<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 2, 1997
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, par value $.10 per share, and Class B Common Stock, par value $.10 per
share, at September 12, 1997 were 10,644,874 and 2,912,665, respectively.
There were no shares of Preferred Stock, par value $.01 per share,
outstanding at September 12, 1997.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of August 2, 1997 (unaudited) and
February 1, 1997................................................3-4
Statements of Operations (unaudited) for the 13 and
26 weeks ended August 2, 1997 and August 3, 1996..................5
Statements of Cash Flows (unaudited) for the
26 weeks ended August 2, 1997 and August 3, 1996..................6
Notes to 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
SIGNATURE PAGE...................................................17
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THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 2, FEBRUARY 1,
1997 1997
------------ ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 53,842,000 $ 71,483,000
Marketable securities 28,765,000 17,700,000
Other receivables 2,158,000 1,577,000
Merchandise inventories 32,296,000 22,589,000
Prepaid expenses, including $5,538,000
of prepaid rent as of August 2, 1997 7,002,000 -
Deferred tax charges 693,000 693,000
------------ ------------
Total current assets 124,756,000 114,042,000
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 61,580,000 55,429,000
Furniture, fixtures and equipment 25,270,000 21,742,000
Leasehold rights 3,342,000 3,342,000
Construction in progress 257,000 2,000
------------ ------------
90,449,000 80,515,000
Less accumulated depreciation (52,922,000) (47,285,000)
------------ ------------
Net equipment and leasehold improvements 37,527,000 33,230,000
------------ ------------
OTHER ASSETS:
Deferred tax charges and other assets 6,918,000 6,914,000
Goodwill, net of accumulated amortization of
$589,000 and $566,000 as of August 2, 1997
and February 1, 1997, respectively 543,000 566,000
------------ ------------
Total other assets 7,461,000 7,480,000
------------ ------------
$169,744,000 $154,752,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 2, FEBRUARY 1,
1997 1997
------------ ------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $39,323,000 $26,035,000
Accrued liabilities 21,682,000 24,064,000
Income taxes payable - 2,152,000
Current portion of long-term debt 2,000,000 2,000,000
------------ ------------
Total current liabilities 63,005,000 54,251,000
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt 2,264,000 3,264,000
Deferred rent 6,248,000 6,117,000
------------ ------------
Total long-term liabilities 8,512,000 9,381,000
------------ ------------
Total liabilities 71,517,000 63,632,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
5,000,000 shares; none issued and outstanding - -
Common Stock, Class A, $.10 par value,
authorized 50,000,000 shares;
10,644,874 and 10,628,874 shares issued and outstanding
at August 2, 1997 and February 1, 1997, respectively 1,064,000 1,063,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares;
2,912,665 shares issued and outstanding
at August 2, 1997 and February 1, 1997, respectively 291,000 291,000
Paid-in capital 56,770,000 56,596,000
Retained earnings 40,102,000 33,170,000
------------ ------------
Total stockholders' equity 98,227,000 91,120,000
------------ ------------
$169,744,000 $154,752,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
------------------------------- --------------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
SALES $94,254,000 $94,356,000 $189,817,000 $174,931,000
COST OF SALES (INCLUDING BUYING, DISTRIBUTION
AND OCCUPANCY COSTS) 68,917,000 69,570,000 139,039,000 131,107,000
----------- ----------- ------------ ------------
GROSS MARGIN 25,337,000 24,786,000 50,778,000 43,824,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 20,470,000 19,695,000 40,667,000 37,959,000
INTEREST INCOME, NET (990,000) (605,000) (1,704,000) (1,082,000)
----------- ----------- ------------ ------------
NET OPERATING EXPENSES 19,480,000 19,090,000 38,963,000 36,877,000
----------- ----------- ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 5,857,000 5,696,000 11,815,000 6,947,000
PROVISION FOR INCOME TAXES 2,440,000 2,381,000 4,883,000 2,910,000
----------- ----------- ------------ ------------
NET INCOME $ 3,417,000 $ 3,315,000 $ 6,932,000 $ 4,037,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
NET INCOME PER SHARE $ 0.25 $ 0.25 $ 0.50 $ 0.31
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 13,851,502 13,528,612 13,839,357 13,194,191
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
--------------------------------
AUGUST 2, AUGUST 3,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,932,000 $ 4,037,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,660,000 6,236,000
Loss on disposal of equipment and leasehold improvements - 2,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Other receivables (581,000) (345,000)
Merchandise inventories (9,707,000) (12,961,000)
Prepaid expenses (7,002,000) (4,974,000)
Other assets (4,000) 20,000
(Decrease) increase in:
Accounts payable and accrued liabilities 10,906,000 21,558,000
Income taxes payable (2,152,000) (3,246,000)
Deferred rent 131,000 457,000
------------ ------------
Total adjustments (2,749,000) 6,747,000
------------ ------------
Net cash provided by operating activities 4,183,000 10,784,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 11,000,000 -
Investment in equipment and leasehold improvements (9,934,000) (3,427,000)
Investment in marketable securities (22,065,000) -
------------ ------------
Net cash used in investing activities (20,999,000) (3,427,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,000,000) (2,736,000)
Proceeds from issuance of stock 175,000 16,115,000
------------ ------------
Net cash (used in) provided by financing activities (825,000) 13,379,000
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,641,000) 20,736,000
CASH AND CASH EQUIVALENTS, beginning of period 71,483,000 57,153,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 53,842,000 $ 77,889,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $186,000 $316,000
Income taxes 8,401,000 6,155,000
</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.
See accompanying notes to financial statements
6
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THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The information set forth in these financial statements is unaudited
except for the February 1, 1997 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.
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 2, 1997 are
not necessarily indicative of the results that may be expected for the year
ending January 31, 1998. For further information, refer to the financial
statements and notes thereto included in the Company's Annual Report for the
year ended February 1, 1997.
Effective February 2, 1997, Contempo Casuals, Inc. was merged with and
into The Wet Seal, Inc. forming one legal entity.
NOTE 2 - LINE OF CREDIT AND LOAN PAYABLE TO BANK:
Under an unsecured revolving line-of-credit arrangement with Bank of
America National Trust and Savings Association ("Bank of America"), the
Company may borrow up to a maximum of $30 million on a revolving basis
through July 1, 1998. The cash borrowings under the arrangement bear
interest at Bank of America's prime rate or, at the Company's option, LIBOR
plus 1.75%. As of August 2, 1997, the Company had no borrowings outstanding
under the credit arrangement.
In June 1995, the Company entered into an unsecured five-year, $10
million term loan. The loan bears interest at Bank of America's prime rate
plus .25% or, at the Company's option, LIBOR plus 1.75%. The estimated
annual principal payments on the loan are $2,000,000 payable in quarterly
installments of $500,000 which commenced October 31, 1995. As of August 2,
1997, the loan has a remaining outstanding balance of $4,264,000.
The credit arrangement and the term loan impose quarterly and annual
financial covenants requiring the Company to maintain
7
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NOTE 2 - LOAN PAYABLE TO BANK AND LINE OF CREDIT (CONTINUED):
certain financial ratios and achieve certain levels of annual income. In
addition, the credit arrangement and the term loan require that Bank of
America approve the payment of dividends and restrict the level of capital
expenditures. At August 2, 1997, the Company was in compliance with these
covenants.
NOTE 3 - EARNINGS PER COMMON SHARE:
Earnings per common share are based on the weighted average number of
common and common stock equivalent shares outstanding, if dilutive, during
the periods.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which is effective for financial statements issued for
periods ending after December 15, 1997. SFAS No. 128 requires the disclosure
of basic and diluted earnings per share. For the periods ended August 2, 1997
and August 3, 1996, the amount reported as net income per common and common
equivalent share is not materially different than that which would have been
reported for basic and diluted earnings per share in accordance with SFAS No.
128.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company is one of the largest national mall-based specialty
retailers focusing primarily on young women's apparel, and as of September
12, 1997 operates 367 retail stores in 34 states and Puerto Rico under the
names "Wet Seal", "Contempo Casuals", "Limbo Lounge" and "Next". The Company
sells moderately priced, fashionable, casual apparel and accessory items
designed for consumers with a young, active lifestyle.
On July 1, 1995, the Company acquired Contempo Casuals. The acquisition
increased the number of stores the Company operates by 237 stores. 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.
As of August 2, 1997 the Company operated 368 stores as compared to 364
stores as of August 3, 1996, the end of the second quarter of fiscal 1996.
The Company opened 14 stores during the period from August 4, 1996 to
August 2, 1997 and closed ten stores.
Effective February 2, 1997, Contempo Casuals, Inc. was merged with and
into The Wet Seal, Inc. forming one legal entity. For financial reporting
purposes, Wet Seal and Contempo Casuals have been reported on a consolidated
basis since the original acquisition on July 1, 1995.
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's Financial
Statements and the Notes related thereto.
RESULTS OF OPERATIONS
THE 13 WEEKS ENDED AUGUST 2, 1997 (SECOND QUARTER OF FISCAL 1997) AS COMPARED
TO THE 13 WEEKS ENDED AUGUST 3, 1996 (SECOND QUARTER OF FISCAL 1996)
Sales in the second quarter of fiscal 1997 were $94,254,000 compared to
sales in the second quarter of fiscal 1996 of $94,356,000, a decrease of
$102,000 or 0.1%. The dollar decrease in sales was primarily due to a
decrease of 1.6% in comparable store sales. Comparable store sales are
defined as sales in
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
stores that were open throughout the full fiscal year and throughout the full
prior fiscal year. The decrease in comparable store sales was offset
somewhat by the opening of 14 new stores with a higher sales productivity per
store than the ten closed stores.
Cost of sales, including buying, distribution and occupancy costs, was
$68,917,000 in the second quarter of fiscal 1997 compared to $69,570,000 in
the second quarter of fiscal 1996, a decrease of $653,000. The dollar
decrease in cost of sales was due primarily to a decrease in the cost of
merchandise. As a percentage of sales, cost of sales decreased from 73.7% in
the second quarter of fiscal 1996 to 73.1% in the second quarter of fiscal
1997, a decrease of 0.6%. This decrease in cost of sales as a percentage of
sales was related to a decrease in the cost of merchandise as a percentage of
sales of 0.7% and a decrease in distribution costs as a percentage of sales
of 0.4%, offset somewhat by an increase in occupancy costs of 0.4% and an
increase in buying costs of 0.1%. The decrease in the cost of merchandise
was due to a decrease in the provision for inventory shrink in the second
quarter of fiscal 1997 as compared to the second quarter of fiscal 1996,
offset somewhat by an increase in markdowns. The decrease in distribution
costs was due to a decrease in the number of units processed for the quarter
due to a reduction in receipts resulting from slower than planned sales early
in the second quarter. The increase in occupancy costs was associated
primarily with the reduced leverage in fixed costs which was due to the
decrease in comparable store sales.
Selling, general and administrative expense was $20,470,000 in the second
quarter of fiscal 1997 compared to $19,695,000 in the second quarter of
fiscal 1996, an increase of $775,000 or 3.9%. The dollar increase in
selling, general and administrative expense was primarily due to an increase
in store wages. As a percentage of sales, selling, general and
administrative expense increased from 20.9% in the second quarter of fiscal
1996 to 21.7% in the second quarter of fiscal 1997, an increase of 0.8%. The
increase as a percentage of sales was related to the reduced leverage of the
fixed components of this expense, primarily store wages, as a result of the
decrease in comparable store sales.
Interest income, net, was $990,000 in the second quarter of fiscal 1997
compared to $605,000 in the second quarter of fiscal 1996, an increase of
$385,000. The increase was due to an increase in the average cash balance
invested in the current year period as compared to the prior year.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Income tax provision was $2,440,000 in the second quarter of fiscal 1997
compared to $2,381,000 in the second quarter of fiscal 1996. The effective
tax rate was 41.7% compared to 41.8% in the prior year.
Due to the factors noted above, net income was $3,417,000 in the second
quarter of fiscal 1997 compared to $3,315,000 in the second quarter of fiscal
1996. As a percentage of sales, net income was 3.6% in the second quarter of
fiscal 1997 compared to 3.5% in the second quarter of fiscal 1996.
THE 26 WEEKS ENDED AUGUST 2, 1997 (SECOND QUARTER YEAR TO DATE OF FISCAL
1997) AS COMPARED TO THE 26 WEEKS ENDED AUGUST 3, 1996 (SECOND QUARTER YEAR
TO DATE OF FISCAL 1996)
Sales in the 26 weeks ended August 2, 1997 were $189,817,000 compared to
sales in the 26 weeks ended August 3, 1996 of $174,931,000, an increase of
$14,886,000 or 8.5%. The dollar increase in sales was primarily due to an
increase of 6.1% in comparable store sales. Further contributing to the
sales increase was the opening of 14 new stores with a higher sales
productivity per store than the ten closed stores.
Cost of sales, including buying, distribution and occupancy costs, was
$139,039,000 in the second quarter year to date of fiscal 1997 compared to
$131,107,000 in the second quarter year to date of fiscal 1996, an increase
of $7,932,000 or 6.1%. The dollar increase in cost of sales was due
primarily to the increase in sales. As a percentage of sales, cost of sales
decreased from 74.9% in the second quarter year to date of fiscal 1996 to
73.2% in the second quarter year to date of fiscal 1997, a decrease of 1.7%.
This decrease in cost of sales as a percentage of sales was related primarily
to a decrease in occupancy costs of 1.6% and a decrease in distribution costs
of 0.1%. The decrease in occupancy costs was associated primarily with a
decrease in depreciation resulting from the impact of fully depreciable
assets. This is somewhat offset by the increase in the average depreciation
for new and remodeled stores as compared to the depreciation for the acquired
Contempo Casuals stores as a result of the favorable acquisition price.
Selling, general and administrative expense was $40,667,000 in the second
quarter year to date of fiscal 1997 compared to $37,959,000 in the second
quarter year to date of fiscal 1996, an increase of $2,708,000 or 7.1%. The
dollar increase in selling, general and administrative expense was related to
the increase in sales. As a percentage of sales, selling, general and
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
administrative expense decreased from 21.7% in the second quarter year to
date of fiscal 1996 to 21.4% in the second quarter year to date of fiscal
1997, a decrease year to date of 0.3%. The slight decrease as a percentage
of sales was related to the leverage of the fixed components of this expense,
as a result of the increase in comparable store sales.
Interest income, net, was $1,704,000 in the second quarter year to date
of fiscal 1997 compared to $1,082,000 in the second quarter year to date of
fiscal 1996, an increase of $622,000. The increase was due primarily to an
increase in the average cash balance invested in the current year period as
compared to the prior year.
Income tax provision was $4,883,000 in the second quarter year to date of
fiscal 1997 compared to $2,910,000 in the second quarter year to date of
fiscal 1996. The effective tax rate was 41.3% compared to 41.9% in the prior
year.
Net income was $6,932,000 in the second quarter year to date of fiscal
1997 compared to $4,037,000 in the second quarter year to date of fiscal
1996. As a percentage of sales, net income was 3.7% in the second quarter
year to date of fiscal 1997 compared to 2.3% in the second quarter year to
date of fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at August 2, 1997 was $61,751,000 compared to $59,791,000
at February 1, 1997, an increase of $1,960,000. 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 2, 1997 was $4,183,000 compared to $10,784,000 for the 26 weeks
ended August 3, 1996. Inventory increased $9,707,000 at August 2, 1997
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 increase in
accounts payable and accrued liabilities of $10,906,000 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 1997, the Company invested
$9,934,000 in equipment and leasehold improvements. These expenditures
related primarily to the seven stores opened and the 15 stores remodeled in
the first and second quarters of fiscal 1997 along with construction in
progress for additional new and remodeled stores. The Company currently
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
estimates that the capital expenditures for the remainder of fiscal 1997 will
be approximately $20,000,000. These planned expenditures relate primarily to
store openings and remodeling of existing stores as well as a new corporate
office and distribution center.
Under an unsecured revolving line-of-credit arrangement with Bank of
America, the Company may borrow up to a maximum of $30 million on a revolving
basis through July 1, 1998. The cash borrowings under the arrangement bear
interest at Bank of America's prime rate or, at the Company's option, LIBOR
plus 1.75%. As of August 2, 1997, the Company had no borrowings outstanding
under the credit arrangement.
In June 1995, the Company entered into an unsecured five-year, $10
million term loan. The loan bears interest at Bank of America's prime rate
plus .25% or, at the Company's option, LIBOR plus 1.75%. The estimated
annual principal payments on the loan are $2,000,000 payable in quarterly
installments of $500,000 which commenced October 31, 1995. As of August 2,
1997, the loan has a remaining outstanding balance of $4,264,000.
The credit arrangement and the term loan impose quarterly and annual
financial covenants requiring the Company to maintain certain financial
ratios and achieve certain levels of annual income. In addition, the credit
arrangement and the term loan require that Bank of America approve the
payment of dividends and restrict the level of capital expenditures. At
August 2, 1997, the Company was in compliance with these covenants.
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 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 previous fiscal years,
the Christmas and back-to-school seasons together accounted for an average of
approximately 32% of the Company's annual sales, after
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 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 Securities Exchange Act of 1934, as
amended, 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 retention by the Company of suppliers for both brand name and
Company-developed merchandise, the ability of the Company to expand and to
increase comparable store sales, 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 locate and
obtain acceptable store sites and lease terms or renew existing leases, the
ability of the Company to obtain adequate merchandise supply, the ability of
the Company to hire and train employees, the ability of the Company to gauge
the fashion tastes of its customers and provide merchandise that satisfies
customer demand, management's ability to manage the Company's expansion, the
effect of economic conditions, the effect of severe weather or natural
disasters and the effect of competitive pressures from other retailers. The
Company undertakes no obligation to update any forward looking statement or
statements to reflect events or circumstances after the date on which such
statement or statements were made.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128") which is effective for financial statements issued for
periods ending after December 15, 1997. SFAS No. 128 requires the disclosure
of basic and diluted earnings per share. For the periods ended August 2,
1997 and August 3, 1996, the amount reported as net income per common and
common equivalent share is not materially different than that which
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
would have been reported for basic and diluted earnings per share in
accordance with SFAS No. 128.
15
<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 17, 1997. Class
A shares are entitled to one vote per share. Class B shares are entitled to
two votes per share. 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
9,168,980 Class A shares and 2,912,665 Class B shares for each director, with
no more than 99,309 Class A shares voting against any director. The
shareholders ratified the proposal to increase the number of authorized
shares with an affirmative vote of 3,116,366 Class A shares and 2,912,665
Class B shares, with 3,878,430 Class A shares voting against. The
shareholders ratified and approved the 1996 Long-Term Incentive Plan with an
affirmative vote of 3,563,964 Class A shares and 2,912,665 Class B shares,
with 3,450,693 Class A shares voting against. The shareholders also ratified
the Company's selection of Deloitte & Touche LLP as the independent certified
public accountants for the fiscal year ending January 31, 1998 with an
affirmative vote of 9,245,094 Class A shares and 2,912,665 Class B shares,
with 3,808 Class A shares voting against. The proposal to divide the board
of directors into three classes did not pass, as it received an affirmative
vote of 1,481,616 Class A shares and 2,912,665 Class B shares, while
5,512,946 Class A shares voted against the proposal. The proposal to require
a 75% approval rate for business combinations also did not pass, as it
received an affirmative vote of 1,347,783 Class A shares and 2,912,665 Class
B shares, while 5,647,651 Class A shares voted against the proposal.
ITEM 5 - OTHER INFORMATION. Not Applicable
ITEM 6(a) - EXHIBITS. Not Applicable
ITEM 6(b) - REPORTS ON FORM 8-K. Not Applicable
16
<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 12, 1997 /S/KATHY BRONSTEIN
--------------------------------------
Kathy Bronstein
Vice Chairman and Chief Executive
Officer (Principal Executive Officer)
Date: September 12, 1997 /S/EDMOND THOMAS
--------------------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: September 12, 1997 /S/ANN CADIER KIM
--------------------------------------
Ann Cadier Kim
Vice President of Finance
and Chief Financial Officer (Principal
Financial and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET
SEAL, INC. BALANCE SHEETS AND 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-04-1997
<PERIOD-END> AUG-02-1997
<CASH> 53,842,000
<SECURITIES> 28,765,000
<RECEIVABLES> 2,158,000
<ALLOWANCES> 0
<INVENTORY> 32,296,000
<CURRENT-ASSETS> 124,756,000
<PP&E> 90,449,000
<DEPRECIATION> 52,922,000
<TOTAL-ASSETS> 169,744,000
<CURRENT-LIABILITIES> 63,005,000
<BONDS> 0
0
0
<COMMON> 1,355,000
<OTHER-SE> 96,872,000
<TOTAL-LIABILITY-AND-EQUITY> 169,744,000
<SALES> 94,254,000
<TOTAL-REVENUES> 94,254,000
<CGS> 68,917,000
<TOTAL-COSTS> 20,470,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (990,000)
<INCOME-PRETAX> 5,857,000
<INCOME-TAX> 2,440,000
<INCOME-CONTINUING> 3,417,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,417,000
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
