<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 28, 2000
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 7, 2000
were 10,904,023 and 2,912,665, respectively. There were no shares of Preferred
Stock, par value $.01 per share, outstanding at December 7, 2000.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of October 28, 2000
(unaudited) and January 29, 2000 ..........................3-4
Consolidated statements of income and comprehensive
income (unaudited) for the 13 and 39 weeks ended
October 28, 2000 and October 30, 1999 .......................5
Consolidated statements of cash flows (unaudited) for
the 39 weeks ended October 28, 2000 and October 30,
1999.........................................................6
Notes to consolidated financial statements.................7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................9-15
PART II.OTHER INFORMATION...........................................16
SIGNATURE PAGE..............................................17
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THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 28, January 29,
2000 2000
------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 41,418,000 $ 44,921,000
Short-term investments 6,986,000 26,395,000
Other receivables 2,777,000 3,909,000
Merchandise inventories 42,282,000 33,288,000
Deferred tax charges 1,560,000 1,560,000
------------- -------------
Total current assets 95,023,000 110,073,000
------------- -------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 106,520,000 99,679,000
Furniture, fixtures and equipment 54,228,000 47,488,000
Leasehold rights 2,944,000 2,944,000
Construction in progress -- --
------------- -------------
163,692,000 150,111,000
Less accumulated depreciation (85,482,000) (73,167,000)
------------- -------------
Net equipment and leasehold improvements 78,210,000 76,944,000
------------- -------------
LONG-TERM INVESTMENTS 35,872,000 7,287,000
OTHER ASSETS:
Deferred taxes and other assets 11,939,000 11,594,000
Goodwill, net of accumulated amortization of
$1,287,000 and $992,000 as of October 28, 2000
and January 29, 2000, respectively 6,816,000 7,111,000
------------- -------------
Total other assets 18,755,000 18,705,000
------------- -------------
$ 227,860,000 $ 213,009,000
============= =============
</TABLE>
3
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THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 28, January 29,
2000 2000
------------- -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 51,134,000 $ 39,448,000
Accrued liabilities 18,471,000 20,611,000
Income taxes payable 29,000 543,000
Current portion of long-term debt -- 1,764,000
------------- -------------
Total current liabilities 69,634,000 62,366,000
------------- -------------
LONG-TERM LIABILITIES:
Deferred rent 9,033,000 8,501,000
Other long-term liabilities 4,565,000 3,909,000
------------- -------------
Total long-term liabilities 13,598,000 12,410,000
------------- -------------
Total liabilities 83,232,000 74,776,000
------------- -------------
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;
10,904,023 and 10,900,023 shares issued and outstanding
at October 28, 2000 and January 29, 2000, respectively 1,090,000 1,090,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares;
2,912,665 shares issued and outstanding
at October 28, 2000 and January 29, 2000 291,000 291,000
Paid-in capital 62,545,000 62,493,000
Retained earnings 101,190,000 94,557,000
Other comprehensive loss (139,000) (139,000)
Treasury stock, 1,367,600 and 1,347,600 shares, at cost,
at October 28, 2000 and January 29, 2000, respectively (20,349,000) (20,059,000)
------------- -------------
Total stockholders' equity 144,628,000 138,233,000
------------- -------------
$ 227,860,000 $ 213,009,000
============= =============
</TABLE>
4
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THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
--------------------------- ---------------------------
OCTOBER 28, OCTOBER 30, OCTOBER 28, OCTOBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $144,858,000 $131,465,000 $403,652,000 $381,204,000
COST OF SALES (INCLUDING BUYING, DISTRIBUTION
AND OCCUPANCY COSTS) 104,665,000 94,622,000 299,750,000 272,553,000
------------ ------------ ------------ ------------
GROSS MARGIN 40,193,000 36,843,000 103,902,000 108,651,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 34,764,000 32,940,000 96,068,000 92,802,000
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME 5,429,000 3,903,000 7,834,000 15,849,000
INTEREST INCOME, NET 1,106,000 701,000 3,091,000 2,230,000
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,535,000 4,604,000 10,925,000 18,079,000
PROVISION FOR INCOME TAXES 2,580,000 1,857,000 4,292,000 7,247,000
------------ ------------ ------------ ------------
NET INCOME $ 3,955,000 $ 2,747,000 $ 6,633,000 $ 10,832,000
============ ============ ============ ============
COMPREHENSIVE INCOME $ 3,955,000 $ 2,747,000 $ 6,633,000 $ 10,832,000
============ ============ ============ ============
NET INCOME PER SHARE, BASIC $ 0.32 $ 0.22 $ 0.53 $ 0.87
============ ============ ============ ============
NET INCOME PER SHARE, DILUTED $ 0.31 $ 0.22 $ 0.52 $ 0.84
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC 12,459,418 12,455,973 12,464,813 12,415,880
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED 12,691,110 12,574,681 12,653,577 12,833,058
============ ============ ============ ============
</TABLE>
5
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
----------------------------
October 28, October 30,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,633,000 $ 10,832,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 15,550,000 13,471,000
Loss on disposal of equipment and leasehold improvements 44,000 --
Changes in operating assets and liabilities:
Other receivables 1,132,000 1,371,000
Merchandise inventories (8,994,000) (10,079,000)
Prepaid expenses -- (7,689,000)
Other assets (345,000) (464,000)
Accounts payable and accrued liabilities 9,546,000 (1,107,000)
Income taxes payable (514,000) (4,394,000)
Deferred rent 532,000 937,000
Other long-term liabilities 656,000 517,000
------------ ------------
Net cash provided by operating activities 24,240,000 3,395,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (16,565,000) (27,749,000)
Acquisition of store leases and store assets -- (15,704,000)
Investment in marketable securities (28,585,000) (3,879,000)
Proceeds from sale of marketable securities 19,409,000 18,749,000
------------ ------------
Net cash used in investing activities (25,741,000) (28,583,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,764,000) --
Purchase of treasury stock (290,000) (384,000)
Proceeds from issuance of stock 52,000 1,709,000
------------ ------------
Net cash (used in) provided by financing activities (2,002,000) 1,325,000
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,503,000) (23,863,000)
CASH AND CASH EQUIVALENTS, beginning of period 44,921,000 31,590,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 41,418,000 $ 7,727,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 38,000 $ 100,000
Income taxes, net 4,789,000 11,386,000
</TABLE>
6
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THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The information set forth in these consolidated financial statements is
unaudited except for the January 29, 2000 balance sheet. These statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America 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 accounting principles generally
accepted in the United States of America 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 28, 2000 are not
necessarily indicative of the results that may be expected for the year ending
February 3, 2001 (fiscal 2000). For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report for the year ended January 29, 2000.
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 $50,000,000 on a revolving basis through July 1,
2001. The cash borrowings under the arrangement bear interest at Bank of
America's prime rate or, at the Company's option, LIBOR plus 1.5%. As of October
28, 2000, the Company had no borrowings outstanding under the credit
arrangement.
In June 1995, the Company entered into an unsecured five-year,
$10,000,000 term loan with Bank of America. The loan bears interest at Bank of
America's prime rate plus 0.25% or, at the Company's option, LIBOR plus 1.5%.
This loan was repaid in full on May 24, 2000.
The credit arrangement imposes 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 requires that Bank
of America approve the payment of dividends and restrict the level of capital
expenditures. At October 28, 2000, the Company was in compliance with these
covenants.
7
<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 39 WEEKS ENDED 39 WEEKS ENDED
OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 28, 2000 OCTOBER 30, 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income .............................. $ 3,955,000 $ 2,747,000 $ 6,633,000 $ 10,832,000
=========== =========== =========== ==============
Weighted average Number of common shares:
Basic ................................... 12,459,418 12,455,973 12,464,813 12,415,880
Effect of dilutive
Securities-stock options ................ 231,692 118,708 188,764 417,178
----------- ----------- ----------- --------------
Diluted ................................. 12,691,110 12,574,681 12,653,577 12,833,058
Net income per share:
Basic ................................... $ 0.32 $ 0.22 $ 0.53 $ 0.87
Effect of dilutive
Securities-stock options ................ 0.01 0.00 0.01 0.03
----------- ----------- ----------- --------------
Diluted ................................. $ 0.31 $ 0.22 $ 0.52 $ 0.84
</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
28, 2000, 1,367,600 shares had been repurchased at a cost of $20,349,000. Such
repurchased shares are reflected as Treasury Stock in the Company's consolidated
balance sheet.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is one of the largest national mall-based specialty retailers
focusing primarily on young women's apparel, and currently operates 570 retail
stores in 42 states, Washington D.C. and Puerto Rico. Of the 570 stores, 244 are
Contempo Casuals stores and 215 are Wet Seal stores which cater to the junior
customer, 85 are Arden B. stores which focus on a young, contemporary woman and
26 are Limbo Lounge stores, a unisex concept. The Company initiated an
e-commerce web-site in August 1999.
On February 1, 1999, the Company acquired the leases and furniture and
fixtures for 78 store locations from Britches of Georgetowne, Inc. for
$15,704,000. Based upon a third-party appraisal, the purchase price was
allocated to leasehold improvements, lease rights, and furniture, fixtures and
equipment. Excess of cost over net assets acquired (goodwill) totaling
$6,972,000 is being amortized on the straight-line method over 20 years. The
majority of the locations acquired were converted to Arden B. stores.
As of October 28, 2000, the Company operated 568 stores compared to 545
stores as of October 30, 1999, the end of the third quarter of fiscal 1999. The
Company opened 43 stores and closed 20 stores for the period from October 31,
1999 to October 28, 2000.
Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the Company's consolidated
financial statements and the notes thereto.
RESULTS OF OPERATIONS
THE 13 WEEKS ENDED OCTOBER 28, 2000 (THIRD QUARTER OF FISCAL 2000) AS COMPARED
TO THE 13 WEEKS ENDED OCTOBER 30, 1999 (THIRD QUARTER OF FISCAL 1999)
Sales in the third quarter of fiscal 2000 were $144,858,000 compared
to sales in the third quarter of fiscal 1999 of $131,465,000, an increase of
$13,393,000, or 10.2%. The dollar increase in sales was due to the net
increase of 23 stores and the 6.8% increase in comparable store sales. There
were 568 stores at the end of the third quarter of fiscal 2000 compared to
545 stores at the end of the third quarter of fiscal 1999. Comparable store
sales increased 6.8% for the third quarter compared to a decrease of 11.6% in
the third quarter of fiscal 1999.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
Comparable store sales are defined as sales in stores that were open throughout
the full prior 14 months.
Cost of sales, including buying, distribution and occupancy costs, was
$104,665,000 in the third quarter of fiscal 2000 compared to $94,622,000 in the
third quarter of fiscal 1999, an increase of $10,043,000. The dollar increase in
cost of sales in fiscal 2000 compared to fiscal 1999 was due primarily to the
increase in sales. As a percentage of sales, cost of sales was 72.3% in the
third quarter of fiscal 2000 compared to 72.0% in the third quarter of fiscal
1999, an increase of 0.3%. The increase in cost of sales as a percentage of
sales related primarily to the increase in the cost of merchandise which was
offset by the decrease in occupancy costs as a percent of sales. The cost of
merchandise as a percentage of sales increased over the prior year due to a
decrease in the initial mark up percentage. The decrease in the occupancy costs
as a percentage of sales was due to the positive impact on leverage of store
occupancy due to the increase in comparable store sales. To a lesser extent, the
increase in cost of sales was due to an increase in buying costs as a percentage
of sales due to additional headcount added to support the new divisions. The
increase in distribution costs as a percentage of sales was due to a shift in
certain functions previously performed at the stores.
Selling, general and administrative expenses were $34,764,000 in the
third quarter of fiscal 2000 compared to $32,940,000 in the third quarter of
fiscal 1999, an increase of $1,824,000, or 5.5%. As a percentage of sales,
selling, general and administrative expenses were 24.0% in fiscal 2000 compared
to 25.1% in fiscal 1999, a decrease of 1.1%. The decrease as a percentage of
sales was primarily related to a decrease in advertising from the prior year and
the decision to discontinue the catalog business in order to further develop the
company's e-commerce business. Also contributing to the decrease was a decrease
in various operational expenses. Offsetting this decrease was an increase in
executive salaries due to the separation payment to the former president.
Interest income, net, was $1,106,000 in the third quarter of fiscal
2000 compared to $701,000 in the third quarter of fiscal 1999, an increase of
$405,000. This increase was due primarily to an increase in the average cash
balance invested during the third quarter and higher interest rates.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
Income tax provision was $2,580,000 in the third quarter of fiscal 2000
compared to $1,857,000 in the third quarter of fiscal 1999. The effective income
tax rate was 39.5% compared to 40.3% in the prior year. The decrease in the
effective tax rate was due to the decrease in income generated from states with
higher effective tax rates.
Based on the factors noted above, net income was $3,955,000 in the
third quarter of fiscal 2000 compared to $2,747,000 in the third quarter of
fiscal 1999, an increase of $1,208,000, or 44.0%. As a percentage of sales, net
income was 2.7% in the third quarter of fiscal 2000 compared to 2.1% in the
third quarter of fiscal 1999.
THE 39 WEEKS ENDED OCTOBER 28, 2000 (THE NINE MONTHS ENDED OCTOBER 28, 2000) AS
COMPARED TO THE 39 WEEKS ENDED OCTOBER 30, 1999 (THE NINE MONTHS ENDED OCTOBER
30, 1999)
Sales in the 39 weeks ended October 28, 2000 were $403,652,000 compared
to sales in the 39 weeks ended October 30, 1999 of $381,204,000, an increase of
$22,448,000 or 5.9%. The dollar increase in sales was primarily due to the net
increase of 23 stores during the period from October 31, 1999 to October 28,
2000. Comparable store sales decreased 0.2% for the nine months ended October
28, 2000 compared to a decrease of 7.1% for the nine months ended October 30,
1999.
Cost of sales, including buying, distribution and occupancy costs, was
$299,750,000 for the nine months ended October 28, 2000 compared to $272,553,000
for the nine months ended October 30, 1999, an increase of $27,197,000. The
dollar increase in cost of sales in fiscal 2000 compared to fiscal 1999 was due
primarily to the increase in sales. As a percentage of sales, cost of sales was
74.3% for the nine months ended October 28, 2000 compared to 71.5% for the nine
months ended October 30, 1999, an increase of 2.8%. The increase in cost of
sales as a percentage of sales related primarily to an increase in occupancy
costs and cost of merchandise. The increase in occupancy costs as a percentage
of sales was due to the decrease in comparable store sales. The cost of
merchandise as a percentage of sales increased over the prior year due to an
increase in markdowns. The increase in markdowns resulted from the need to clear
merchandise due to the decrease in comparable store sales. The cost of sales
increase was also impacted by a decrease in the initial mark up percentage.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
To a lesser extent, the increase in cost of sales was due to an increase in
buying costs as a percentage of sales due to additional headcount added to
support the new divisions and the loss of leverage due to the decrease in
comparable store sales. The increase in distribution costs as a percentage of
sales was due to a shift in certain functions previously done at the stores.
Selling, general and administrative expenses were $96,068,000 for the
nine months ended October 28, 2000 compared to $92,802,000 for the nine months
ended October 30, 1999, an increase of $3,266,000, or 3.5%. As a percentage of
sales, selling, general and administrative expenses was 23.8% in fiscal 2000
compared to 24.3% in fiscal 1999, a decrease of 0.5%. The dollar increase in
selling, general and administrative expenses in fiscal 2000 compared to fiscal
1999 was primarily due to the increase in total sales. The decrease as a
percentage of sales was related to a decrease in advertising from the prior
year, a decrease in costs related to the catalog which was discontinued in order
to further develop the company's e-commerce business and a decrease in the year
to date accrual for executive bonuses due to the shortfall in earnings.
Offsetting this decrease to selling, general and administrative expenses is an
increase in executive salaries due to the separation payment to the former
president.
Interest income, net, was $3,091,000 for the nine months ended October
28, 2000 compared to $2,230,000 for the nine months ended October 30, 1999, an
increase of $861,000. This increase was due primarily to an increase in the
average cash balance invested during the year and an increase in interest rates.
Income tax provision was $4,292,000 for the nine months ended October
28, 2000 compared to $7,247,000 for the nine months ended October 30, 1999. The
effective income tax rate was 39.3% compared to 40.0% in the prior year. The
decrease in the effective tax rate was due to the decrease in income generated
from states with higher effective tax rates.
Based on the factors noted above, net income was $6,633,000 for the
nine months ended October 28, 2000 compared to $10,832,000 for the nine months
ended October 30, 1999, a decrease of $4,199,000 or 38.8%. As a percentage of
sales, net income was 1.6% for the nine months ended October 28, 2000 compared
to 2.8% for the nine months ended October 30, 1999.
12
<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 nine months ended
October 28, 2000 was $24,240,000. Working capital at October 28, 2000 was
$25,389,000 compared to $47,707,000 at January 29, 2000, a decrease of
$22,318,000. This decrease was primarily due to a net increase in long-term
investments of $28,585,000, as current year excess cash has been invested in
long-term investments with maturities of more than one year. This was offset to
some extent by the increase in inventory and accounts payable. Inventory was
$42,282,000 at October 28, 2000 compared to $33,288,000 at January 29, 2000, an
increase of $8,994,000. The increase was due to a net increase of 20 stores, 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
$9,546,000 compared to January 29, 2000 was primarily due to the increase in
inventory.
For the nine months ended October 28, 2000, the Company invested
$16,565,000 in equipment and leasehold improvements, compared to $27,749,000 in
the same period of the prior year. For the nine months ended October 28, 2000,
the Company opened 34 stores and remodeled 17 stores compared to 100 stores
opened and 12 stores remodeled for the nine months ended October 30, 1999. The
Company currently estimates that the capital expenditures for the remainder of
fiscal 2000 will be approximately $6,445,000. These planned expenditures relate
primarily to new store openings and remodel construction.
In September 1998, 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 28, 2000, 1,367,600 shares had been repurchased at a
cost of $20,349,000. Such repurchased shares are reflected as treasury stock in
the accompanying consolidated financial statements.
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 $50,000,000, maturing on July 1, 2001. At October
28, 2000, there were no outstanding borrowings under the credit arrangement, and
the Company was in compliance with all terms and covenants of the credit
arrangement. The five year amortizing unsecured term loan with Bank of America
in the amount of $10,000,000 was repaid in full on May 24, 2000.
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
The Company invests its excess funds primarily in a long-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 third Saturday after
Christmas) and the back-to-school season (beginning the last week of July and
ending the third week of September) historically accounting for the largest
percentage of sales volume. In the Company's three fiscal years ended January
29, 2000, the Christmas and back-to-school seasons together accounted for an
average of approximately 32% of the Company's annual sales, after adjusting for
sales increases related to new stores. The Company does not believe that
inflation has had a material effect on the results of operations during the past
three years. However, there can be 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 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
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FSAB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS No. 133
was initially effective for fiscal years beginning after June 15, 1999. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
which delays the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company does not believe the adoption of SFAS No. 133 will
have a material effect on the Company's consolidated results of operations or
financial condition.
In December 1999, the Security and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes the staff's views in applying accounting principles
generally accepted in the United States of America to revenue recognition in
financial statements. SAB 101 is effective for the fourth quarter of fiscal year
2000. The Company does not believe SAB 101 will have a significant impact on its
financial statements.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions involving Stock Compensation." FIN 44 is
an interpretation of Accounting Principal Board's Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Among other matters, FIN 44
clarifies the application of APB 25 regarding the definition of employee for
purposes of applying APB 25, the criteria for determining whether a plan
qualifies as non compensatory and the accounting consequences of
modifications to the terms of a previously issued stock options or similar
awards. The Company adopted the provisions of FIN 44 in the third quarter of
2000. The adoption of FIN 44 did not have a material impact on the Company's
financial condition or results of operations.
15
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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. None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5 - OTHER INFORMATION. None
ITEM 6(a) - EXHIBITS.
(27) Financial Data Schedule
ITEM 6(b) - REPORTS ON FORM 8-K. None
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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, 2000 /s/ Kathy Bronstein
---------------------------- ------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer and
Director (Principal
Executive Officer)
Date: December 11, 2000 /s/ Ann Cadier Kim
---------------------------- ------------------------
Ann Cadier Kim
Senior Vice President of
Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
17
