<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 October 31, 1998
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.)
26972 BURBANK
FOOTHILL RANCH, CALIFORNIA 92610
(Address of principal executive offices) (Zip code)
(949) 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 December 4, 1998
were 10,681,578 and 2,912,665, respectively. There were no shares of
Preferred Stock, par value $.01 per share, outstanding at December 4, 1998.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of October 31, 1998 (unaudited)
and January 31, 1998....................................3-4
Statements of Operations (unaudited) for the 13 and
39 weeks ended October 31, 1998 and
November 1, 1997..........................................5
Statements of Cash Flows (unaudited) for the 39 weeks
ended October 31, 1998 and November 1, 1997...............6
Notes to Financial Statements...........................7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................9-17
PART II. OTHER INFORMATION........................................18
SIGNATURE PAGE...........................................19
</TABLE>
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
-------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $53,517,000 $76,056,000
Short-term investments 7,618,000 19,817,000
Other receivables 2,995,000 3,209,000
Merchandise inventories 36,255,000 26,884,000
Prepaid expenses 5,826,000 330,000
Deferred tax charges 1,137,000 1,137,000
-------------------- ---------------------
Total current assets 107,348,000 127,433,000
-------------------- ---------------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 70,911,000 65,465,000
Furniture, fixtures and equipment 32,674,000 24,965,000
Leasehold rights 3,577,000 3,692,000
Construction in progress 3,265,000 2,000
-------------------- ---------------------
110,427,000 94,124,000
Less accumulated depreciation (55,040,000) (49,171,000)
-------------------- ---------------------
Net equipment and leasehold improvements 55,387,000 44,953,000
-------------------- ---------------------
LONG-TERM INVESTMENTS 14,198,000 499,000
OTHER ASSETS:
Deferred taxes and other assets 11,402,000 10,817,000
Goodwill, net of accumulated amortization of
$645,000 and $611,000 as of October 31, 1998
and January 31, 1998, respectively 487,000 521,000
-------------------- ---------------------
Total other assets 11,889,000 11,338,000
==================== =====================
$188,822,000 $184,223,000
==================== =====================
</TABLE>
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1998
-------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $48,638,000 $35,858,000
Accrued liabilities 18,371,000 20,570,000
Income taxes payable 2,055,000 2,553,000
Current portion of long-term debt 2,000,000 2,000,000
-------------------- ---------------------
Total current liabilities 71,064,000 60,981,000
-------------------- ---------------------
LONG-TERM LIABILITIES:
Long-term debt 264,000 1,264,000
Deferred rent 6,994,000 6,254,000
Other long-term liabilities 3,248,000 2,730,000
-------------------- ---------------------
Total long-term liabilities 10,506,000 10,248,000
-------------------- ---------------------
Total liabilities 81,570,000 71,229,000
-------------------- ---------------------
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;
10,676,578 and 10,656,578 shares issued and outstanding
at October 31, 1998 and January 31, 1998, respectively 1,068,000 1,066,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares;
2,912,665 shares issued and outstanding
at October 31, 1998 and January 31, 1998, respectively 291,000 291,000
Paid-in capital 57,363,000 57,217,000
Retained earnings 68,205,000 54,420,000
Treasury stock, 1,327,000 shares at cost (19,675,000) -
-------------------- ---------------------
Total stockholders' equity 107,252,000 112,994,000
==================== =====================
$188,822,000 $184,223,000
==================== =====================
</TABLE>
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------------------- --------------------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
SALES $121,622,000 $104,435,000 $339,503,000 $294,252,000
COST OF SALES (including buying, distribution
and occupancy costs) 85,121,000 74,003,000 240,141,000 213,042,000
---------------- ----------------- ----------------- -----------------
GROSS MARGIN 36,501,000 30,432,000 99,362,000 81,210,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 28,648,000 21,932,000 79,924,000 62,599,000
---------------- ----------------- ----------------- -----------------
OPERATING INCOME 7,853,000 8,500,000 19,438,000 18,611,000
INTEREST INCOME, NET (957,000) (905,000) (2,977,000) (2,609,000)
---------------- ----------------- ----------------- -----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,810,000 9,405,000 22,415,000 21,220,000
PROVISION FOR INCOME TAXES 3,392,000 3,926,000 8,630,000 8,809,000
---------------- ----------------- ----------------- -----------------
NET INCOME $5,418,000 $5,479,000 $13,785,000 $12,411,000
================ ================= ================= =================
NET INCOME PER SHARE, BASIC $0.42 $0.40 $1.03 $0.92
================ ================= ================= =================
NET INCOME PER SHARE, DILUTED $0.41 $0.39 $1.00 $0.89
================ ================= ================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC 12,915,100 13,557,539 13,358,342 13,550,670
================ ================= ================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED 13,249,208 13,899,561 13,849,798 13,868,239
================ ================= ================= =================
</TABLE>
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
----------------------------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
-------------------- ---------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $13,785,000 $12,411,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,186,000 8,504,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Other receivables 214,000 (1,931,000)
Merchandise inventories (9,371,000) (5,477,000)
Prepaid expenses (5,496,000) (6,427,000)
Other assets (585,000) (13,000)
(Decrease) increase in:
Accounts payable and accrued liabilities 10,581,000 9,446,000
Income taxes payable (498,000) (2,152,000)
Deferred rent 740,000 263,000
Other long-term liabilities 518,000 -
-------------------- ---------------------
Net cash provided by operating activities 19,074,000 14,624,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 31,285,000 15,365,000
Investment in equipment and leasehold improvements (19,586,000) (18,623,000)
Investment in marketable securities (32,785,000) (36,908,000)
-------------------- ---------------------
Net cash used in investing activities (21,086,000) (40,166,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,000,000) (1,500,000)
Purchase of treasury stock (19,675,000) -
Proceeds from issuance of stock 148,000 175,000
-------------------- ---------------------
Net cash used in financing activities (20,527,000) (1,325,000)
-------------------- ---------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (22,539,000) (26,867,000)
CASH AND CASH EQUIVALENTS, beginning of period 76,056,000 71,483,000
-------------------- ---------------------
CASH AND CASH EQUIVALENTS, end of period $53,517,000 $44,616,000
==================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $154,000 $267,000
Income taxes, net 6,290,000 11,669,000
</TABLE>
See accompanying notes to financial statements.
<PAGE>
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 January 31, 1998 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 39 weeks ended October 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending January 30, 1999. For further information, refer to the financial
statements and notes thereto included in the Company's Annual Report for the
year ended January 31, 1998.
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, 2000. 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 October 31, 1998, 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 the Bank of America's prime
rate plus 0.25% 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 October 31,
1998, the loan has a remaining outstanding balance of $2,264,000.
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
October 31, 1998, the Company was in compliance with these covenants.
<PAGE>
NOTE 3 - NET INCOME PER SHARE:
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") beginning with the Company's fourth
quarter of fiscal 1997. All prior period earnings per common share data have
been restated to conform to the provisions of this statement. Net income per
share, basic, is computed based on the weighted average number of common
shares outstanding for the period. Net income per share, diluted, is
computed based on the weighted average number of common and potentially
dilutive common equivalent shares outstanding for the period. A
reconciliation of the numerators and denominators used in basic and diluted
net income per share is as follows:
<TABLE>
<CAPTION>
13 WEEKS ENDED 13 WEEKS ENDED 39 WEEKS ENDED 39 WEEKS ENDED
OCTOBER 31, 1998 NOVEMBER 1, 1997 OCTOBER 31, 1998 NOVEMBER 1, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income:
Basic and diluted....... $5,418,000 $5,479,000 $13,785,000 $12,411,000
Weighted average
number of common shares:
Basic................... 12,915,100 13,557,539 13,358,342 13,550,670
Effect of dilutive
securities-stock options 334,108 342,022 491,456 317,569
---------- ---------- ----------- -----------
Diluted................. 13,249,208 13,899,561 13,849,798 13,868,239
Net income per share:
Basic................... $0.42 $0.40 $1.03 $0.92
Effect of dilutive
securities-stock options 0.01 0.01 0.03 0.03
---------- ---------- ----------- -----------
Diluted................. $0.41 $0.39 $1.00 $0.89
</TABLE>
NOTE 4 - TREASURY STOCK:
The Company's Board of Directors authorized the repurchase of up to 20%
of the outstanding shares of the Company's Class A common stock. As of
October 31, 1998, 1,327,000 shares had been repurchased at a cost of
$19,675,000. Such repurchased shares are reflected as Treasury Stock in the
Company's Balance Sheet.
<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 currently operates
462 retail stores in 42 states and Puerto Rico under the names "Wet Seal",
"Contempo Casuals", "Limbo Lounge", "Arden B." and "Next". In January 1998
the Company initiated a catalog which operates under the name "Wet Seal".
On July 1, 1995, the Company acquired Contempo Casuals, Inc. 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. Effective February 2, 1997, Contempo Casuals, Inc. was
merged with and into The Wet Seal, Inc.
As of October 31, 1998 the Company operated 424 stores compared to 375
stores as of November 1, 1997, the end of the third quarter of fiscal 1997.
The Company opened 62 stores during the period from November 1, 1997 to
October 31, 1998 and closed 13 stores.
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 OCTOBER 31, 1998 (THIRD QUARTER OF FISCAL 1998) AS COMPARED
TO THE 13 WEEKS ENDED NOVEMBER 1, 1997 (THIRD QUARTER OF FISCAL 1997)
Sales in the third quarter of fiscal 1998 were $121,622,000 compared to
sales in the third quarter of fiscal 1997 of $104,435,000, an increase of
$17,187,000 or 16.5%. The dollar increase in sales was primarily due to the
net increase of 49 stores; 424 stores at the end of the third quarter of
fiscal 1998 compared to 375 stores at the end of the third quarter of fiscal
1997. The increase was also due to the catalog sales associated with the
fourth and fifth catalog mailings in the third quarter of fiscal 1998. To a
lesser extent the increase in sales was due to a 0.1% increase in comparable
store sales. Comparable store
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
sales are defined as sales in stores that were open throughout the full
fiscal year and throughout the full prior fiscal year.
Cost of sales, including buying, distribution and occupancy costs, was
$85,121,000 in the third quarter of fiscal 1998 compared to $74,003,00 in the
third quarter of fiscal 1997, an increase of $11,118,000. The dollar
increase in cost of sales was due to the increase in sales. As a percentage
of sales, cost of sales was 70.0% in the third quarter of fiscal 1998
compared to 70.9% in the third quarter of fiscal 1997, a decrease of 0.9%.
This decrease as a percentage of sales was due primarily to a 1.3% decrease
in occupancy costs and a 0.1% decrease in buying costs as a percentage of
sales. These decreases were offset to some extent by a 0.5% increase in
distribution costs as a percentage of sales. The 1.3% decrease in occupancy
costs as a percentage of sales was due primarily to the leverage of the
catalog operation sales on store occupancy costs. The 0.1% decrease in
buying costs as a percentage of sales was due to the leverage associated with
the increase in total sales. The 0.5% increase in the distribution costs as
a percentage of sales related primarily to the catalog operation. The cost
of merchandise as a percentage of sales was unchanged from prior year third
quarter; improvement in the initial margins in the third quarter of fiscal
1998 was offset by increased markdowns.
Selling, general and administrative expenses were $28,648,000 in the
third quarter of fiscal 1998 compared to $21,932,000 in the third quarter of
fiscal 1997, an increase of $6,716,000. The dollar increase in selling,
general and administrative expenses was related to the increase in total
sales. As a percentage of sales, selling, general and administrative
expenses were 23.6% in the third quarter of fiscal 1998 compared to 21.0% in
the third quarter of fiscal 1997, an increase of 2.6%. The increase as a
percentage of sales for the third quarter was primarily related to the impact
of the fixed costs associated with catalog production. Without the impact of
the catalog operation, selling, general and administrative expenses increased
0.6% as a percentage of sales. This increase was primarily due to an increase
in selling expense as a percentage of sales due to the increases in minimum
wage and to the start up costs associated with new store openings. Also
contributing to the increase as a percentage of sales is an increase in
general and administrative wages to support the expanded operations in fiscal
1998.
Interest income, net, was $957,000 in the third quarter of fiscal 1998
compared to $905,000 in the third quarter of fiscal 1997, an increase of
$52,000. The increase was due to an
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
increase in the average cash balance invested offset somewhat by a change in
the corporate cash investment strategy in the current year to more tax exempt
investments which carry a lower interest rate.
Income tax provision was $3,392,000 in the third quarter of fiscal 1998
compared to $3,926,000 in the third quarter of fiscal 1997. The effective
tax rate was 38.5% compared to 41.7% in the prior year. The decrease in the
effective tax rate was due to the impact of changes in the corporate cash
investment strategy.
Due to the factors noted above, net income was $5,418,000 in the third
quarter of fiscal 1998 compared to $5,479,000 in the third quarter of fiscal
1997. As a percentage of sales, net income was 4.5% in the third quarter of
fiscal 1998 compared to 5.2% in the third quarter of fiscal 1997.
THE 39 WEEKS ENDED OCTOBER 31, 1998 (THIRD QUARTER YEAR TO DATE OF FISCAL 1998)
AS COMPARED TO THE 39 WEEKS ENDED NOVEMBER 1, 1997 (THIRD QUARTER YEAR TO DATE
OF FISCAL 1997)
Sales in the 39 weeks ended October 31, 1998 were $339,503,000 compared
to sales in the 39 weeks ended November 1, 1997 of $294,252,000, an increase
of $45,251,000 or 15.4%. The dollar increase in sales was primarily due to
the net increase of 49 stores during the period from November 2, 1997 to
October 31, 1998. The increase was also due to the catalog sales associated
with the five catalog mailings year to date in fiscal 1998. To a lesser
extent the increase in sales was due to the 0.6% increase in comparable store
sales. Comparable store sales are defined as sales in stores that were open
throughout the full fiscal year and throughout the full prior fiscal year.
Cost of sales, including buying, distribution and occupancy costs, was
$240,141,000 in the third quarter year to date of fiscal 1998 compared to
$213,042,00 in the third quarter year to date of fiscal 1997, an increase of
$27,099,000. The dollar increase in cost of sales was due to the increase in
sales. As a percentage of sales, cost of sales was 70.7% in the third
quarter year to date of fiscal 1998 compared to 72.4% in the third quarter
year to date of fiscal 1997, a decrease of 1.7%. This decrease as a
percentage of sales related primarily to a 1.2% decrease in occupancy costs
and a 0.8% decrease in the cost of merchandise as a percentage of sales.
These decreases were offset to some extent by a 0.3% increase in distribution
costs as
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
a percentage of sales. The 1.2% decrease in occupancy costs as a percentage
of sales was due primarily to the leverage of the catalog operation sales on
store occupancy costs. The 0.8% decrease in the cost of merchandise as a
percentage of sales was due to improvement in the initial margins in fiscal
1998. The 0.3% increase in the distribution costs as a percentage of sales
related primarily to the catalog operation.
Selling, general and administrative expenses were $79,924,000 in the
third quarter year to date of fiscal 1998 compared to $62,599,000 in the
third quarter year to date of fiscal 1997, an increase of $17,325,000. The
dollar increase in selling, general and administrative expenses was related
to the increase in total sales. As a percentage of sales, selling, general
and administrative expenses was 23.5% in the third quarter year to date of
fiscal 1998 compared to 21.3% in the third quarter year to date of fiscal
1997, an increase of 2.2%. The increase as a percentage of sales for the
third quarter year to date was primarily related to the impact of the fixed
costs associated with catalog production. Without the impact of the catalog
operation, selling, general and administrative expenses increased 0.9% over
prior year as a percentage of sales. This increase was primarily due to an
increase in general and administrative expenses due to an increase in wages
to support the expanded operations in the current year, as well as an
increase in selling expense as a percentage of sales related to an increase
in store wages due to the increase in minimum wage and start up costs
associated with new store openings.
Interest income, net, was $2,977,000 in the third quarter year to date
of fiscal 1998 compared to $2,609,000 in the third quarter year to date of
fiscal 1997, an increase of $368,000. The increase was due to an increase in
the average cash balance invested offset by a change in the corporate cash
investment strategy in the current year to more tax exempt investments which
carry a lower interest rate.
Income tax provision was $8,630,000 in the third quarter year to date of
fiscal 1998 compared to $8,809,000 in the third quarter year to date of
fiscal 1997. The effective tax rate was 38.5% compared to 41.5% in the prior
year. The decrease in the effective tax rate is due to the impact of changes
in the corporate cash investment strategy.
Due to the factors noted above, net income was $13,785,000 in the third
quarter year to date of fiscal 1998 compared to $12,411,000 in the third
quarter year to date of fiscal 1997. As
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
a percentage of sales, net income was 4.1% in the third quarter year to date
of fiscal 1998 compared to 4.2% in the third quarter year to date of fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first three quarters
of fiscal 1998 was $19,074,000. Working capital at October 31, 1998 was
$36,284,000 compared to $66,452,000 at January 31, 1998, a decrease of
$30,168,000. This decrease was primarily due to the purchase of treasury
stock for $19,675,000 in the third quarter, along with an increase in
long-term investments in the first three quarters of fiscal 1998, as current
year cash was invested to a larger extent in investments with maturities
beyond one year, as well as an increase in capital expenditures for new store
and remodel construction. Inventory was $36,255,000 at October 31, 1998
compared to $26,884,000 at January 31, 1998, an increase of $9,371,000, due
to the 46 new stores opened during this period, the new catalog operation,
and 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 $10,581,000 at October 31, 1998 compared to January 31, 1998
was primarily attributable to the increase in inventory as well as to the
increase in payables related to capital expenditures for new store and
remodel construction.
In the first three quarters of fiscal 1998, the Company invested
$19,586,000 in equipment and leasehold improvements, compared to $18,623,000
in the same period of the prior year. These expenditures related primarily
to the 46 new stores opened and 22 stores remodeled in the first three
quarters of fiscal 1998 along with construction in progress for additional
new and remodeled stores in the fourth quarter. The Company currently
estimates that the capital expenditures for the remainder of fiscal 1998 will
be approximately $9,000,000. These planned expenditures relate primarily to
new store openings and remodels.
In July 1998, the Company signed a definitive agreement to purchase 83
stores from Britches Great Outdoor Stores for approximately $15 million,
subject to final adjustment per the terms of the agreement. Payment for the
Britches stores will occur on or about February 5, 1999. In September 1998,
the Company signed a definitive agreement to purchase approximately 20
Episode stores from Mothers Work, Inc. for $2.8 million, subject to final
adjustment per the terms of the agreement. Payment for the Episode stores
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
is expected to be completed by December 31, 1998.
The Company has an unsecured revolving line of credit arrangement with
Bank of America National Trust and Savings Association ("Bank of America") in
an aggregate principal amount of $30,000,000 and a five year amortizing term
loan with Bank of America in the amount of $10,000,000, maturing on July 1,
2000. At October 31, 1998, there were no outstanding borrowings under the
credit arrangement, and the Company believes it was in compliance with all
terms and covenants of the credit arrangement and the term loan.
The Company invests its excess funds primarily in an 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
January 31, 1998, the Christmas and back-to-school seasons together accounted
for an average of approximately 33% 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 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
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
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 continue 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" (SFAS 130), in the first quarter of fiscal
1998. SFAS 130 establishes standards for the reporting and display of
comprehensive income. Components of comprehensive income may include foreign
currency translation adjustments, minimum pension liability adjustments, and
unrealized gains and losses on marketable securities classified as
available-for-sale. The adoption of SFAS 130 required no additional
disclosure for the Company and did not have a material effect on the
Company's financial position or results of operations.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which is effective for
fiscal years beginning after December 15, 1997. This statement standardized
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer as
useful as they were under previous statements. The Company will adopt the
disclosure requirements in its Form 10-K for the fiscal year ending January
30, 1999.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions in
operations, including, among other things, a temporary inability to process
transactions, distribute merchandise, or engage in similar normal business
activities.
During fiscal 1998 and fiscal 1999, the Company plans to convert
substantially all of its computer software systems and hardware. Prior to
the purchase of the new systems and hardware the Company obtained or is in
the process of obtaining assurance from the vendors that the products
purchased are in fact Year 2000 compliant. The Company will also complete an
independent review of such systems to further verify Year 2000 compliance.
The Company has performed a preliminary review of its existing computer
software systems and hardware to identify processes which may be affected by
Year 2000 problems. At this time, no significant issues have been
identified, however the Company will complete a more thorough review of its
existing systems by the end of fiscal 1998 to ensure an adequate plan exists
for Year 2000 compliance should the conversions fall behind schedule.
During fiscal 1998 and fiscal 1999, the Company will also complete a
Year 2000 review of its relationships with suppliers and financial
institutions and obtain assurance, where necessary, that these entities are
Year 2000 compliant. The Company's total Year 2000 project costs include the
estimated costs and time associated with the impact of a third party's Year
2000 issue on the Company, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
Due to the fact that the majority of the Company's computer software
systems and hardware have been purchased or developed recently and were
designed to be Year 2000 compliant, the Company does not expect to incur
significant additional costs in addressing the Year 2000 issue. The total
cost of the Year 2000 project is estimated at $300,000, and will be funded
through operating cash flows.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
The costs of the project and time of completion for the Year 2000
modifications are based on management's best estimates, which were derived
utilizing assumptions of future events including the continued availability
of certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from these plans. Specific factors
that might cause such material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
<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 a special meeting of shareholders on October 26, 1998. At
this meeting, the Company's shareholders approved an amendment to the Company's
1996 Long-Term Incentive Plan to increase the number of shares to provide for
additional grants to eligible individuals under the Plan with an affirmative
vote of 1,932,686 Class A shares and 2,912,665 Class B shares, with 3,456,928
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. Not Applicable
<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: December 11, 1998 /S/KATHY BRONSTEIN
---------------------- -------------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer
(Principal Executive
Officer)
Date: December 11, 1998 /S/EDMOND THOMAS
---------------------- -------------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: December 11, 1998 /S/ANN CADIER KIM
---------------------- -------------------------------
Ann Cadier Kim
Senior Vice President of
Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
<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> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 53,517,000
<SECURITIES> 21,816,000
<RECEIVABLES> 2,995,000
<ALLOWANCES> 0
<INVENTORY> 36,255,000
<CURRENT-ASSETS> 107,348,000
<PP&E> 110,427,000
<DEPRECIATION> 55,040,000
<TOTAL-ASSETS> 188,822,000
<CURRENT-LIABILITIES> 71,064,000
<BONDS> 0
0
0
<COMMON> 1,359,000
<OTHER-SE> 105,893,000
<TOTAL-LIABILITY-AND-EQUITY> 188,822,000
<SALES> 339,503,000
<TOTAL-REVENUES> 339,503,000
<CGS> 240,141,000
<TOTAL-COSTS> 79,924,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,977,000)
<INCOME-PRETAX> 22,415,000
<INCOME-TAX> 8,630,000
<INCOME-CONTINUING> 13,785,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,785,000
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.00
</TABLE>
