<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 MAY 1, 1999
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 June 4, 1999
were 10,887,886 and 2,912,665, respectively. There were no shares of
Preferred Stock, par value $.01 per share, outstanding at June 4, 1999.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of May 1, 1999 (unaudited)
and January 30, 1999..............................................3-4
Statements of Income and Comprehensive Income
(unaudited) for the 13 weeks ended May 1, 1999
and May 2, 1998.....................................................5
Statements of Cash Flows (unaudited) for the 13
weeks ended May 1, 1999 and May 2, 1998.............................6
Notes to Financial Statements.....................................7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................10-16
PART II. OTHER INFORMATION..................................................17
SIGNATURE PAGE.....................................................18
</TABLE>
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
1999 1999
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<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,744,000 $ 31,590,000
Short-term investments 18,527,000 21,943,000
Other receivables 4,591,000 3,665,000
Merchandise inventories 37,832,000 28,002,000
Prepaid expenses 7,674,000 -
Deferred tax charges 1,791,000 1,791,000
------------- -------------
Total current assets 91,159,000 86,991,000
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EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 94,049,000 75,659,000
Furniture, fixtures and equipment 44,076,000 37,758,000
Leasehold rights 5,252,000 3,577,000
Construction in progress 615,000 489,000
------------- -------------
143,992,000 117,483,000
Less accumulated depreciation (60,977,000) (57,110,000)
------------- -------------
Net equipment and leasehold improvements 83,015,000 60,373,000
------------- -------------
LONG-TERM INVESTMENTS 21,550,000 37,973,000
OTHER ASSETS:
Deferred taxes and other assets 11,718,000 11,677,000
Goodwill, net of accumulated amortization of
$693,000 and $656,000 as of May 1, 1999
and January 30, 1999, respectively 7,412,000 476,000
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Total other assets 19,130,000 12,153,000
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$ 214,854,000 $ 197,490,000
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</TABLE>
See accompanying notes to financial statements
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 1, JANUARY 30,
1999 1999
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<S> <C> <C>
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 58,077,000 $ 37,515,000
Accrued liabilities 16,757,000 20,430,000
Income taxes payable - 6,190,000
Current portion of long-term debt 1,000,000 1,000,000
------------- -------------
Total current liabilities 75,834,000 65,135,000
------------- -------------
LONG-TERM LIABILITIES:
Long-term debt 1,264,000 1,264,000
Deferred rent 7,850,000 7,458,000
Other long-term liabilities 3,527,000 3,355,000
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Total long-term liabilities 12,641,000 12,077,000
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Total liabilities 88,475,000 77,212,000
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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;
10,887,886 and 10,704,886 shares issued and outstanding
at May 1, 1999 and January 30, 1999, respectively 1,122,000 1,071,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares;
2,912,665 shares issued and outstanding
at May 1, 1999 and January 30, 1999 291,000 291,000
Paid-in capital 60,007,000 58,356,000
Retained earnings 84,773,000 80,374,000
Other comprehensive income (139,000) (139,000)
Treasury stock, 1,327,000 shares at cost (19,675,000) (19,675,000)
------------- -------------
Total stockholders' equity 126,379,000 120,278,000
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$ 214,854,000 $ 197,490,000
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</TABLE>
See accompanying notes to financial statements
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------------------
MAY 1, MAY 2,
1999 1998
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<S> <C> <C>
SALES $122,835,000 $104,845,000
COST OF SALES (INCLUDING BUYING, DISTRIBUTION
AND OCCUPANCY COSTS) 86,992,000 74,872,000
------------ ------------
GROSS MARGIN 35,843,000 29,973,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 29,365,000 25,420,000
------------ ------------
OPERATING INCOME 6,478,000 4,553,000
INTEREST INCOME, NET 854,000 1,119,000
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,332,000 5,672,000
PROVISION FOR INCOME TAXES 2,933,000 2,184,000
------------ ------------
NET INCOME $ 4,399,000 $ 3,488,000
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------------ ------------
COMPREHENSIVE INCOME $ 4,399,000 $ 3,488,000
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NET INCOME PER SHARE, BASIC $ 0.36 $ 0.26
------------ ------------
------------ ------------
NET INCOME PER SHARE, DILUTED $ 0.34 $ 0.25
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC 12,316,908 13,575,518
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED 12,807,031 14,103,040
------------ ------------
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</TABLE>
See accompanying notes to financial statements
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------------------------
MAY 1, MAY 2,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,399,000 $ 3,488,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,904,000 2,774,000
Changes in operating assets and liabilities:
Other receivables (926,000) 294,000
Merchandise inventories (9,830,000) (5,223,000)
Prepaid expenses (7,674,000) (5,153,000)
Other assets (41,000) (171,000)
Accounts payable and accrued liabilities 16,889,000 11,642,000
Income taxes payable (6,190,000) 775,000
Deferred rent 392,000 154,000
Other long-term liabilities 172,000 172,000
------------ ------------
Net cash provided by operating activities 1,095,000 8,752,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (17,780,000) (9,917,000)
Acquisition of store leases and related store assets (15,702,000) -
Investment in marketable securities (3,051,000) (19,069,000)
Proceeds from sale of marketable securities 22,890,000 16,164,000
------------ ------------
Net cash used in investing activities (13,643,000) (12,822,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt - (500,000)
Proceeds from issuance of stock associated with stock options 1,702,000 117,000
------------ ------------
Net cash provided by (used in) financing activities 1,702,000 (383,000)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,846,000) (4,453,000)
CASH AND CASH EQUIVALENTS, beginning of period 31,590,000 76,056,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 20,744,000 $ 71,603,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 38,000 $ 61,000
Income taxes, net 10,177,000 1,362,000
</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 30, 1999 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 weeks ended May 1, 1999 are not necessarily
indicative of the results that may be expected for the year ending January
29, 2000. For further information, refer to the financial statements and
notes thereto included in the Company's Annual Report for the year ended
January 30, 1999.
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 May 1, 1999, 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 0.25% or, at the Company's option, LIBOR plus 1.75%. Under the terms of
the loan agreement, the outstanding balance of $2,264,000 will be repaid in
quarterly installments of $500,000, commencing October 31, 1999, until paid.
Aggregate principal payments during fiscal 1999 and fiscal 2000 are
$1,000,000 and $1,264,000, respectively.
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 May 1,
1999, 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. 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
MAY 1, 1999 MAY 2, 1998
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<S> <C> <C>
Net income:
Basic and diluted ........... $ 4,399,000 $ 3,488,000
-------------- --------------
-------------- --------------
Weighted average
Number of common shares:
Basic ....................... 12,316,908 13,575,518
Effect of dilutive
Securities-stock options .... 490,123 527,522
-------------- --------------
Diluted ..................... 12,807,031 14,103,040
Net income per share:
Basic ....................... $ 0.36 $ 0.26
Effect of dilutive
Securities-stock options .... 0.02 0.01
-------------- --------------
Diluted ..................... $ 0.34 $ 0.25
</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 May 1,
1999, 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>
NOTE 5 - ACQUISITION:
On February 1, 1999, the Company acquired the leases and furniture and
fixtures for 80 store locations from Britches of Georgetowne, Inc. The
purchase price, which aggregated $15,702,000, was allocated to equipment and
leasehold improvements ($8,729,000) and goodwill ($6,973,000). Goodwill
associated with this transaction will be amortized over 20 years. The Company
converted the store locations to Arden B., Wet Seal, Contempo Casuals and
Limbo Lounge stores during the first quarter of fiscal 1999, with the
majority of the locations converted to Arden B. stores.
<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
540 retail stores in 42 states, Washington D.C. and Puerto Rico. Of the 540
stores, 247 operate under the name "Contempo Casuals," 197 operate under the
name "Wet Seal," 78 operate under the name "Arden B.," 17 operate under
the name "Limbo Lounge" and one store operates under the name "Next."
On July 1, 1995, the Company acquired Contempo Casuals, a 237-store
junior women's retail chain. This acquisition substantially increased the
size of the Company. Effective February 2, 1997, Contempo Casuals, Inc. was
merged with and into The Wet Seal, Inc.
In January 1998, the Company introduced the "Wet Seal Catalog." In the
first quarter of fiscal 1998 there were 2.5 million catalogs mailed, whereas
there were no catalogs mailed during the first quarter of fiscal 1999. In the
second half of fiscal 1999, the Company plans to reposition the catalog under
the "Blue Asphalt" brand name. Blue Asphalt is the number one denim brand in
both Wet Seal and Contempo Casuals stores, and has been expanded to a full
assortment of fashion apparel and accessories. The Company also plans to
introduce a related web-site under the Blue Asphalt name by the third quarter
of fiscal 1999. The new site will include an on-line shopping "magalog." The
Blue Asphalt magalog and web-site will both offer Blue Asphalt merchandise
and youth-targeted editorial content intended to build brand awareness and
increase customer base and sales.
In November 1998, the Company introduced a new retail concept, Arden B.,
which offers a collection of dressy and casual apparel, accessories and
footwear for the young contemporary customer. Arden B. serves to fill the
void between a "junior" and a "missy" customer, aged 20 to 40. The Company
currently operates 78 Arden B. stores, 67 of which were acquired through two
acquisitions. On December 1, 1998, the Company acquired the leases and
furniture and fixtures for 19 store locations from Mothers Work, Inc. The
majority of the locations acquired were converted to Arden B. stores. On
February 1, 1999, the Company acquired the leases and furniture and fixtures
for 80 store locations from Britches of Georgetowne, Inc. The Company
converted the locations to Arden B., Wet Seal, Contempo Casuals and Limbo
Lounge stores during the first quarter of fiscal 1999, with the majority of
the locations converted to Arden B.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
As of May 1, 1999, the end of the first quarter of fiscal 1999, the
Company operated 537 stores compared to 407 stores as of May 2, 1998, the end
of the first quarter of fiscal 1998. The Company opened 150 stores during the
period from May 2, 1998 to May 1, 1999 and closed 20 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 MAY 1, 1999 (FIRST QUARTER OF FISCAL 1999) AS COMPARED TO
THE 13 WEEKS ENDED MAY 2, 1998 (FIRST QUARTER OF FISCAL 1998)
Sales in the first quarter of fiscal 1999 were $122,835,000 compared to
sales in the first quarter of fiscal 1998 of $104,845,000, an increase of
$17,990,000 or 17.2%. The dollar increase in sales was primarily due to the
net increase of 130 stores; 537 stores at the end of the first quarter of
fiscal 1999 compared to 407 stores at the end of the first quarter of fiscal
1998. The increase was also due to a 2.9% increase in comparable store sales.
Comparable store sales are defined as sales in stores that were open
throughout the full prior 14 months. The increase in sales was offset
somewhat by the fact that the prior year included catalog sales from the 2.5
million catalogs mailed in the first quarter, whereas there were no catalogs
mailed in the current year first quarter.
Cost of sales, including buying, distribution and occupancy costs, was
$86,992,000 in the first quarter of fiscal 1999 compared to $74,872,00 in the
first quarter of fiscal 1998, an increase of $12,120,000. The dollar increase
in cost of sales was due to the increase in sales. As a percentage of sales,
cost of sales was 70.8% in the first quarter of fiscal 1999 compared to 71.4%
in the first quarter of fiscal 1998, a decrease of 0.6%. This decrease as a
percentage of sales was due primarily to a 0.9% decrease in distribution
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 1.1% increase in
occupancy costs as a percentage of sales. The 1.1% increase in occupancy
costs as a percentage of sales was due primarily to the lack of leverage on
store occupancy costs resulting from the decrease in catalog sales. The 0.9%
decrease in the distribution costs as a percentage of sales was due primarily
to a decrease in the unit
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
cost of processing in the current quarter and due to the lack of
catalog-related expenses this year compared to the prior year. The decrease
in the cost of merchandise as a percentage of sales was due to improvement in
the initial margins in the first quarter of fiscal 1999.
Selling, general and administrative expenses were $29,365,000 in the
first quarter of fiscal 1999 compared to $25,420,000 in the first quarter of
fiscal 1998, an increase of $3,945,000. 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 23.9% in the first quarter of fiscal 1999 compared to 24.2% in the first
quarter of fiscal 1998, a decrease of 0.3%. The decrease as a percentage of
sales for the first quarter was primarily related to the impact of the fixed
costs associated with catalog production on the prior year. Without the
impact of the catalog operation on the prior year, selling, general and
administrative expenses increased 0.9% as a percentage of sales. This
increase was due in part to an increase in selling expense as a percentage of
sales due to the start up costs associated with the 85 new store openings in
the first quarter. Additionally, the increase was due to the fact that the
Company has implemented national advertising campaigns in the current year
promoting the Arden B. store concept and the Blue Asphalt Collection. The
Company expects to spend approximately $3 million in fiscal 1999 related to
this advertising.
Interest income, net, was $854,000 in the first quarter of fiscal 1999
compared to $1,119,000 in the first quarter of fiscal 1998, a decrease of
$265,000. The decrease was due to a decrease in the average cash balance
invested compared to the prior year.
Income tax provision was $2,933,000 in the first quarter of fiscal 1999
compared to $2,184,000 in the first quarter of fiscal 1998. The effective tax
rate was 40.0% compared to 38.5% in the prior year. The increase in the
effective tax rate was due to the decrease in tax exempt interest in the
current year.
Due to the factors noted above, net income was $4,399,000 in the first
quarter of fiscal 1999 compared to $3,488,000 in the first quarter of fiscal
1998. As a percentage of sales, net income was 3.6% in the first quarter of
fiscal 1999 compared to 3.3% in the first quarter of fiscal 1998.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first quarter of
fiscal 1999 was $1,095,000. Working capital at May 1, 1999 was $15,325,000
compared to $21,856,000 at January 30, 1999, a decrease of $6,531,000. This
decrease was primarily due to an increase in capital expenditures for new
store acquisition and construction in the first quarter. Inventory was
$37,832,000 at May 1, 1999 compared to $28,002,000 at January 30, 1999, an
increase of $9,830,000, due to the 85 new stores opened during this period
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 $16,889,000 at May 1, 1999 compared to January 30, 1999 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 quarter of fiscal 1999, the Company invested $17,780,000 in
equipment and leasehold improvements, compared to $9,917,000 in the same
period of the prior year. These expenditures related primarily to the 85 new
stores opened and four stores remodeled in the first quarter of fiscal 1999
along with construction in progress for additional new and remodeled stores
in the second quarter. On February 1, 1999, the Company acquired the leases
and furniture and fixtures for 80 store locations from Britches of
Georgetowne, Inc. for $15,702,000, of which $6,973,000 is classified as
goodwill. The Company converted the locations to Arden B., Wet Seal, Contempo
Casuals and Limbo Lounge stores during the first quarter of fiscal 1999, with
the majority of the locations converted to Arden B. The Company currently
estimates that the capital expenditures for the remainder of fiscal 1999 will
be approximately $20,000,000. These planned expenditures relate primarily to
new store openings and remodel construction.
On December 1, 1998, the Company acquired the leases and furniture and
fixtures for 19 store locations from Mothers Work, Inc. The purchase price
was recorded as leasehold improvements and furniture, fixtures and equipment
in the accompanying financial statements. The majority of the locations
acquired were converted to Arden B. stores.
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
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
America in the amount of $10,000,000, maturing on July 1, 2000. At May 1,
1999, there were no outstanding borrowings under the credit arrangement,
there was $2,264,000 outstanding under the term loan, and the Company 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 30, 1999, 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," may 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
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
expand and to continue to increase comparable store sales and the sufficiency
of the Company's working capital and cash flows from operating activities. In
addition, 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, 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 disclaims any obligation or undertaking to disseminate
any updates or revisions to any forward looking statement contained herein or
to reflect any change in the expectations of the Company after the date
hereof or any change in events, conditions or circumstances on which any
statement is based.
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.
During fiscal 1999, the Company is in the process of completing the
conversion of 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 thorough review of its existing
computer software systems and hardware to identify processes that may be
affected by Year 2000 problems. At this time, no significant issues have been
identified and the Company has developed an adequate plan for Year 2000
compliance should the conversions fall behind schedule.
During fiscal 1999, the Company is also in the process of completing a
Year 2000 review of its relationships with suppliers
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
and financial institutions to 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's business, results of operations, cash flows and
financial condition.
If the Company is not completely successful in mitigating internal and
external Year 2000 risks, the result could be a system failure causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, distribute merchandise, or engage in
similar normal business activities at the Company or its vendors and
suppliers. The Company believes that under a worst case scenario, it could
continue the majority of its normal business activities on a manual basis.
With respect to potential Year 2000 failures of its vendors and suppliers,
the Company plans to mitigate this risk by not depending on any single vendor
or supplier for products or merchandise.
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. Year 2000 costs as of May 1, 1999 totaled
$125,000.
<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.
Not Applicable
ITEM 5 - OTHER INFORMATION. Not Applicable
ITEM 6(a) - EXHIBITS.
(27) Financial Data Schedule
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: June 11, 1999 /S/ KATHY BRONSTEIN
----------------------- --------------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer
(Principal Executive Officer)
Date: June 11, 1999 /S/ EDMOND THOMAS
----------------------- --------------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: June 11, 1999 /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 INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 20,744,000
<SECURITIES> 40,077,000
<RECEIVABLES> 4,591,000
<ALLOWANCES> 0
<INVENTORY> 37,832,000
<CURRENT-ASSETS> 91,159,000
<PP&E> 143,992,000
<DEPRECIATION> 60,977,000
<TOTAL-ASSETS> 214,854,000
<CURRENT-LIABILITIES> 75,834,000
<BONDS> 0
0
0
<COMMON> 1,413,000
<OTHER-SE> 124,966,000
<TOTAL-LIABILITY-AND-EQUITY> 214,854,000
<SALES> 122,835,000
<TOTAL-REVENUES> 122,835,000
<CGS> 86,992,000
<TOTAL-COSTS> 29,365,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (854,000)
<INCOME-PRETAX> 7,332,000
<INCOME-TAX> 2,933,000
<INCOME-CONTINUING> 4,399,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,399,000
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.34
</TABLE>
