<PAGE>
THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 3, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18632
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0415940
(State of Incorporation) (I.R.S. Employer Identification No.)
64 FAIRBANKS
IRVINE, CALIFORNIA 92718
(Address of principal executive offices) (Zip code)
(714) 583-9029
(Registrant's telephone number, including area code)
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 Class A Common stock
and Class B Common stock, par value $.10 per share, at September 12, 1996 were
10,571,566 and 2,957,665, respectively. There were no shares of Preferred
stock, par value $.01 per share, outstanding at September 12, 1996.
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THE WET SEAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of August 3, 1996 (unaudited)
and February 3, 1996 . . . . . . . . . . . . . . . . . . . . . . 3-4
Consolidated Statements of Income (unaudited) for the 13
and 26 weeks ended August 3, 1996 and July 29, 1995. . . . . . . 5
Consolidated Statements of Cash Flows (unaudited) for
the 26 weeks ended August 3, 1996 and July 29, 1995. . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 9-15
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 16-17
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . 18
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<PAGE>
THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 3, FEBRUARY 3,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $77,889,000 $57,153,000
Other receivables 868,000 523,000
Merchandise inventories 29,202,000 16,241,000
Prepaid expenses 5,402,000 428,000
Deferred tax charges 1,100,000 1,100,000
------------ ------------
Total current assets 114,461,000 75,445,000
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 55,238,000 55,438,000
Furniture, fixtures and equipment 21,713,000 21,606,000
Leasehold rights 4,011,000 2,009,000
Construction in progress 2,000 9,000
------------ ------------
80,964,000 79,062,000
Less accumulated depreciation (47,187,000) (41,015,000)
------------ ------------
Net equipment and leasehold improvements 33,777,000 38,047,000
------------ ------------
OTHER ASSETS:
Deferred tax charges and other assets 3,441,000 3,461,000
Goodwill, net of accumulated amortization of
$543,000 and $521,000 as of August 3, 1996
and February 3, 1996, respectively 589,000 611,000
------------ ------------
Total other assets 4,030,000 4,072,000
------------ ------------
$152,268,000 $117,564,000
------------ ------------
------------ ------------
</TABLE>
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<PAGE>
THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 3, FEBRUARY 3,
1996 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $37,236,000 $19,491,000
Accrued liabilities 25,145,000 22,813,000
Income taxes payable 108,000 3,354,000
Current portion of long-term debt 2,000,000 3,736,000
------------ ------------
Total current liabilities 64,489,000 49,394,000
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt 4,264,000 5,264,000
Deferred rent 5,628,000 5,171,000
------------ ------------
Total long-term liabilities 9,892,000 10,435,000
------------ ------------
Total liabilities 74,381,000 59,829,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
2,000,000 shares; none issued and outstanding - -
Common Stock, Class A, $.10 par value,
authorized 20,000,000 shares;
10,358,566 and 5,687,066 shares issued and
outstanding at August 3, 1996 and February 3,
1996, respectively 1,036,000 568,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares;
3,157,665 and 6,807,665 shares issued and
outstanding at August 3, 1996 and February 3,
1996, respectively 316,000 681,000
Paid-in capital 54,580,000 38,568,000
Retained earnings 21,955,000 17,918,000
------------ ------------
Total Stockholders' Equity 77,887,000 57,735,000
------------ ------------
$152,268,000 $117,564,000
------------ ------------
------------ ------------
</TABLE>
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<PAGE>
THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------- -------------------------------
AUGUST 3, JULY 29, AUGUST 3, JULY 29,
1996 1995 1996 1995
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
SALES
$94,356,000 $45,169,000 $174,931,000 $75,143,000
COST OF SALES, (including buying, distribution
and occupancy costs) 69,570,000 35,939,000 131,107,000 60,136,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
GROSS MARGIN 24,786,000 9,230,000 43,824,000 15,007,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 19,695,000 10,647,000 37,959,000 17,787,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
INTEREST INCOME, NET (605,000) (237,000) (1,082,000) (570,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
NET OPERATING EXPENSES 19,090,000 10,410,000 36,877,000 17,217,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 5,696,000 (1,180,000) 6,947,000 (2,210,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
PROVISION (BENEFIT) FOR INCOME TAXES 2,381,000 (447,000) 2,910,000 (806,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
NET INCOME (LOSS) $3,315,000 ($733,000) $4,037,000 ($1,404,000)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
NET INCOME (LOSS) PER COMMON SHARE $0.25 ($0.06) $0.31 ($0.11)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,318,385 12,315,979 12,908,138 12,276,390
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 13,528,612 12,315,979 13,194,191 12,276,390
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
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THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
-------------------------------
AUGUST 3, JULY 29,
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $4,037,000 ($1,404,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,236,000 4,247,000
Loss on disposal of equipment and leasehold improvements 2,000 11,000
Changes in operating assets and liabilities, net of acquisition:
(Increase) decrease in:
Other receivables (345,000) (189,000)
Tax refund receivable - (851,000)
Merchandise inventories (12,961,000) (5,475,000)
Prepaid expenses (4,974,000) (5,900,000)
Other assets 20,000 (37,000)
(Decrease) increase in:
Accounts payable and accrued liabilities 21,558,000 7,709,000
Income taxes payable (3,246,000) (237,000)
Deferred rent 457,000 309,000
----------- -----------
Total adjustments 6,747,000 (413,000)
----------- -----------
Net cash provided by (used in) operating activities 10,784,000 (1,817,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (3,427,000) (732,000)
Cash paid for acquisition, less cash acquired - (20,000)
----------- -----------
Net cash used in investing activities (3,427,000) (752,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (2,736,000) -
Proceeds from issuance of stock 16,115,000 4,000
Proceeds from issuance of debt - 10,000,000
----------- -----------
Net cash provided by financing activities 13,379,000 10,004,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 20,736,000 7,435,000
CASH AND CASH EQUIVALEbeginning of period 57,153,000 25,369,000
----------- -----------
CASH AND CASH EQUIVALEend of period $77,889,000 $32,804,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $316,000 $78,000
Income taxes, net 6,155,000 286,000
</TABLE>
SCHEDULE OF NONCASH TRANSACTIONS:
During the twenty-six weeks ended August 3, 1996, the Company reduced
certain estimated liabilities assumed in connection with the acquisition of
Contempo Casuals. As a result, a reduction in accounts payable of
$1,481,000 was recorded with a corresponding reduction in fixed assets.
During the twenty-six weeks ended July 29, 1995, the Company acquired the
assets of Contempo Casuals for common stock valued at $1,178,000.
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THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The information set forth in these consolidated financial statements is
unaudited except for the February 3, 1996 Balance Sheet. These statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The accompanying consolidated financial statements consolidate the accounts
of Contempo Casuals, Inc. ("Contempo") which was acquired on July 1, 1995. All
significant intercompany transactions have been eliminated.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the 13 and 26 weeks ended August 3, 1996 are not
necessarily indicative of the results that may be expected for the year ending
February 1, 1997. For further information, refer to the financial statements
and notes thereto included in the Company's Annual Report for the year ended
February 3, 1996.
Certain reclassifications have been made to conform the July 29, 1995
financial statements to the August 3, 1996 financial statements.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" which became effective for the Company beginning February 4, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.
7 of 18
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 3 - LOAN PAYABLE TO BANK AND LINES OF CREDIT:
On July 1, 1996, the Company renewed its three bank credit facilities which
consisted of two revolving lines of credit for an aggregate of $30,000,000 and
which expire on July 1, 1998, and one term loan for $10,000,000 which expires on
July 31, 2000. The borrowings under the two revolving credit lines bear
interest at the bank's prime rate or, at the Company's option, the London
Interbank Offered Rate (LIBOR) plus 1.75% for both facilities. The Wet Seal
facility is guaranteed by Contempo. The Contempo facility is guaranteed by Wet
Seal and is also secured by the stock of Contempo. As of August 31, 1996 there
were no borrowings against either of the lines.
The Company's five year amortizing term loan in the amount of $10,000,000
is repayable in twenty equal quarterly installments of $500,000 which commenced
October 31, 1995. The borrowing bears interest at the bank's prime rate or, at
the Company's option, LIBOR plus 1.75%. The term loan is guaranteed by
Contempo. All of the above facilities are subject to certain financial
covenants and conditions with which the Company was in compliance as of August
3, 1996.
NOTE 4 - EARNINGS PER COMMON SHARE:
Earnings per common share are based on the weighted average number of
common and common stock equivalent, if dilutive, shares outstanding during the
periods.
NOTE 5 - ISSUANCE OF STOCK:
On May 24, 1996 the Company completed its previously announced public
offering of 3,565,000 shares of its Class A Common Stock, of which 765,000
shares were sold by the Company and 2,800,000 were sold by Selling Stockholders.
The shares were sold to the public at an initial offering price of $20 per
share. The net proceeds to the Company from the sale of the 765,000 shares were
$14,459,000. The proceeds are being used for general corporate purposes, which
may include repayment of certain indebtedness, remodeling and opening of stores
and upgrading of the Company's point-of-sale system.
8 of 18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On July 1, 1995, the Company acquired Contempo Casuals. The transaction
was accounted for under the purchase method. During the twenty-six weeks ended
August 3,1996, the Company reduced certain estimated liabilities assumed in
connection with the acquisition of Contempo Casuals. As a result, a reduction
in accounts payable of $1,481,000 was recorded with a corresponding reduction in
fixed assets.
The acquisition of Contempo Casuals increased the number of stores the
Company operates by 237 stores. As of August 3, 1996 the Company operated 364
stores as compared to 367 stores as of July 29, 1995, the end of the second
quarter of fiscal 1995.
Acquiring Contempo Casuals enabled the Company to significantly reduce
fixed expenses as a percentage of sales through the consolidation and
integration of the two companies' management teams, corporate offices and
distribution centers. This process was substantially completed at the time of
the acquisition.
The following discussion and analysis of financial condition and results of
operations include a comparison of the results of operations for the second
quarter year to date of fiscal 1996, which contained the full period results of
both the Wet Seal stores and the Contempo Casuals stores, to the second quarter
year to date of fiscal 1995, which contained the full period results of the Wet
Seal stores, and only the month of July 1995 results for the Contempo Casuals
stores, due to the fact that the Contempo Casuals acquisition occurred on July
1, 1995. Therefore, the results of operations for the second quarter year to
date of fiscal 1996 are not directly comparable to the second quarter year to
date of fiscal 1995.
Comparable store sales are defined as sales in stores that were open
throughout the full fiscal year and throughout the full prior fiscal year. In
the second quarter and second quarter year to date of fiscal 1996, comparable
store sales included sales results of Contempo Casuals stores as compared to
sales results of Contempo Casuals stores in the corresponding period in the
prior year during which time Contempo Casuals was under different ownership.
Management's discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes related thereto.
9 of 18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS
THE 13 WEEKS ENDED AUGUST 3, 1996 (SECOND QUARTER OF FISCAL 1996) AS COMPARED TO
THE 13 WEEKS ENDED JULY 29, 1995 (SECOND QUARTER OF FISCAL 1995)
Sales in the 13 weeks ended August 3, 1996 were $94,356,000 compared to
sales in the 13 weeks ended July 29, 1995 of $45,169,000, an increase of
$49,187,000 or 108.9%. The dollar increase in sales was primarily due to the
acquisition of Contempo Casuals. The increase in sales is also due, to a
significantly lesser extent, to the 16.5% increase in comparable store sales for
the combined Wet Seal and Contempo chains as well as due to a shift in the
fiscal calendar. The second quarter of fiscal 1996 begins and ends one week
later than the second quarter of fiscal 1995 resulting in a 'net' stronger 13
weeks of sales in the second quarter of fiscal 1996 as compared to the 13 weeks
of sales in the second quarter of fiscal 1995.
Cost of sales, including buying, distribution and occupancy costs, was
$69,570,000 in the second quarter of fiscal 1996 compared to $35,939,000 in the
second quarter of fiscal 1995, an increase of $33,631,000 or 93.6%. The dollar
increase in cost of sales was due to the increase in the number of stores as a
result of the acquisition of Contempo Casuals. As a percentage of sales, cost
of sales decreased from 79.6% in the second quarter of fiscal 1995 to 73.7% in
the second quarter of fiscal 1996, a decrease of 5.9%. This decrease in cost of
sales as a percentage of sales was related primarily to a decrease in occupancy
costs of 6.1% and a decrease in buying and distribution costs of 0.9%. This was
offset somewhat by an increase in the cost of merchandise of 1.1%. The decrease
in occupancy costs was associated primarily with a decrease in depreciation
resulting from the lower net book value per store of the depreciable assets of
Contempo Casuals, as compared to Wet Seal, as well as to the improved leverage
in fixed costs related to the increase in comparable store sales. The increase
in merchandise cost was due to an increase in the provision for shrink in the
second quarter of fiscal 1996 as compared to the second quarter of fiscal 1995,
and was offset somewhat by an increase in initial markup rates.
Selling, general and administrative expenses were $19,695,000 in the second
quarter of fiscal 1996 compared to $10,647,000 in the second quarter of fiscal
1995, an increase of $9,048,000 or 85.0%. The dollar increase in selling,
10 of 18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
general and administrative expenses was primarily due to the acquisition of
Contempo Casuals which served to substantially increase the number of stores.
As a percentage of sales, selling, general and administrative expenses decreased
from 23.6% in the second quarter of fiscal 1995 to 20.9% in the second quarter
of fiscal 1996, a decrease of 2.7%. The decrease as a percentage of sales was
related to the economies of scale the Company achieved as a result of this
acquisition and to the increase in comparable store sales. The decrease was
most notable in store payroll expense which decreased 1.7% as a percentage of
sales as compared to the prior year.
Interest income, net, was $605,000 in the second quarter of fiscal 1996
compared to $237,000 in the second quarter of fiscal 1995, an increase of
$368,000. The increase was due primarily to an increase in the average cash
balance invested and was partially offset by interest expense during the period
that was related to the loan payable.
Income tax provision was $2,381,000 in the second quarter of fiscal 1996
compared to a tax benefit of $447,000 in the second quarter of fiscal 1995.
Net income was $3,315,000 in the second quarter of fiscal 1996 compared to
a net loss of $733,000 in the second quarter of fiscal 1995. As a percentage of
sales, net income was 3.5% in the second quarter of fiscal 1996 compared to a
net loss of 1.6% in the second quarter of fiscal 1995. The Company's return to
profitability, which began in the second half of fiscal 1995, was related in
part to the acquisition of Contempo Casuals. With this acquisition, the Company
achieved significant economies of scale in areas such as buying, distribution
and general and administrative costs. At the same time, the acquisition enabled
the Company to reduce its average depreciation cost per store due, in part, to
the favorable acquisition price. Also contributing to the improvement in
profitability is the increase in comparable store sales.
THE 26 WEEKS ENDED AUGUST 3, 1996 (SECOND QUARTER YEAR TO DATE OF FISCAL 1996)
AS COMPARED TO THE 26 WEEKS ENDED JULY 29, 1995 (SECOND QUARTER YEAR TO DATE OF
FISCAL 1995)
Sales in the 26 weeks ended August 3, 1996 were $174,931,000 compared to
sales in the 26 weeks ended July 29, 1995 of $75,143,000, an increase of
$99,788,000 or 132.8%. The dollar increase in sales was primarily due to the
acquisition of Contempo Casuals. The increase in sales is also due, to a
11 of 18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
significantly lesser extent, to the 10.5% increase in comparable store sales for
the combined Wet Seal and Contempo chains as well as due to a shift in the
fiscal calendar. The second quarter year to date of fiscal 1996 begins and ends
one week later than the second quarter year to date of fiscal 1995 resulting in
a 'net' stronger 26 weeks of sales in the second quarter year to date of fiscal
1996 as compared to the second quarter year to date of fiscal 1995.
Cost of sales, including buying, distribution and occupancy costs, was
$131,107,000 in the second quarter year to date of fiscal 1996 compared to
$60,136,000 in the second quarter year to date of fiscal 1995, an increase of
$70,971,000 or 118.0%. The dollar increase in cost of sales was due to the
increase in the number of stores as a result of the acquisition of Contempo
Casuals. As a percentage of sales, cost of sales decreased from 80.0% in the
second quarter year to date of fiscal 1995 to 74.9% in the second quarter year
to date of fiscal 1996, a decrease of 5.1%. This decrease in cost of sales as a
percentage of sales was related primarily to a decrease in occupancy costs of
4.5% and a decrease in buying and distribution costs of 0.9%. This was offset
slightly by an increase in the cost of merchandise of 0.3%. The decrease in
occupancy costs was associated primarily with a decrease in depreciation
resulting from the lower net book value per store of the depreciable assets of
Contempo Casuals, as compared to Wet Seal, as well as to the improved leverage
in fixed costs related to the increase in the comparable store sales. The
slight increase in merchandise cost was due to an increase in the provision for
shrink for the 26 weeks ended August 3, 1996 as compared to the corresponding
period in the prior year, and was offset somewhat by an increase in initial
markup rates.
Selling, general and administrative expenses were $37,959,000 in the second
quarter year to date of fiscal 1996 compared to $17,787,000 in the second
quarter year to date of fiscal 1995, an increase of $20,172,000 or 113.4%. The
dollar increase in selling, general and administrative expenses was primarily
due to the acquisition of Contempo Casuals which served to substantially
increase the number of stores. As a percentage of sales, selling, general and
administrative expenses decreased from 23.7% in the second quarter year to date
of fiscal 1995 to 21.7% in the second quarter year to date of fiscal 1996, a
decrease year to date of 2.0%. The decrease as a percentage of sales was
related to the economies of scale the Company achieved as a result of the
Contempo acquisition and to the increase in comparable store sales. The
decrease
12 of 18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
was most notable in store payroll expense which decreased 1.2% as a percentage
of sales as compared to the prior year.
Interest income, net, was $1,082,000 in the second quarter year to date of
fiscal 1996 compared to $570,000 in the second quarter year to date of fiscal
1995, an increase of $512,000. The increase was due primarily to an increase in
the average cash balance invested and was partially offset by interest expense
during the period that was related to the loan payable.
Income tax provision was $2,910,000 in the second quarter year to date of
fiscal 1996 compared to a tax benefit of $806,000 in the second quarter year to
date of fiscal 1995.
Net income was $4,037,000 in the second quarter year to date of fiscal
1996 compared to a net loss of $1,404,000 in the second quarter year to date of
fiscal 1995. As a percentage of sales, net income was 2.3% in the second
quarter year to date of fiscal 1996 compared to a net loss of 1.9% in the second
quarter year to date of fiscal 1995. The Company's return to profitability,
which began in the second half of fiscal 1995, was related in part to the
acquisition of Contempo Casuals. With this acquisition, the Company achieved
significant economies of scale in areas such as buying, distribution and general
and administrative costs. At the same time, the acquisition enabled the Company
to reduce its average depreciation cost per store due, in part, to the
favorable acquisition price. Also contributing to the improvements in
profitability is the increase in comparable store sales.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at August 3, 1996 was $49,972,000 compared to $26,051,000
at February 3, 1996, an increase of $23,921,000. The Company's primary source
of working capital has historically been cash flows from operating activities.
Net cash flows provided by operating activities for the 26 weeks ended August 3,
1996 was $10,784,000 compared to ($1,817,000) for the 26 weeks ended July 29,
1995. Inventory increased $12,961,000 at August 3, 1996 compared to the fiscal
year end due to the seasonal nature of the business; inventory levels are
typically at a low point at year end. The accounts payable and accrued
liabilities increase of $21,558,000 more than offset this increase in inventory
due to the terms of the payments in relation to the receipt of the inventory.
In the second quarter year to date of fiscal 1996, the Company invested
$3,427,000 in equipment, leasehold
13 of 18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
improvements and leasehold rights. These expenditures related primarily to the
purchase of leasehold rights for three stores that the Company opened in the
second quarter of this fiscal year and one store that the Company will open in
the third quarter of this fiscal year. The Company currently estimates that the
capital expenditures for the remainder of fiscal 1996 will be $8,000,000. These
planned expenditures relate primarily to store remodels and a new point-of-sale
system.
Cash provided by financing activities increased $13,379,000 in the second
quarter year to date of fiscal 1996 due to the proceeds received from the sale
by the Company of 765,000 shares of Class A Common Stock in a public offering
which closed on May 24, 1996.
In July 1996, the Company renewed its lines of credit with Bank of America
National Trust and Savings Association ("Bank of America") in an aggregate
principal amount of $30,000,000 (the "Revolving Credit Facilities"), and a five
year amortizing term loan with Bank of America in the amount of $10,000,000 (the
"Term Loan"). In connection with the Contempo Casuals acquisition, the Company
entered into the Term Loan to satisfy certain net worth requirements related to
the assignment of leases. As of August 31, 1996, there were no borrowings under
the Revolving Credit Facilities, and the Company was in compliance with all
terms and covenants of such agreements. The Company invests its excess funds
primarily in a short-term investment grade money market fund, investment grade
commercial paper and U.S. Treasury and Agency obligations. Management believes
the Company's working capital and cash flows from operating activities will be
sufficient to meet the Company's operating and capital requirements in the
foreseeable future.
SEASONALITY AND QUARTERLY OPERATING RESULTS
The Company's business is seasonal by nature with the Christmas season
(beginning the week of Thanksgiving and ending the first Saturday after
Christmas) and the back-to-school season (beginning the last week of July and
ending the first week of September) historically accounting for the largest
percentage of sales volume. In the Company's three fiscal years ended February
3, 1996, the Christmas and back-to-school seasons accounted for an average of
approximately 32% of the Company's annual sales, after adjusting for sales
increases related to new stores. The Company does not believe that inflation
has had a material effect on the results of operations during the past three
years. However, there can be
14 of 18
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
no assurance that the Company's business will not be affected by inflation in
the future.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the
preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain various forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act, which represent the
Company's expectations or beliefs concerning future events. The Company
cautions that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements, including, without limitation, the sufficiency of the
Company's working capital and cash flows from operating activities, a decline in
demand for the merchandise offered by the Company, the ability of the Company to
obtain adequate merchandise supply, the ability of the Company to gauge the
fashion tastes of its customers and provide merchandise that satisfies customer
demand, the effect of economic conditions, the effect of severe weather or
natural disasters and the effect of competitive pressures from other retailers.
15 of 18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings, other than ordinary
routine litigation incidental to the Company's business.
ITEM 2 - CHANGES IN SECURITIES. Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES. Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its most recent annual meeting on June 20, 1996. At this
meeting, the Company's shareholders elected George H. Benter, Jr., Kathy
Bronstein, Stephen Gross, Walter F. Loeb, Wilfred Posluns, Gerald Randolph, Alan
Siegel, Irving Teitelbaum and Edmond Thomas to the Board of Directors with an
affirmative vote of at least 6,059,481 Class A shares and 3,157,665 Class B
shares for each director, with no more than 19,203 Class A shares voting against
any director. The shareholders also ratified the Company's selection of
Deloitte & Touche LLP as the independent certified public accountants for the
fiscal year ending February 1, 1997 with an affirmative vote of 6,071,197 Class
A shares and 3,157,665 Class B shares, with no more than 7,714 Class A shares
voting against. Class A shares are entitled to one vote per share. Class B
shares are entitled to two votes per share.
ITEM 5 - OTHER INFORMATION. Not Applicable
ITEM 6(a) - EXHIBITS. Not Applicable
ITEM 6(b) - REPORTS ON FORM 8-K.
On May 24, 1996, a form 8-K was filed which reported that on May 15, 1996,
Gross-Teitelbaum Holdings Inc. ("GTHI"), 2927977 Canada Inc. ("GTHI Sub"), Suzy
Shier Inc., Los Angeles Express Fashions Inc. and Suzy Shier Limited, as
trustors, and Maryse Bertrand, as trustee, under that certain Voting Trust
Agreement dated as of August 9, 1995 (the "Voting Trust Agreement"), entered
into an Agreement to terminate the Voting Trust Agreement immediately prior to
the closing of the public offering of 3,565,000 shares of Class A Common Stock,
$.10 par value per share (the "Class A Common Stock") of the registrant which
occurred on May 24, 1996. In the public offering, GTHI Sub, GTHI and Suzy Shier
Inc. sold 946,773, 378,227 and 1,325,000 shares of Class B Common Stock, $.10
par value per share (the "Class B Common Stock"), respectively, all of which
16 of 18
<PAGE>
ITEM 6(b) - REPORTS ON FORM 8-K, CONTINUED
shares were converted to Class A Common Stock upon their sale in the public
offering.
Prior to the public offering, the voting trustee controlled approximately
58.2% of the voting power with respect to the registrant. Following the public
offering which occurred on May 24, 1996, GTHI Sub, Suzy Shier Inc. and Los
Angeles Express Fashions Inc. held directly 1,015,573 shares, 175,000 shares and
1,500,000 shares, respectively, of the registrant's Class B Common Stock,
representing 12.2%, 2.1% and 18%, respectively, of the voting power with respect
to the registrant. GTHI no longer directly owns any shares of Common Stock of
the registrant. Each of GTHI Sub, Suzy Shier Inc. and Los Angeles Express
Fashions Inc. is controlled directly or indirectly by Irving Teitelbaum, the
Chairman of the Board and Stephen Gross, Secretary and a director of the
registrant. As of May 24, 1996, these entities collectively controlled
approximately 32.5% of the voting power with respect to the registrant.
17 of 18
<PAGE>
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.
The Wet Seal, Inc.
(Registrant)
Date: September 16, 1996 /S/KATHY BRONSTEIN
------------------------------ ------------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer (Principal
Executive Officer)
Date: September 16, 1996 /S/EDMOND THOMAS
------------------------------ ------------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: September 16, 1996 /S/ANN CADIER KIM
------------------------------ ------------------------------
Ann Cadier Kim
Vice President of Finance
and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
18 of 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
WET SEAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> MAY-05-1996
<PERIOD-END> AUG-03-1996
<CASH> 77,889,000
<SECURITIES> 0
<RECEIVABLES> 868,000
<ALLOWANCES> 0
<INVENTORY> 29,202,000
<CURRENT-ASSETS> 114,461,000
<PP&E> 80,964,000
<DEPRECIATION> 47,187,000
<TOTAL-ASSETS> 152,268,000
<CURRENT-LIABILITIES> 64,489,000
<BONDS> 0
0
0
<COMMON> 1,352,000
<OTHER-SE> 76,535,000
<TOTAL-LIABILITY-AND-EQUITY> 152,268,000
<SALES> 94,356,000
<TOTAL-REVENUES> 94,356,000
<CGS> 69,570,000
<TOTAL-COSTS> 19,695,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (605,000)
<INCOME-PRETAX> 5,696,000
<INCOME-TAX> 2,381,000
<INCOME-CONTINUING> 3,315,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,315,000
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0
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