<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 1, 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 September 4,
1998 were 10,676,578 and 2,912,665, respectively. There were no shares of
Preferred Stock, par value $.01 per share, outstanding at September 4, 1998.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of August 1, 1998 (unaudited)
and January 31, 1998....................................3-4
Statements of Operations (unaudited) for the 13 and
26 weeks ended August 1, 1998 and August 2, 1997..........5
Statements of Cash Flows (unaudited) for the 26 weeks
ended August 1, 1998 and August 2, 1997...................6
Notes to Financial Statements...........................7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................9-16
PART II. OTHER INFORMATION........................................17
SIGNATURE PAGE...........................................18
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 1, JANUARY 31,
1998 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,119,000 $ 76,056,000
Short-term investments 9,377,000 19,817,000
Other receivables 2,633,000 3,209,000
Merchandise inventories 38,778,000 26,884,000
Prepaid expenses 5,436,000 330,000
Deferred tax charges 1,137,000 1,137,000
------------ ------------
Total current assets 118,480,000 127,433,000
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 74,466,000 65,465,000
Furniture, fixtures and equipment 28,352,000 24,965,000
Leasehold rights 3,692,000 3,692,000
Construction in progress 734,000 2,000
------------ ------------
107,244,000 94,124,000
Less accumulated depreciation (55,063,000) (49,171,000)
------------ ------------
Net equipment and leasehold improvements 52,181,000 44,953,000
------------ ------------
LONG-TERM INVESTMENTS 16,850,000 499,000
OTHER ASSETS:
Deferred tax charges and other assets 10,971,000 10,817,000
Goodwill, net of accumulated amortization of
$634,000 and $611,000 as of August 1, 1998
and January 31, 1998, respectively 498,000 521,000
------------ ------------
Total other assets 11,469,000 11,338,000
------------ ------------
$198,980,000 $184,223,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 1, JANUARY 31,
1998 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 45,943,000 $ 35,858,000
Accrued liabilities 18,504,000 20,570,000
Income taxes payable 984,000 2,553,000
Current portion of long-term debt 2,000,000 2,000,000
------------ ------------
Total current liabilities 67,431,000 60,981,000
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt 264,000 1,264,000
Deferred rent 6,701,000 6,254,000
Other long-term liabilities 3,075,000 2,730,000
------------ ------------
Total long-term liabilities 10,040,000 10,248,000
------------ ------------
Total liabilities 77,471,000 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 August 1, 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 August 1, 1998 and January 31, 1998,
respectively 291,000 291,000
Paid-in capital 57,363,000 57,217,000
Retained earnings 62,787,000 54,420,000
------------ ------------
Total stockholders' equity 121,509,000 112,994,000
------------ ------------
$198,980,000 $184,223,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
-------------------------- --------------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
SALES $113,036,000 $94,254,000 $217,881,000 $189,817,000
COST OF SALES (INCLUDING BUYING, DISTRIBUTION
AND OCCUPANCY COSTS) 80,148,000 68,917,000 155,020,000 139,039,000
------------ ----------- ------------ ------------
GROSS MARGIN 32,888,000 25,337,000 62,861,000 50,778,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 25,856,000 20,470,000 51,276,000 40,667,000
------------ ----------- ------------ ------------
OPERATING INCOME 7,032,000 4,867,000 11,585,000 10,111,000
INTEREST INCOME, NET (901,000) (990,000) (2,020,000) (1,704,000)
------------ ----------- ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,933,000 5,857,000 13,605,000 11,815,000
PROVISION FOR INCOME TAXES 3,054,000 2,440,000 5,238,000 4,883,000
------------ ----------- ------------ ------------
NET INCOME $ 4,879,000 $ 3,417,000 $ 8,367,000 $ 6,932,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
NET INCOME PER SHARE, BASIC $0.36 $0.25 $0.62 $0.51
NET INCOME PER SHARE, DILUTED $0.35 $0.25 $0.59 $0.50
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC 13,584,408 13,552,932 13,579,963 13,547,235
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED 14,091,995 13,851,502 14,098,178 13,839,357
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
-----------------------------
AUGUST 1, AUGUST 2,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,367,000 $ 6,932,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,915,000 5,660,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Other receivables 576,000 (581,000)
Merchandise inventories (11,894,000) (9,707,000)
Prepaid expenses (5,106,000) (7,002,000)
Other assets (154,000) (4,000)
(Decrease) increase in:
Accounts payable and accrued liabilities 8,019,000 10,906,000
Income taxes payable (1,569,000) (2,152,000)
Deferred rent 447,000 131,000
Other long-term liabilities 345,000 -
------------ ------------
Net cash provided by operating activities 4,946,000 4,183,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 17,170,000 11,000,000
Investment in equipment and leasehold improvements (13,120,000) (9,934,000)
Investment in marketable securities (23,081,000) (22,065,000)
------------ ------------
Net cash used in investing activities (19,031,000) (20,999,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,000,000) (1,000,000)
Proceeds from issuance of stock 148,000 175,000
------------ ------------
Net cash used in financing activities (852,000) (825,000)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (14,937,000) (17,641,000)
CASH AND CASH EQUIVALENTS, beginning of period 76,056,000 71,483,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 61,119,000 $ 53,842,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 114,000 $ 186,000
Income taxes, net 3,973,000 8,401,000
</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 26 weeks ended August 1, 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 August 1, 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 August 1,
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
<PAGE>
NOTE 2 - LINE OF CREDIT AND LOAN PAYABLE TO BANK (CONTINUED):
require that Bank of America approve the payment of dividends and restrict
the level of capital expenditures. At August 1, 1998, the Company was in
compliance with these covenants.
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 26 WEEKS ENDED 26 WEEKS ENDED
AUGUST 1, 1998 AUGUST 2, 1997 AUGUST 1, 1998 AUGUST 2, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income:
Basic and diluted............ $ 4,879,000 $ 3,417,000 $ 8,367,000 $ 6,932,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average
number of common shares:
Basic........................ 13,584,408 13,552,932 13,579,963 13,547,235
Effect of dilutive
securities-stock options..... 507,587 298,570 518,215 292,122
----------- ----------- ----------- -----------
Diluted...................... 14,091,995 13,851,502 14,098,178 13,839,357
Net income per share:
Basic........................ $0.36 $0.25 $0.62 $0.51
Effect of dilutive
securities-stock options..... 0.01 0.00 0.03 0.01
----------- ----------- ----------- -----------
Diluted...................... $0.35 $0.25 $0.59 $0.50
</TABLE>
<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
414 retail stores in 42 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, 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.
As of August 1, 1998 the Company operated 413 stores compared to 368
stores as of August 2, 1997, the end of the second quarter of fiscal 1997.
The Company opened 57 stores during the period from August 2, 1997 to August
1, 1998 and closed 12 stores.
Effective February 2, 1997, Contempo Casuals, Inc. was merged with and
into The Wet Seal, Inc.
Since January 1998 the Company has mailed four editions of the Wet Seal
Catalog, the most recent at the end of July. The results of the catalog
operations are included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which follows. The Company plans to mail
two additional catalogs during the remainder of fiscal 1998.
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.
<PAGE>
RESULTS OF OPERATIONS
THE 13 WEEKS ENDED AUGUST 1, 1998 (SECOND QUARTER OF FISCAL 1998) AS COMPARED TO
THE 13 WEEKS ENDED AUGUST 2, 1997 (SECOND QUARTER OF FISCAL 1997)
Sales in the second quarter of fiscal 1998 were $113,036,000 compared to
sales in the second quarter of fiscal 1997 of $94,254,000, an increase of
$18,782,000 or 19.9%. The dollar increase in sales was primarily due to the
net increase of 45 stores; 413 stores at the end of the second quarter of
fiscal 1998 compared to 368 stores at the end of the second quarter of fiscal
1997. The increase was also due to the 4.3% increase in comparable store
sales, and to a lesser extent due to sales related to the third catalog
mailing in May 1998. 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
$80,148,000 in the second quarter of fiscal 1998 compared to $68,917,000 in
the second quarter of fiscal 1997, an increase of $11,231,000. The dollar
increase in cost of sales was due to the increase in sales. As a percentage
of sales, cost of sales decreased from 73.1% in the second quarter of fiscal
1997 to 70.9% in the second quarter of fiscal 1998, a decrease of 2.2%. This
decrease as a percentage of sales was due primarily to a 1.7% improvement in
occupancy costs as a percentage of total sales, resulting primarily from the
catalog operation not having any occupancy costs. In addition to the catalog
leverage, there was a decrease in occupancy costs as a percentage of sales
for the stores as a result of the increase in comparable store sales. The
decrease in cost of sales as a percentage of sales was also due to a 0.7%
decrease in the cost of merchandise due primarily to improvement in the
initial margins in the second quarter of fiscal 1998. The improvements in
cost of sales as a percentage of sales were offset slightly by an increase of
0.2% in the distribution costs as a percentage of sales related to the
catalog operation.
Selling, general and administrative expenses were $25,856,000 in the
second quarter of fiscal 1998 compared to $20,470,000 in the second quarter
of fiscal 1997, an increase of $5,386,000. The dollar increase in selling,
general and administrative expenses was related to the increase in total
sales and to the catalog operation. As a percentage of sales, selling,
general and administrative expenses increased from 21.7% in the second
quarter of fiscal 1997 to 22.9% in the second quarter of fiscal 1998, an
increase of 1.2%. The increase as a percentage of sales was related
primarily to the catalog operation. The catalog
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
production costs and administrative costs were classified as selling, general
and administrative expenses. Without the impact of the catalog operation,
selling, general and administrative expenses increased 0.4% over prior year
as a percentage of sales. This increase was primarily due to an increase in
general and administrative expenses due to additional staff to support our
expanded operations, offset by a slight decrease in selling expense as a
result of leverage from the increase in comparable store sales.
Interest income, net, was $901,000 in the second quarter of fiscal 1998
compared to $990,000 in the second quarter of fiscal 1997, a decrease of
$89,000. The decrease was due to 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 $3,054,000 in the second quarter of fiscal 1998
compared to $2,440,000 in the second 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 is due to the impact of changes in the corporate cash
investment strategy.
Due to the factors noted above, net income was $4,879,000 in the second
quarter of fiscal 1998 compared to $3,417,000 in the second quarter of fiscal
1997. As a percentage of sales, net income was 4.3% in the second quarter of
fiscal 1998 compared to 3.6% in the second quarter of fiscal 1997.
THE 26 WEEKS ENDED AUGUST 1, 1998 (SECOND QUARTER YEAR TO DATE OF FISCAL
1998) AS COMPARED TO THE 26 WEEKS ENDED AUGUST 2, 1997 (SECOND QUARTER YEAR
TO DATE OF FISCAL 1997)
Sales in the 26 weeks ended August 1, 1998 were $217,881,000 compared to
sales in the 26 weeks ended August 2, 1997 of $189,817,000, an increase of
$28,064,000 or 14.8%. The dollar increase in sales was primarily due to the
net increase of 45 stores during the period from August 3, 1997 to August 1,
1998. The increase was also due to sales related to the three catalog
mailings in the first and second quarters of fiscal 1998, and to a lesser
extent the increase of 0.8% in comparable store sales.
Cost of sales, including buying, distribution and occupancy costs, was
$155,020,000 in the second quarter year to date of fiscal 1998 compared to
$139,039,00 in the second quarter year to
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
date of fiscal 1997, an increase of $15,981,000. The dollar increase in cost
of sales was due to the increase in sales. As a percentage of sales, cost of
sales decreased from 73.3% in the second quarter year to date of fiscal 1997
to 71.2% in the second quarter year to date of fiscal 1998, a decrease of
2.1%. This decrease as a percentage of sales related primarily to a 1.3%
decrease in the cost of merchandise due to improvement in the initial margins
in the first and second quarters of fiscal 1998. The decrease in cost of
sales as a percentage of sales was also due to a 1.0% improvement in
occupancy costs as a percentage of total sales, resulting primarily from the
catalog operation not having any occupancy costs. In addition to the catalog
leverage, there was a decrease in occupancy costs as a percentage of sales
for the stores as a result of the slight increase in comparable store sales.
The improvements in cost of sales as a percentage of sales were offset
slightly by an increase of 0.2% in the distribution costs as a percentage of
sales related to the catalog operation.
Selling, general and administrative expenses were $51,276,000 in the
second quarter year to date of fiscal 1998 compared to $40,667,000 in the
second quarter year to date of fiscal 1997, an increase of $10,609,000. The
dollar increase in selling, general and administrative expenses was related
to the increase in total sales and to the catalog operation. As a percentage
of sales, selling, general and administrative expenses increased from 21.4%
in the second quarter year to date of fiscal 1997 to 23.5% in the second
quarter year to date of fiscal 1998, an increase of 2.1%. The increase as a
percentage of sales for the second quarter year to date was primarily related
to the catalog operation. The catalog production costs and administrative
costs were classified as selling, general and administrative expenses.
Without the impact of the catalog operation, selling, general and
administrative expenses increased 1.1% over prior year as a percentage of
sales. This increase was primarily due to an increase in general and
administrative expenses due to additional staff to support our expanded
operations, as well as a slight increase in selling expense related to an
increase in store wages due to minimum wage increases.
Interest income, net, was $2,020,000 in the second quarter year to date
of fiscal 1998 compared to $1,704,000 in the second quarter year to date of
fiscal 1997, an increase of $316,000. The increase was due to an 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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
Income tax provision was $5,238,000 in the second quarter year to date
of fiscal 1998 compared to $4,883,000 in the second quarter year to date of
fiscal 1997. The effective tax rate was 38.5% compared to 41.3% 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 $8,367,000 in the second
quarter year to date of fiscal 1998 compared to $6,932,000 in the second
quarter year to date of fiscal 1997. As a percentage of sales, net income
was 3.8% in the second quarter year to date of fiscal 1998 compared to 3.7%
in the second quarter year to date of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first half of fiscal
1998 was $4,946,000 compared to $4,183,000 for the first half of fiscal 1997.
The increase of $763,000 was attributable to an increase in net income of
$1,435,000, an increase in depreciation and amortization of $255,000, an
increase in other receivables of $1,157,000, a decrease in prepaid expenses
of $1,896,000 and an increase in taxes payable, deferred rent and other
long-term liabilities of $1,244,000 offset by an increase in merchandise
inventories of $2,187,000, an increase in other assets of $150,000 and a
decrease in accounts payable and accrued liabilities of $2,887,000.
Working capital at August 1, 1998 was $51,049,000 compared to
$66,452,000 at January 31, 1998, a decrease of $15,403,000. This decrease
was primarily due to an increase in long-term investments in the first half
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
$38,778,000 at August 1, 1998 compared to $26,884,000 at January 31, 1998, an
increase of $11,894,000, due to the 31 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 $8,019,000 at August 1, 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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
In the first half of fiscal 1998, the Company invested $13,120,000 in
equipment and leasehold improvements, compared to $9,934,000 in the first
half of the prior year. These expenditures related primarily to the 31 new
stores opened and 15 stores remodeled in the first half of fiscal 1998 along
with construction in progress for additional new and remodeled stores. The
Company currently estimates that the capital expenditures for the remainder
of fiscal 1998 will be approximately $22,000,000. These planned expenditures
relate primarily to new store openings and remodels.
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 August 1, 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 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
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.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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
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
<PAGE>
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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.
YEAR 2000 COMPLIANCE
During fiscal 1998 and fiscal 1999, the Company plans to convert
substantially all of its computer 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
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 in order to ensure an adequate plan exists for Year
2000 compliance in the event 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. Because the majority of the Company's computer 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
costs in addressing the Year 2000 issue.
<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 9, 1998. 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 10,099,232 Class A shares and 2,912,665
Class B shares for each director, with no more than 12,975 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 January 30, 1999 with an affirmative
vote of 10,107,357 Class A shares and 2,912,665 Class B shares, with 1,900
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: September 11, 1998 /s/ KATHY BRONSTEIN
------------------ ----------------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer
(Principal Executive
Officer)
Date: September 11, 1998 /s/ EDMOND THOMAS
------------------ ----------------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: September 11, 1998 /s/ ANN CADIER KIM
------------------ ----------------------------------
Ann Cadier Kim
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 61,119,000
<SECURITIES> 26,227,000
<RECEIVABLES> 2,633,000
<ALLOWANCES> 0
<INVENTORY> 38,778,000
<CURRENT-ASSETS> 118,480,000
<PP&E> 107,244,000
<DEPRECIATION> 55,063,000
<TOTAL-ASSETS> 198,980,000
<CURRENT-LIABILITIES> 67,431,000
<BONDS> 0
0
0
<COMMON> 1,359,000
<OTHER-SE> 120,150,000
<TOTAL-LIABILITY-AND-EQUITY> 198,980,000
<SALES> 217,881,000
<TOTAL-REVENUES> 217,881,000
<CGS> 155,020,000
<TOTAL-COSTS> 51,276,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,020,000)
<INCOME-PRETAX> 13,605,000
<INCOME-TAX> 5,238,000
<INCOME-CONTINUING> 8,367,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,367,000
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.59
</TABLE>
