstances related to specific customers change, the Company’s estimates of the recoverability of receivables could be further adjusted or the related receivables could be written-off to the allowance as uncollectible.

 

6.   Inventories – Inventories consist of the following:

 

    

March 31,

2003


  

September 30,

2002


    

(unaudited)

    

Raw materials

  

$

47,953

  

$

34,863

Work-in-process

  

 

80,347

  

 

14,826

Finished goods

  

 

625,667

  

 

677,615

    

  

Total

  

$

753,967

  

$

727,304

    

  

 

In January 2003 the Company amended its Strategic Alliance Agreement with West Marine Products, Inc. to transfer title of inventory for which West Marine made advance payments to the Company. Prior to January 2003, title passed upon the shipment of inventory by the Company to West Marine retail stores. The amendment transfers title, but not risk of loss, upon payment for the inventory by West Marine. At September 30, 2002, approximately $407,000 of inventory paid for by West Marine was carried as finished goods inventory owned by the Company. In addition, the Company entered into a three-way agreement with West Marine and a bank wherein the bank is granted a first priority perfected security interest in the West Marine inventory subject to the Company’s claim for unpaid charges. The Company continues to defer recognition of revenue until risk of loss has passed to the customer. Therefore advance payments less related cost of sales are classified as deferred revenue at March 31, 2003.

 

7.   Comprehensive Income – SFAS No. 130, “Reporting Comprehensive Income” established standards for reporting and display of comprehensive income and its components. Net loss was the same as comprehensive loss for the periods presented.

 

8.   Significant Customer – Sales to West Marine accounted for approximately 86% of the Company’s net sales for each of the three and six month periods ended March 31, 2003, as compared to approximately 94% and 87%, respectively, of the Company’s net sales for the three and six month periods ended March 31, 2002.

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our unaudited financial statements and notes thereto included herein. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward-looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ

 

5


materially from those expressed in any forward-looking statements made by or on our behalf. We disclaim any obligation to update forward-looking statements.

 

The following table sets forth, as a percentage of net sales, statements of operations data for the periods indicated.

 

    

Three months ended

March 31,


    

Six months ended

March 31,


 
    

2003


    

2002


    

2003


    

2002


 

Net sales

  

100

%

  

100

%

  

100

%

  

100

%

Cost of sales

  

67

 

  

66

 

  

72

 

  

70

 

    

  

  

  

Gross profit

  

33

 

  

34

 

  

28

 

  

30

 

Selling, general and administrative expenses

  

39

 

  

32

 

  

53

 

  

47

 

    

  

  

  

Income / (loss) from operations

  

(6

)

  

2

 

  

(25

)

  

(17

)

    

  

  

  

Other expense—net

  

(1

)

  

(2

)

  

(2

)

  

(3

)

    

  

  

  

Net loss

  

(7

)%

  

0

%

  

(27

)%

  

(20

)%

    

  

  

  

 

Results of Operations

 

Three and six month periods ended March 31, 2003 compared to the three and six month periods ended March 31, 2002

 

Our sales for the three and six months ended March 31, 2003 increased by approximately 83% and 85%, respectively, over the comparable periods in fiscal 2002 due primarily to the increase in sales of West Marine® private label branded products. In addition, both wholesale and retail sales of Dickie Walker brand products contributed to the increase in fiscal 2003 sales over the comparable fiscal 2002 periods.

 

Our gross profit as a percentage of sales was approximately 33% and 28%, respectively, for the three and six months ended March 31, 2003 as compared to 34% and 30% for the comparable 2002 periods. The gross profit percentage decline of 1.1% and 2.5% from the comparable 2002 periods was due primarily to a higher cost of sales percentage for the Dickie Walker line. This is a reflection of our current purchasing strategy for the Dickie Walker product lines. We have chosen to purchase smaller quantities more frequently, which results in a lower gross margin, rather than maximizing margin through larger purchases. This strategy allows us to minimize both inventory risk and inventory carrying costs for the Dickie Walker wholesale and retail businesses.

 

Selling, general and administrative expenses were approximately 39% and 53% of net sales, respectively, for the three and six months ended March 31, 2003 as compared to 32% and 47% for the comparable 2002 periods and represents an increase in absolute dollars of approximately 125% and 109%, respectively. The absolute dollar increase for the three and six months ended March 31, 2003 was primarily due to an increase in payroll and payroll related expenses as the Company increased staff to meet increased sales, and to develop a sales, marketing and design infrastructure. Expenses related to the Company’s retail store, expenses associated with operating as a publicly-traded company, and trade show and other merchandising costs also contributed to the period over period increases.

 

Interest expense remained relatively unchanged between comparable periods. These expenses represent interest on the notes payable to stockholders, a capital lease obligation and the amortization of deferred financing costs.

 

Interest income reflects earnings on a money market account containing unused funds and has increased as a result of the funds raised in our initial public offering.

 

6


 

As a result of the factors described above, we had a net loss of approximately $133,000 and $653,000 for the three and six month periods ended March 31, 2003, respectively as compared to a $2,000 profit for the three months ended March 31, 2002 and a $267,000 loss for the six months ended March 31, 2002.

 

Liquidity and Capital Resources

 

Since our inception, we have funded our operations and satisfied our capital expenditure requirements primarily with proceeds from sales of common stock to our founders, the private placement of our common stock and promissory notes in fiscal 2001, and our initial public offering in fiscal 2002. In the quarter ended June 30, 2002, we completed our initial public offering and received approximately $5,287,000 in cash, net of underwriting discounts, commissions, and other related expenses. Proceeds from these financing sources since inception and through March 31, 2003 totaled approximately $7,536,000 and capital equipment lease financing totaled approximately $207,000.

 

Net cash used in operating activities of approximately $640,000 for the six months ended March 31, 2003, resulted primarily from the net loss for the period, with other cash adjustments offsetting each other. The $59,000 of cash provided by operating activities for the six months ended March 31, 2002, resulted primarily from an increase in advances from West Marine and an increase in accounts payable offsetting the net loss for the period, the increase in prepaid expenses, primarily expenses related to the Company’s initial public offering, and the increase in inventories.

 

Included in accounts receivable at March 31, 2003 is approximately $87,000 due from West Marine for inventory purchased on its behalf. The Company has recorded deferred revenue totaling approximately $530,000 related to West Marine products awaiting shipment to West Marine’s retail stores.

 

Net cash used by investing activities, primarily capital expenditures, totaled approximately $756,000 and $141,000 for the six months ended March 31, 2003 and 2002, respectively. The expenditures for the six months ended March 31, 2003 related primarily to leasehold improvements and equipment for our retail store and leasehold improvements to our warehouse and headquarters facility.

 

At March 31, 2003, approximately $3,556,000 in cash and cash equivalents was available to fund operations. We believe that existing cash resources, together with the expected revenue from our future seasonal lines and other retail products, will be sufficient to satisfy our cash requirements for the next 12 to 18 months. Thereafter, if cash generated from operations is insufficient to satisfy our working capital and capital expenditure requirements, we will need to raise additional funds through the public or private sale of our equity or debt securities or from other sources. No assurance can be given that our business or operations will not change in a manner that would consume available resources more rapidly than anticipated. The timing and amount of our capital requirements will depend on a number of factors, including demand for our products, the need for merchandising and promotional programs and competitive pressures. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and our stockholders will experience additional dilution. Such additional securities may have rights, preferences, or privileges senior to those of our common stockholders. There can be no assurance that the additional financing will be available on terms favorable to us, if at all. If adequate funds are not available, or are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance products or otherwise respond to competitive pressures could be significantly limited. Our business, financial condition and results of operations may be harmed by such limitations.

 

Risks and Uncertainties

 

The following is a summary description of the many risks we face in our business. You should carefully review these risks and the other information described in this report in evaluating our business.

 

7


 

Dickie Walker has had limited operations and a history of losses that make our future operating results difficult to predict.

 

Our business began in October 2000. We have a limited operating history and you have limited historical information about us on which to base your investment decision. We face the risks and uncertainties of other early-stage companies. We have had losses from operations since our inception and may incur future losses from operations. At March 31, 2003, the accumulated deficit was approximately $3,098,000. Our limited operating history and history of losses make future operating results difficult to predict.

 

Dickie Walker may need additional financing and we may not be able to obtain it.

 

If cash generated from operations and the proceeds of our recent initial public offering are insufficient to satisfy our working capital and capital expenditure requirements during the next 12 to 18 months, we will need to raise additional funds through the public or private sale of our equity or debt securities. The timing and amount of our capital requirements will depend on a number of factors, including demand for our products, the need for merchandising and promotional programs and competitive pressures. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our then-existing stockholders will be reduced. We cannot assure you that additional financing will be available on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance products or otherwise respond to competitive pressures could be significantly limited. Our business, financial condition and results of operations may be harmed by such limitations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

Dickie Walker relies on West Marine for the vast majority of our business and the loss of West Marine as a customer could decrease sales and impede our ability to attain profitability.

 

We have an agreement with West Marine under which we will provide the apparel line for West Marine’s retail stores, catalogs, and Internet website. Sales to West Marine and to West Marine customers through catalog and website sales accounted for approximately 86% of our sales for both the three and six month periods ended March 31, 2003, and 87% of our sales in the year ended September 30, 2002. Our agreement with West Marine expires in December 2003. Should the agreement terminate prior to December 2003, or should the agreement not be renewed at that time, we may not have sufficient sales from other customers to achieve profitability.

 

It is difficult to predict the rate at which consumers will purchase our products from West Marine and other retailers, and if the rate is low, sales may be lower than anticipated.

 

We are unable currently to estimate the rate at which consumers will purchase our products from West Marine’s stores and other retailers, which we refer to as the rate of sell-through. The rate of sell-through of private label West Marine® and Dickie Walker brand apparel and accessories will depend on factors such as the placement of apparel and accessories in the stores, the types of customers who patronize the stores, the merchandising of our products, acceptance of our designs, and our and West Marine’s ability to build customer loyalty to our brands. We have the ability to affect the merchandising and display of our products, but many of the other factors are not in our control. If there was a low rate of sell-through of our products in West Marine or other retail outlets, retailers may reduce reorders of apparel or accessories or could reduce purchase commitments for the next season’s collection. Either of these events could decrease our sales.

 

Our success will depend on our ability to design nautical apparel and accessories that are well received by consumers, and unanticipated shifts in consumer preferences could result in lower than anticipated sales or loss of customers.

 

Our success is dependent upon our ability to correctly anticipate fashion trends within our industry and to design apparel that appeals to consumers’ preferences in a timely manner. We depend upon our designers and others to develop designs and marketing strategies that distinguish our products favorably from the apparel and boating accessories of our competitors. While we believe that our designs and marketing strategy will be successful, we cannot assure you that we will generate sufficient sales to make us profitable. If we misjudge the

 

8


 

market for our products or are unsuccessful in responding to changes in fashion trends or market demand, we could experience excess inventories and higher markdowns and inventory reserves, resulting in lower gross margins. Conversely, if we have insufficient inventory, we may miss market opportunities. Any of these events could result in lower than anticipated sales and loss of customers.

 

A downturn in economic conditions could adversely affect our sales because our products are purchased using discretionary income.

 

The apparel industry historically has been subject to substantial cyclical variations. Apparel manufacturers rely on the expenditure of discretionary income for sales of their products. Accordingly, any downturn, whether real or perceived, in the general economy or uncertainties regarding future economic prospects that affect consumer-spending habits could decrease our sales. During the past several years, various retailers have experienced financial difficulties. Financial problems experienced by West Marine or other retailers could have a direct and adverse impact on sales of our products.

 

Because we rely on Gerald W. Montiel’s experience and relationships in the apparel industry, the loss of Mr. Montiel could materially harm our business and operating results.

 

We believe the apparel industry experience of Gerald W. Montiel, our Chief Executive Officer, is important to our future success. We entered into an employment agreement with Mr. Montiel in February 2002 for a three-year period. We do not carry key man insurance on Mr. Montiel. The loss of the services of Mr. Montiel could force us to operate without a chief executive officer with experience in the apparel industry if we are unable to find a suitable replacement.

 

If our contractors fail to meet our pricing, product quality and timeliness requirements, sales may be lower than anticipated.

 

Our products are manufactured by outside contractors to our specifications by both domestic and international manufacturers with whom we have no long-term contractual arrangements. The inability of a manufacturer to manufacture and ship our products in a timely manner could result in us missing certain retailing seasons and opportunities with respect to one or more of our products. The inability of a manufacturer to perform according to our specifications and specified quality standards, or a change in manufacturer in mid-production of a product line, could decrease our sales.

 

Competition in the nautical apparel and accessories market is intense and if Dickie Walker fails to compete effectively, we may not be successful in increasing sales or in achieving profitability.

 

The apparel and gift industries are highly competitive. Many of our competitors have far greater financial and other resources than we do, and have established reputations. There can be no assurance that our apparel, gifts and decorative items will successfully compete with those of our competitors. Competitive factors in our business include quality, marketing strategy, price, design, and customer service. If we do not compete effectively on the basis of these factors, we may experience lower than anticipated sales.

 

Sales of nautical apparel and marine-themed accessories are seasonal and, in certain quarters, our operating results may fall below market analysts’ and investors’ expectations, which could lower the price of our common stock.

 

We anticipate that we will experience seasonal fluctuation in our sales and income and that a substantial portion of our sales will occur in the second and third quarters of our fiscal year. It is in these quarters that our largest shipments take place. Sales in the first and fourth quarters will be lower as a result of seasonal fluctuations. As a result, our operating results may fall below market analysts’ and investors’ expectations in some quarters, which could lower the market price of our common stock.

 

9


 

Changes in import restrictions may increase our costs and may restrict our ability to import certain products.

 

Our import of nautical apparel and accessories are subject to constraints imposed by bilateral textile agreements between the United States and some of the countries in which we source our products, such as Thailand and China. These agreements impose quotas on the amount and type of goods that can be imported into the United States from these countries. These agreements also allow the United States to impose import limitations on categories of merchandise that are not subject to specified limits.

 

Our nautical apparel and accessories are also subject both to customs inspections, which could result in delays in delivery of our products, and to U.S. customs duties. The United States and the countries in which our products are manufactured may, from time to time, impose or increase quotas, duties, tariffs or other restrictions, or adversely adjust prevailing quota, duty or tariff levels. Changes in customs duties or a decrease in quotas could increase our costs and reduce our gross margins thereby decreasing our profitability.

 

Dickie Walker’s entry into retailing will present challenges.

 

We have opened one retail store and intend to open additional stores in the next 12 to 18 months. There are many risks associated with our entry into retailing including: our ability to find suitable locations for our stores on reasonable rental terms; potential premises liability; the risks associated with long-term leases; the leasehold improvement cost required to create the nautical image of the Dickie Walker brand; our ability to manage our relationships with specialty retailers who currently sell our products; our ability to select and sell nautically-inspired merchandise which complements the Dickie Walker brand; and competition from other retailers.

 

We will need to augment our management team in order to open and manage the retail stores. We will also need to increase our number of employees, which will result in an increased burden on our human resources function and increased exposure to employment-related legal liabilities. Our inability to implement successfully our retail strategy could harm our financial condition and operating results.

 

Stockholders of Dickie Walker who are directors and executive officers own approximately 46% of our shares and may exercise significant influence over our direction and policies.

 

As a result of this stock ownership, management has sufficient voting power to significantly influence our direction and policies, the election of directors, the outcome of any other matter submitted to a vote of stockholders, and a change in control.

 

Dickie Walker does not pay dividends on its common stock and investors will have to rely on increases in its share price to obtain a return on their investment.

 

Since our inception we have not paid any dividends and we do not anticipate paying any dividends in the foreseeable future. We expect that future earnings, if any, will be used for working capital and to finance growth. Because we will not pay dividends on our common stock in the foreseeable future, investors must rely on stock appreciation for any return on their investment in our common stock.

 

Dickie Walker could use the issuance of additional shares of our authorized stock to deter a change in control even if a change in control would be beneficial to our stockholders.

 

Shares of our common stock and preferred stock that have not yet been issued or reserved for specific purposes may be issued without any action or approval of our stockholders, unless such approval is required by the rules of the SEC or Nasdaq. Issuance of shares of preferred stock may discourage, delay or prevent a change in control even if a change in control would be beneficial to our stockholders. We have adopted a stockholder rights plan, which provides for the issuance of shares as a method of discouraging, delaying or preventing a change in control. The issuance of additional shares would make it more difficult for a third party to acquire us, even if so doing would be beneficial to our stockholders.

 

10


 

Prior to our initial public offering in May 2002, there was no public market for our common stock

 

Prior to our initial public offering in May 2002, there was no public market for our common stock and there can be no assurance that a public trading market for our common stock will develop, or if developed, will be sustained. Our common stock is traded on The Nasdaq SmallCap Market, but there can be no assurance that a regular trading market will develop for the common stock.

 

Future sales of Dickie Walker common stock by our stockholders may depress our stock price.

 

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock by our stockholders in the market and after our stockholders’ lockup agreements have expired. These factors could make it more difficult for us to raise funds through future offerings of our equity securities. We currently have 3,680,000 shares of common stock. Of such shares, 1,380,000 shares are freely tradable without restriction or further registration under the Securities Act. All of the remaining outstanding shares are “restricted securities,” as that term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended, and may only be sold pursuant to a registration statement under the Securities Act or an applicable exemption from the registration requirements of the Securities Act, including Rule 144 thereunder. Our executive officers, directors and stockholders who acquired our common stock prior to our initial public offering in May 2002 have agreed not to offer, sell, or otherwise dispose of their shares until May 15, 2003 without the prior written consent of the representative of the underwriters. Our Chief Executive Officer, Gerald W. Montiel, and Montiel Family LLC, have agreed to similar restrictions until May 15, 2004.

 

If we do not continue to meet the listing criteria of The Nasdaq SmallCap Market, our shares may be delisted which may cause the shares to be more difficult to sell.

 

Our shares are currently listed on The Nasdaq SmallCap Market. If we should fail to continue to meet one or more of the listing standards, our shares would be subject to delisting. If this should occur, trading of the shares would be conducted in the over-the-counter market on the Electronic Bulletin Board, a National Association of Securities Dealers, Inc. (“NASD”) sponsored interdealer quotation system. As a result, investors may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the shares. In addition, if the shares cease to be listed on The Nasdaq SmallCap Market and we fail to meet certain other criteria, trading of the shares would be subject to Securities and Exchange Commission rules regulating broker-dealer practices in connection with transactions in “penny stock.” If the shares became subject to the penny stock rules, many brokers may be unwilling to engage in transactions in the shares because of the disclosure requirements under Section 15(g) of the Exchange Act which require that in order for a broker dealer to approve a customer’s account for transactions in penny stocks, a broker or dealer must determine that transactions penny stocks are suitable for the customer, and deliver a written statement of the basis for their determination to the customer, who must sign the written statement.

 

Item 3.     Controls and Procedures

 

The Company has established and currently maintains disclosure controls and other procedures designed to ensure that material information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission. In conjunction with the close of each fiscal quarter, the Company conducts a review and evaluation of the effectiveness of the Company’s disclosure controls and procedures. It is the opinion of the Company’s Chief Executive Officer and President, based upon an evaluation completed within 90 days prior to the filing of this report, that the Company’s disclosure controls and procedures are effective and ensure that any material information relating to the Company is recorded, processed, summarized and reported to its principal officers to allow timely decisions regarding required disclosures. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date we completed our evaluation.

 

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PART II—OTHER INFORMATION

 

Item 1.     Legal Proceedings

 

None.

 

Item 2.     Changes in Securities and Use of Proceeds

 

Our initial public offering of common stock was effected through a Registration Statement on Form SB-2 (File No. 333-82532) that was declared effective by the Securities and Exchange Commission on May 15, 2002. A total of 1,380,000 shares of our common stock were registered in this offering. All 1,380,000 shares were sold at an initial public offering price of $5.00 per share, for an aggregate offering price of approximately $6,900,000, through a syndicate of underwriters managed by Schneider Securities, Inc. We paid to the underwriters underwriting discounts and commissions totaling approximately $690,000 in connection with the offering. In addition, we estimate that we incurred additional expenses of approximately $923,000 in connection with the offering, which when added to the underwriting discounts and commissions paid by us, amounts to total estimated expenses of approximately $1,613,000. Thus, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were approximately $5,287,000. No offering expenses were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

 

At March 31, 2003, we had expended approximately $1,731,000 of the net offering proceeds for tenant improvements for the retail store and our headquarters facility and for other working capital purposes. We have invested the net proceeds of the public offering in short-term money market and money market equivalent securities. We intend to continue to use the balance of the net proceeds for capital expenditures and for other general corporate purposes, including the addition of sales personnel, the expansion of marketing and promotional programs, and the setup of retail stores. The amounts and timing of these expenditures will vary significantly depending on a number of factors, including our future revenue growth, if any, and the amount of cash generated by our operations. As a result, we retain broad discretion over the allocation of the net proceeds of the offering. Pending these uses, we will continue to invest the net proceeds of the offering in short-term money market and money market equivalent securities. We cannot predict whether the proceeds so invested will yield a favorable return. We also may use a portion of the net proceeds for the acquisition of businesses and products. We have no current agreements or commitments for acquisitions of any businesses or products.

 

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 and Reports on Form 8-K

 

(a)   Exhibits:

 

Exhibit No.


  

Description


10.13

  

Revision dated January 27, 2003 to Facility Lease Agreement with WHMF originally dated February 1, 2002

10.14

  

Amendment to Strategic Alliance Agreement with West Marine, Inc. dated January 13, 2003

10.15

  

Warehouse Agreement with Wells Fargo Bank dated January 13, 2003

99.1  

  

Certification of CEO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2  

  

Certification of CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)   Reports on Form 8-K- No reports on Form 8-K were filed during the quarter ended March 31, 2003.

 

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.

 

Dated: May 6, 2003

 

DICKIE WALKER MARINE, INC.

(Registrant)

By:

 

/s/    JULIA B. KNUDSEN        


   

(Julia B. Knudsen)

President, Chief Operating Officer, Chief Financial Officer (Principal Financial and Accounting Officer)

 

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CERTIFICATION

 

I, Gerald W. Montiel, certify that:

 

1.    I have reviewed this quarterly report on Form 10-QSB of Dickie Walker Marine, Inc.;

 

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods represented by this quarterly report;

 

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and have:

 

        (a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the registrant, particularly during the period in which this quarterly report is being prepared;

 

        (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

        (c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

        (a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

        (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.    The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:    May 6, 2003

 

By:

 

/s/    GERALD W. MONTIEL        


   

Gerald W. Montiel,

Chairman and Chief Executive Officer

 

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CERTIFICATION

 

I, Julia B. Knudsen, certify that:

 

1.    I have reviewed this quarterly report on Form 10-QSB of Dickie Walker Marine, Inc.;

 

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods represented by this quarterly report;

 

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and have:

 

        (a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within the registrant, particularly during the period in which this quarterly report is being prepared;

 

        (b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

        (c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

        5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

        (a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

        (b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.    The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date:    May 6, 2003

 

By:

 

/s/    JULIA B. KNUDSEN        


   

Julia B. Knudsen,

President and Chief Financial Officer

 

15