<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 JULY 29, 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 September 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 September 7, 2000.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of July 29, 2000 (unaudited)
and January 29, 2000..................................... 3-4
Consolidated statements of income and comprehensive income
(unaudited) for the 13 and 26 weeks ended July 29, 2000
and July 31, 1999........................................ 5
Consolidated statements of cash flows (unaudited) for the
26 weeks ended July 29, 2000 and July 31, 1999.......... 6
Notes to consolidated 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
</TABLE>
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 29, JANUARY 29,
2000 2000
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $34,598,000 $44,921,000
Short-term investments 17,164,000 26,395,000
Other receivables 4,607,000 3,909,000
Merchandise inventories 44,212,000 33,288,000
Deferred tax charges 1,560,000 1,560,000
------------------ ------------------
Total current assets 102,141,000 110,073,000
------------------ ------------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 104,407,000 99,679,000
Furniture, fixtures and equipment 54,346,000 47,488,000
Leasehold rights 2,944,000 2,944,000
Construction in progress 1,007,000 -
------------------ ------------------
162,704,000 150,111,000
Less accumulated depreciation (80,158,000) (73,167,000)
------------------ ------------------
Net equipment and leasehold improvements 82,546,000 76,944,000
------------------ ------------------
LONG-TERM INVESTMENTS 26,479,000 7,287,000
OTHER ASSETS:
Deferred taxes and other assets 11,581,000 11,594,000
Goodwill, net of accumulated amortization of
$1,189,000 and $992,000 as of July 29, 2000
and January 29, 2000, respectively 6,914,000 7,111,000
------------------ ------------------
Total other assets 18,495,000 18,705,000
------------------ ------------------
$229,661,000 $213,009,000
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 29, JANUARY 29,
2000 2000
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $57,483,000 $39,448,000
Accrued liabilities 18,068,000 20,611,000
Income taxes payable - 543,000
Current portion of long-term debt - 1,764,000
------------------ ------------------
Total current liabilities 75,551,000 62,366,000
------------------ ------------------
LONG-TERM LIABILITIES:
Deferred rent 8,800,000 8,501,000
Other long-term liabilities 4,347,000 3,909,000
------------------ ------------------
Total long-term liabilities 13,147,000 12,410,000
------------------ ------------------
Total liabilities 88,698,000 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 July 29, 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 July 29, 2000 and January 29, 2000 291,000 291,000
Paid-in capital 62,545,000 62,493,000
Retained earnings 97,235,000 94,557,000
Other comprehensive loss (139,000) (139,000)
Treasury stock, 1,347,600 shares at cost (20,059,000) (20,059,000)
------------------ ------------------
Total stockholders' equity 140,963,000 138,233,000
------------------ ------------------
$229,661,000 $213,009,000
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
--------------------------------------- --------------------------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
SALES $128,194,000 $126,904,000 $258,794,000 $249,739,000
COST OF SALES (INCLUDING BUYING, DISTRIBUTION
AND OCCUPANCY COSTS) 98,202,000 90,939,000 195,085,000 177,931,000
------------------ ------------------ ----------------- ------------------
GROSS MARGIN 29,992,000 35,965,000 63,709,000 71,808,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 30,349,000 30,497,000 61,305,000 59,862,000
------------------ ------------------ ----------------- ------------------
OPERATING (LOSS) INCOME (357,000) 5,468,000 2,404,000 11,946,000
INTEREST INCOME, NET 1,112,000 675,000 1,986,000 1,529,000
------------------ ------------------ ----------------- ------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 755,000 6,143,000 4,390,000 13,475,000
PROVISION FOR INCOME TAXES 294,000 2,457,000 1,712,000 5,390,000
------------------ ------------------ ----------------- ------------------
NET INCOME $461,000 $3,686,000 $2,678,000 $8,085,000
================== ================== ================= ==================
COMPREHENSIVE INCOME $461,000 $3,686,000 $2,678,000 $8,085,000
================== ================== ================= ==================
NET INCOME PER SHARE, BASIC $0.04 $0.30 $0.21 $0.65
================== ================== ================= ==================
NET INCOME PER SHARE, DILUTED $0.04 $0.29 $0.21 $0.63
================== ================== ================= ==================
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC 12,469,088 12,474,760 12,467,511 12,395,834
================== ================== ================= ==================
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED 12,642,761 12,886,556 12,640,916 12,849,452
================== ================== ================= ==================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
---------------------------------------
JULY 29, JULY 31,
2000 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,678,000 $8,085,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,126,000 8,552,000
Loss on disposal of equipment and leasehold improvements 46,000 -
Changes in operating assets and liabilities:
Other receivables (698,000) 2,295,000
Merchandise inventories (10,924,000) (15,373,000)
Prepaid expenses - (7,814,000)
Other assets 13,000 (28,000)
Accounts payable and accrued liabilities 15,492,000 12,688,000
Income taxes payable (543,000) (5,445,000)
Deferred rent 299,000 613,000
Other long-term liabilities 438,000 345,000
------------------ ------------------
Net cash provided by operating activities 16,927,000 3,918,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (15,577,000) (22,261,000)
Acquisition of store leases and store assets - (15,704,000)
Investment in marketable securities (19,192,000) (8,612,000)
Proceeds from sale of marketable securities 9,231,000 29,704,000
------------------ ------------------
Net cash used in investing activities (25,538,000) (16,873,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (1,764,000) -
Proceeds from issuance of stock 52,000 1,709,000
------------------ ------------------
Net cash (used in) provided by financing activities (1,712,000) 1,709,000
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,323,000) (11,246,000)
CASH AND CASH EQUIVALENTS, beginning of period 44,921,000 31,590,000
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $34,598,000 $20,344,000
================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $38,000 $74,000
Income taxes, net 4,410,000 10,834,000
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
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 26 weeks ended July 29, 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 July
29, 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 July 29, 2000, 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 26 WEEKS ENDED 26 WEEKS ENDED
JULY 29, 2000 JULY 31, 1999 JULY 29, 2000 JULY 31, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income..................................... $461,000 $3,686,000 $2,678,000 $8,085,000
============== ============== ============== ==============
Weighted average
Number of common shares:
Basic.......................................... 12,469,088 12,474,760 12,467,511 12,395,834
Effect of dilutive
Securities-stock options 173,673 411,796 173,405 453,618
-------------- -------------- -------------- --------------
Diluted........................................ 12,642,761 12,886,556 12,640,916 12,849,452
Net income per share:
Basic.......................................... $0.04 $0.30 $0.21 $0.65
Effect of dilutive
Securities-stock options 0.00 0.01 0.00 0.02
-------------- -------------- -------------- --------------
Diluted........................................ $0.04 $0.29 $0.21 $0.63
</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 July 29,
2000, 1,347,600 shares had been repurchased at a cost of $20,059,000. Such
repurchased shares are reflected as Treasury Stock in the Company's consolidated
balance sheet.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is one of the largest national mall-based specialty retailers
focusing primarily on young women's apparel, and currently operates 567 retail
stores in 42 states, Washington D.C. and Puerto Rico. Of the 567 stores, 245 are
Contempo Casuals stores and 213 are Wet Seal stores which cater to the junior
customer, 83 are Arden B. stores which focus on a young, contemporary woman and
26 are Limbo Lounge stores, a unisex concept. The Company initiated a catalog in
fiscal 1998 and an e-commerce web-site in August 1999. In fiscal 2000, the
Company does not plan to mail any catalogs, but will continue its e-commerce
initiatives.
On July 1, 1995, the Company acquired Contempo Casuals. The purchase
price consisted of a $100,000 cash payment and the issuance of 254,676 shares of
Class A Common Stock which had a market value of $1,178,000 as of the
acquisition date. In addition, the Company assumed approximately $27,700,000 of
current liabilities of Contempo Casuals. The transaction was accounted for under
the purchase method and resulted in negative goodwill. The acquisition
substantially increased the number of stores the Company operates. Effective
February 2, 1997, Contempo Casuals, Inc. was merged with and into The Wet Seal,
Inc.
On December 1, 1998, the Company acquired the leases and furniture and
fixtures for 19 store locations from Mothers Work, Inc. The purchase price of
$1,911,000 was allocated to leasehold improvements and furniture, fixtures and
equipment. 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 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 July 29, 2000, the Company operated 561 stores compared to 539
stores as of July 31, 1999, the end of the second quarter of fiscal 1999. The
Company opened 43 stores and closed 21 stores for the period from August 1, 1999
to July 29, 2000.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
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 JULY 29, 2000 (SECOND QUARTER OF FISCAL 2000) AS COMPARED TO
THE 13 WEEKS ENDED JULY 31, 1999 (SECOND QUARTER OF FISCAL 1999)
Sales in the second quarter of fiscal 2000 were $128,194,000 compared to
sales in the second quarter of fiscal 1999 of $126,904,000, an increase of
$1,290,000 or 1.0%. The dollar increase in sales was due to the net increase of
22 stores; 561 stores at the end of the second quarter of fiscal 2000 compared
to 539 stores at the end of the second quarter of fiscal 1999. Comparable store
sales decreased 2.9% for the second quarter compared to a decrease of 8.5% in
the second quarter of fiscal 1999. 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 $98,202,000 in the second quarter of fiscal 2000 compared to $90,939,000
in the second quarter of fiscal 1999, an increase of $7,263,000. 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 76.6% in the second quarter of fiscal 2000 compared to 71.7% in the
second quarter of fiscal 1999, an increase of 4.9%. The increase in cost of
sales as a percentage of sales related primarily to the increase in the cost
of merchandise and occupancy costs as a percent of sales. The cost of
merchandise as a percent of sales increased over the prior year due to the
increase in markdowns. The increase in markdowns resulted from the need to
clear merchandise due to the decrease in comparable store sales. In addition,
there was a slight decrease in the initial mark up percentage which was
planned. The increase in the occupancy costs as a percent of sales was due to
the decrease 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 and the loss
of leverage due to the decrease in comparable store sales. Distribution costs
increased due to a shift in certain functions previously done at the stores.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
Selling, general and administrative expenses were $30,349,000 in the
second quarter of fiscal 2000 compared to $30,497,000 in the second quarter of
fiscal 1999, a decrease of $148,000, or 0.5%. As a percentage of sales, selling,
general and administrative expenses was 23.7% in fiscal 2000 compared to 24.0%
in fiscal 1999, a decrease of 0.3%. The decrease as a percentage of sales was
primarily related to a decrease in merchandise delivery costs and a decrease in
advertising from the prior year. Also contributing to the decrease was a
decrease in various operational expenses due to cost saving initiatives and a
decrease in the year-to-date accrual for executive bonus due to the shortfall in
earnings. Offsetting this decrease, is the increase in selling wages and office
wages as a percentage of sales due to the impact of the decrease in the
comparable store sales on the fixed portion of these wages.
Interest income, net, was $1,112,000 in the second quarter of fiscal
2000 compared to $675,000 in the second quarter of fiscal 1999, an increase of
$437,000. This increase was due primarily to an increase in the average cash
balance invested during the second quarter and higher interest rates.
Income tax provision was $294,000 in the second quarter of fiscal
2000 compared to $2,457,000 in the second quarter of fiscal 1999. The
effective income tax rate was 39.0% 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 $461,000 in the second
quarter of fiscal 2000 compared to $3,686,000 in the second quarter of fiscal
1999, a decrease of $3,225,000 or 87.5%. As a percentage of sales, net income
was 0.4% in the second quarter of fiscal 2000 compared to 2.9% in the second
quarter of fiscal 1999.
THE 26 WEEKS ENDED JULY 29, 2000 (SECOND QUARTER OF FISCAL 2000) AS COMPARED TO
THE 26 WEEKS ENDED JULY 31, 1999 (SECOND QUARTER OF FISCAL 1999)
Sales in the 26 weeks ended July 29, 2000 were $258,794,000 compared
to sales in the 26 weeks ended July 31, 1999 of $249,739,000, an increase of
$9,055,000 or 3.6%. The dollar increase in sales was primarily due to the net
increase of 22 stores during the period from August 1, 1999 to July 29, 2000.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
Comparable store sales decreased 3.8% for the year to date in fiscal 2000
compared to a decrease of 3.0% for the year to date in fiscal 1999.
Cost of sales, including buying, distribution and occupancy costs,
was $195,085,000 in the second quarter year to date of fiscal 2000 compared
to $177,931,000 in the second quarter year to date of fiscal 1999, an
increase of $17,154,000. 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 75.4% in the second quarter year to
date of fiscal 2000 compared to 71.2% in the second quarter year to date of
fiscal 1999, an increase of 4.2%. 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 percent of sales
was due to the decrease in comparable store sales. The cost of merchandise as
a percent of sales increased over the prior year due to the 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 slightly impacted by a decrease in the initial mark up
percentage which was planned. 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. Distribution costs
increased due to a shift in certain functions previously done at the stores.
Selling, general and administrative expenses were $61,305,000 in the
second quarter year to date of fiscal 2000 compared to $59,862,000 in the second
quarter year to date of fiscal 1999, an increase of $1,443,000, or 2.4%. As a
percentage of sales, selling, general and administrative expenses was 23.7% in
fiscal 2000 compared to 24.0% in fiscal 1999, a decrease of 0.3%. 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 merchandise delivery costs, a
decrease in advertising from the prior year, a decrease in operational costs due
to cost saving initiatives and a decrease in the year to date accrual for
executive bonuses due to the shortfall in earnings. Offsetting this decrease, is
the increase in selling wages and office wages as a percentage of sales due to
the impact of the decrease in the comparable store sales on the fixed portion of
these wages and an increase in average wages.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
Interest income, net, was $1,986,000 in the second quarter year to date
of fiscal 2000 compared to $1,529,000 in the second quarter year to date of
fiscal 1999, an increase of $457,000. 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 $1,712,000 in the second quarter year to
date of fiscal 2000 compared to $5,390,000 in the second quarter year to date
of fiscal 1999. The effective income tax rate was 39.0% 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 $2,678,000 in the
second quarter year to date of fiscal 2000 compared to $8,085,000 in the second
quarter year to date of fiscal 1999, a decrease of $5,407,000 or 66.9%. As a
percentage of sales, net income was 1.0% in the second quarter year to date of
fiscal 2000 compared to 3.2% in the second quarter year to date of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first half of fiscal
2000 was $16,927,000. Working capital at July 29, 2000 was $26,590,000 compared
to $47,707,000 at January 29, 2000, a decrease of $21,117,000. This decrease was
primarily due to a net increase in long-term investments of $19,192,000, 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 $44,212,000 at July 29, 2000
compared to $33,288,000 at January 29, 2000, an increase of $10,924,000. The
increase was due to a net increase of 13 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 $15,492,000 compared to
January 29, 2000 was primarily due to the increase in inventory.
In the first half of fiscal 2000, the Company invested $15,577,000 in
equipment and leasehold improvements, compared to $22,261,000 in the same period
of the prior year. In the first half of fiscal 2000, the Company opened 25
stores and remodeled 11 stores compared to 91 stores opened and 6 stores
remodeled in the first half of fiscal 1999. The Company currently estimates that
the capital expenditures for the remainder of fiscal 2000 will be approximately
$9,000,000. These planned expenditures relate primarily to new store openings
and remodel construction.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
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 July 29, 2000, 1,347,600 shares had been repurchased at a
cost of $20,059,000. 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 July 29,
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.
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 second Saturday after
Christmas) and the back-to-school season (beginning the last week of July and
ending the second 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
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
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 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 #101, "Revenue Recognition in Financial
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
Statements" ("SAB 101"). SAB 101 summarizes the staff's views in applying
accounting principals 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 is currently evaluating the impact SAB
101 will have on its financial statements, if any.
<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 May 31,
2000. At the meeting, the Company's shareholders elected
Irving Teitelbaum, George H. Benter, Jr., Wilfred Posluns,
Walter Loeb, Gerald Randolph, Stephen Gross, Alan Siegel,
Kathy Bronstein, and Edmond Thomas to the Board of
Directors with an affirmative vote of at least 8,081,756
Class A shares and 2,912,665 Class B shares for each
director, with no more than 724,716 Class A shares voting
against any director. The shareholders ratified the
Company's selection of Deliotte and Touche LLP as the
independent certified public accountants for the fiscal
year ending February 3, 2001 with an affirmative vote of
8,785,872 Class A shares and 2,912,665 Class B shares, with
12,315 Class A shares voting against. Class A shares are
entitled to one vote per share. Class B share are entitled
to two votes per share.
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: SEPTEMBER 11, 2000 /s/KATHY BRONSTEIN
--------------------------- ---------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer and
Director (Principal
Executive Officer)
Date: SEPTEMBER 11, 2000 /s/EDMOND THOMAS
--------------------------- ---------------------------
Edmond Thomas
President and
Chief Operating Officer
and Director
Date: SEPTEMBER 11, 2000 /s/ANN CADIER KIM
--------------------------- ---------------------------
Ann Cadier Kim
Senior Vice President of
Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
