<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18632
------------------------
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0415940
(State of incorporation) (I.R.S. Employer Identification No.)
26972 BURBANK, FOOTHILL RANCH, CA 92610
(Address of principal executive (Zip Code)
offices)
</TABLE>
(714) 583-9029
(Registrant's telephone number, including area code)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
<TABLE>
<S> <C>
CLASS A COMMON STOCK PREFERRED STOCK PURCHASE RIGHTS
(Title of Class) (Title of Class)
</TABLE>
------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to the Form 10-K.
The aggregate market value of voting stock held by non-affiliates as of
April 6, 1998 was $395,666,853.
The number of shares outstanding of the registrant's Class A Common Stock
and Class B Common Stock, par value $.10 per share, at April 6, 1998 was
10,669,578 and 2,912,665, respectively. There were no shares of Preferred Stock,
par value $.01 per share, outstanding at April 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders' to be filed
with the Commission within 120 days of January 31, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Wet Seal, Inc., a Delaware corporation ("Wet Seal" or the "Company"),
founded in 1962, is a specialty retailer of moderately priced, fashionable,
casual apparel and accessory items designed for consumers with a young, active
lifestyle. On July 1, 1995, the Company acquired the business, assets and
properties of Contempo Casuals, Inc. ("Contempo Casuals"), a 237-store retail
junior women's chain. This acquisition substantially increased the size of the
Company. As of April 6, 1998, the Company operated 401 retail stores in 40
states and Puerto Rico, including 119 in California, 52 in Florida, and 31 in
Texas. Of the 401 stores, 236 operate under the "CONTEMPO CASUALS" trademark,
159 operate under the "WET SEAL" trademark, five stores operate under the "LIMBO
LOUNGE" trademark and one of the stores operates under the "NEXT" trademark. All
of the stores, with the exception of the stores located in malls where the
Company operates both a Wet Seal and a Contempo Casuals store ("duplicate
locations"), offer substantially the same merchandise and utilize the same
visual merchandising strategies. At the duplicate locations, the Company employs
different visual merchandising displays as well as in-store image posters and
will on occasion differentiate a portion of the merchandise mix. The Limbo
Lounge is a recent concept which the Company introduced in fiscal 1996 and
intends to expand to up to seven additional stores in fiscal 1998. The Limbo
Lounge offers both junior's and young men's clothing and accessories in a unique
store environment.
The Company introduced the "Wet Seal Catalog" in late January 1998. The
catalog is focused on the junior customer and features both private label and
branded apparel, shoes and accessories. The Company plans to have approximately
six catalog mailings throughout fiscal 1998. Due to the timing of the initial
catalog mailing at the end of fiscal 1997, there is no material impact on the
financial statements for fiscal 1997, other than the costs related to catalog
book production and printing, which are reported as prepaid assets as of January
31, 1998.
PRODUCTS AND MERCHANDISING
Both Wet Seal and Contempo Casuals stores target the same fashion-conscious
junior customer. The Company merchandises both stores similarly. In duplicate
locations, the Company differentiates the locations by displaying the
merchandise differently in each of the stores, and will occasionally
differentiate the merchandise mix. The Company provides a balance of
moderately-priced, fashionable brand name and Company-developed apparel and
accessories that appeal to consumers with young, active lifestyles. The Company
believes that Company-developed apparel differentiates it from its competitors.
The Company frequently updates its product offerings, which include sportswear,
dresses, lingerie, outerwear, shoes, cosmetics and accessories, to provide a
regular flow of fresh, new fashionable merchandise. Additionally, management
carefully monitors pricing and markdowns to expedite sales of slower-moving
inventory, facilitate the introduction of new merchandise and maintain an
updated fashion image.
Generally, the Company's stores display merchandise within a current fashion
statement by color and trend groupings. Rather than displaying garments together
by type (blouses with blouses, for example), the Company combines items of
apparel and accessories which the customer might buy as an ensemble. Store
displays are designed to enable customers to create ensembles within a current
fashion statement or trend group. Management believes that the trend grouping
concept strengthens the fashion image of the merchandise offered in the stores
and enables the customer to locate combinations of blouses, skirts, pants and
accessories in a manner which enhances the Company's opportunity to make
multiple unit sales. The general layout of merchandise in the stores is planned
by the Company's management, but may be varied and adapted by each store's
management. The Company makes use of in-store image posters to help focus
customers on particular fashion themes. The Company changes the visual display
of the merchandise in its stores approximately every six weeks to reflect the
changing tastes of the Company's target customer.
2
<PAGE>
In the last quarter of fiscal 1996, the Company introduced a stand alone
store concept called Limbo Lounge. The product offerings include both junior's
and young men's apparel and accessories. The Company currently operates five
Limbo Lounges and plans to open up to seven additional stores in fiscal 1998.
DESIGN, BUYING AND PRODUCT DEVELOPMENT
The Company's experienced design and buying teams are responsible for
identifying evolving fashion trends and then developing themes to guide the
Company's merchandising strategy. These teams monitor emerging fashion trends by
attending domestic and international fashion shows, engaging the services of
international fashion consultants, following industry publications and
conducting regular market research, including monitoring cutting-edge,
alternative stores, visiting Company stores to interact with customers and
employees and visiting competitors' stores. Additionally, the Company holds
"open to buy" days once a week to allow vendors to meet with buyers. Management
believes that these open sessions provide buyers with the opportunity to
purchase fresh and innovative products that help to further differentiate the
Company's merchandise mix.
The Company's commitment to Company-developed apparel is an important
element in differentiating its merchandise from that of its competitors. After
selecting a fashion theme to promote, the design and buying teams work closely
with vendors to modify colors, materials and designs and create an image
consistent with the theme for the Company's product offerings. Additionally, the
Company has increased its focus on developing exclusive designs and brands to
reinforce the fashion statements of its merchandise offerings as well as to
increase the perception of Wet Seal, Contempo Casuals and Limbo Lounge as
destination stores for the customer. The Company focused on the Blue Asphalt,
Evolution Not Revolution and Arden B. brands in particular in fiscal 1997 and
given the success of these brands, plans to continue this focus.
SOURCING AND VENDOR RELATIONSHIPS
The Company purchases its merchandise from numerous domestic vendors and an
increasing number of foreign vendors. Although in fiscal 1997 no single vendor
accounted for more than 10% of the Company's merchandise and only two vendors
accounted for more than 5%, management believes the Company is the largest
customer of many of its smaller vendors. Management believes the Company's
importance to these vendors allows it to provide significant input into their
design, manufacturing and distribution processes, and has enabled the Company to
negotiate favorable terms with such vendors. Quality control is monitored
carefully at the distribution points of its largest vendors and manufacturers,
and all merchandise is inspected upon arrival at the Company's Foothill Ranch,
California distribution center. The Company does not have any long term or
exclusive contracts with any particular manufacturer or supplier for either
brand name or Company-developed apparel.
ALLOCATION AND DISTRIBUTION
The Company's merchandising effort primarily focuses on maintaining a
regular flow of fresh, fashionable merchandise into its stores. Successful
execution depends in large part on the Company's integrated planning, allocation
and distribution functions. Planning and allocation are managed by a team headed
by the Company's Vice President of Planning and Allocation. By working closely
with District and Regional Directors and merchandise buyers, this team manages
inventory levels and coordinates the allocation of merchandise to each of the
Company's stores based on sales volume, climate and other factors that may
influence individual stores' product mix.
In December 1997, the Company moved its distribution function into a new
facility in Foothill Ranch, California. All merchandise is received from vendors
at this facility, where items are inspected for quality and prepared for
shipping to the Company's stores. The Company ships merchandise to stores within
a
3
<PAGE>
100-mile radius of the distribution center by its fleet of Company-owned trucks.
The remainder of the Company's stores are shipped merchandise by common carrier.
Consistent with the Company's goal of maintaining the freshness of its product
offerings, the Company ships new merchandise to each store daily.
In keeping with the Company's policy of introducing new merchandise,
markdowns are taken regularly to effect a rapid sale of slow-moving inventory.
Merchandise which remains unsold is periodically shipped to the Company's
clearance stores where further markdowns are taken as needed in order to move
the merchandise. Sales of merchandise at these stores aggregated $3.6 million
for the fiscal year ended January 31, 1998. These stores operate under both the
Wet Seal and the Contempo Casuals names.
MARKETING, ADVERTISING AND PROMOTION
The Company believes that the highly-visible locations of its stores within
regional shopping malls, broad selection of fashionable merchandise and dynamic,
entertaining in-store environments have contributed significantly to the
Company's reputation as a destination store addressing the lifestyle of fashion-
conscious young consumers. Consequently, the Company has historically relied
more heavily on these factors and "word-of-mouth" advertising than more
traditional forms of advertising such as print, radio and television.
The Company utilizes a variety of advertising and promotional programs that
allow the Company to gain exposure in a cost-effective manner. By introducing
frequent shopper cards in its stores, the Company has developed a marketing
database that helps to track customers. The cards, which are sold for $20 each,
entitle customers to a standard 10% discount on purchases made within a one-year
period. As part of these programs, sales representatives call selected
cardholders personally to notify customers of special in-store promotions, such
as preferred customer sales during which cardholders receive additional
incentives. Management believes these promotions foster customer loyalty and
encourage frequent visits and multiple item purchases. The Company also sponsors
special events such as snowboarding competitions and beach festivals that focus
on the interests and active lifestyles of its target customers. Further, the
Company utilizes its Company-owned trucks as "rolling billboards" in California,
painting them to promote the Company as well as certain of its Company-developed
labels such as Blue Asphalt and Evolution Not Revolution.
STORE OPERATIONS
The Company's stores are divided into six geographic regions. Each region is
managed by a Regional Director who reports to the Company's Vice President of
Store Operations. Each region is further divided into districts consisting of
between 9 to 16 stores and managed by a District Director. The Company delegates
substantial authority to regional, district and store-level employees, while
taking advantage of economies of scale by centralizing functions such as
finance, data processing, merchandise purchasing and allocation, human resources
and real estate at the corporate level.
The Company encourages communication between and among its Regional and
District Directors and senior management. Each of the Company's 38 District
Directors provides weekly reports to senior management concerning overall
business conditions and specific aspects of their stores' operations. These
reports are used to identify competitive trends and store level concerns in a
timely manner. Store performance is also evaluated by senior management through
the use of a "secret shopper" service that shops each store twice a month.
Stores are typically staffed with one full-time manager, one or two
full-time co-managers, one full-time customer service leader and 9 to 16
customer service representatives and cashiers, most of whom are part-time.
During peak seasons, stores may increase staffing levels to accommodate the
additional in-store traffic. The Company seeks to hire store-level employees who
are energetic, fashionable and friendly and who can identify with its targeted
customers. The Company's policy is to promote store managers from within while
also hiring from outside. Highly-regarded store managers are often given
opportunities to
4
<PAGE>
move to higher-volume stores. The Company sets weekly sales goals for each store
and devises incentives to reward stores that meet or exceed their sales targets.
In addition, from time to time the Company runs sales contests to encourage its
store level employees to maximize sales volume.
Most of the Company's stores are, and the Company expects that most of its
new stores will be, located in regional, high-traffic shopping malls which
contain at least one "anchor" department store. The Company places great
emphasis on its location within a mall and attempts to locate stores in the
higher-traffic areas of a mall and to obtain the greatest amount of frontage
possible. The Company's average store size is approximately 4,200 square feet.
Store hours are determined by the mall in which the store is located.
INFORMATION AND CONTROL SYSTEMS
In fiscal 1996, the register hardware at both the Wet Seal and Contempo
Casuals stores was upgraded to a common system in order to increase efficiency.
Additionally, the Company plans to upgrade the register software in fiscal 1998.
As a result of these two upgrades, the Company expects to decrease communication
and maintenance costs, further improve customer service and become more
innovative in the area of in-store marketing.
While the Company believes its information systems are adequate to support
its current needs, in order to accommodate future growth the Company plans to
convert and upgrade its merchandising and other support systems in fiscal 1998
and fiscal 1999.
EXPANSION STRATEGY
The Company currently plans to open up to 75 new stores in fiscal 1998 and
plans to continue to grow in the following year. The Company may, in limited
instances and to the extent it deems advisable, seek to acquire additional
businesses which complement or enhance the Company's operations. The Company
currently has no commitments or understandings with respect to such business
opportunities.
The following table sets forth the number of stores in each state as of
April 6, 1998:
<TABLE>
<CAPTION>
# OF # OF # OF
STATE STORES STATE STORES STATE STORES
- ---------------------------- --------- ---------------------------- --------- ---------------------------- ---------
<S> <C> <C> <C> <C> <C>
Alabama..................... 1 Louisiana................... 5 Ohio........................ 7
Arizona..................... 11 Maine....................... 1 Oklahoma.................... 2
Arkansas.................... 1 Maryland.................... 6 Oregon...................... 1
California.................. 119 Massachusetts............... 10 Pennsylvania................ 10
Colorado.................... 8 Michigan.................... 12 Rhode Island................ 1
Connecticut................. 8 Minnesota................... 7 South Carolina.............. 1
Delaware.................... 1 Missouri.................... 2 Tennessee................... 2
Florida..................... 52 Nebraska.................... 1 Texas....................... 31
Georgia..................... 5 Nevada...................... 6 Utah........................ 3
Hawaii...................... 7 New Hampshire............... 1 Virginia.................... 4
Illinois.................... 18 New Jersey.................. 16 Washington.................. 4
Iowa........................ 1 New Mexico.................. 3 Wisconsin................... 5
Indiana..................... 3 New York.................... 19 Puerto Rico................. 2
Kentucky.................... 1 North Carolina.............. 3
</TABLE>
Management does not believe there are significant geographic constraints on
the locations of future stores. The Company's strategy is to enter a particular
geographic region with a base of two or three solid stores, and then continue
expansion in such geographic regions while simultaneously entering new markets
in a similar manner, thereby increasing the recognition of the Company's name.
When deciding whether to open a new store, the Company typically targets
regional malls as well as prime street locations in select
5
<PAGE>
markets. In making its selection, the Company evaluates, among other factors,
market area, demographics, "anchor stores," store location, the volume of
consumer traffic, rent payments and other costs associated with opening a new
store. The average store size the Company intends to consider is between 3,600
and 4,500 square feet. However, in making its decision, management reviews all
leases in order to match closely the store size to the sales potential of the
store.
The Company's ability to expand in the future will depend, in part, on
general business conditions, the demand for the Company's merchandise, the
ability to find suitable malls or other locations with acceptable sites on
satisfactory terms, and the continuance of satisfactory cash flows from existing
operations.
TRADEMARKS
The Company's primary trademarks and service marks are "WET SEAL," "CONTEMPO
CASUALS," "LIMBO LOUNGE" and "NEXT," which are registered in the U.S. Trademark
Office. The Company also uses and has registered, or has a pending registration,
on a number of marks, including "ACCOMPLICE," "BLUE ASPHALT," "CEMENT," "URBAN
VIBE," "EVOLUTION NOT REVOLUTION," "ARDEN B.," "MEOW GENES," "UNCIVILIZED" and
"URBAN LIFE." In general, the registrations for these trademarks and service
marks are renewable indefinitely as long as the Company continues to use the
marks as required by applicable trademark law. The Company is the owner of an
allowed and currently pending service mark application for the mark "SEAL PUPS."
The Company is not aware of any adverse claim or other infringement relating to
its trademarks or service marks.
COMPETITION
The young women's retail apparel industry is highly competitive, with
fashion, quality, price, location, in-store environment and service being the
principal competitive factors. The Company competes with specialty apparel
retailers, department stores and certain other apparel retailers, including The
Limited and The GAP, and on a regional basis, with such retailers as Charlotte
Russe, Gadzooks and Pacific Sunwear. Many competitors are large national chains
which have substantially greater financial, marketing and other resources than
the Company. While the Company believes it competes effectively for favorable
site locations and lease terms, competition for prime locations within a mall is
intense.
EMPLOYEES
As of January 31, 1998, the Company had 5,822 employees, consisting of 1,688
full-time employees and 4,134 part-time employees. Full-time personnel consisted
of 1,083 salaried and 605 hourly employees. All part-time personnel are hourly
employees. Of the total employees, 5,537 were sales personnel and 285 were
administrative and distribution center personnel. Personnel at all levels of
store operations are provided with cash incentives based upon various individual
store sales targets.
All of the Company's employees are non-union and, in management's opinion,
are paid competitively with current standards in the industry. The Company
considers its relationship with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located at 26972 Burbank, Foothill
Ranch, California, consisting of 283,200 square feet of leased office and
distribution facility space (including 74,500 square feet of merchandise
handling and storage mezzanine space in the distribution facility and 20,500
square feet of second floor office space). This lease expires on December 4,
2007. The Company's former distribution facility located in Los Angeles,
California was subleased beginning in fiscal 1998 for the remainder of the lease
term. The Los Angeles lease was acquired with the acquisition of Contempo
Casuals and expires on July 31, 2002.
6
<PAGE>
The Company leases all of its stores. Lease terms for the Company's stores
are typically 10 years in length and generally do not contain renewal options.
The leases generally provide for a fixed minimum rental and a rental based on a
percent of sales once a minimum sales level has been reached. As a lease
expires, the Company generally renews such lease at current market terms.
However, each renewal is based upon an analysis of the individual store's
profitability and sales potential.
The following table sets forth information with respect to store openings
and closings since fiscal 1993:
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------------
1997 1996 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
Stores open at beginning of year..................................... 364 364 133 129
Stores acquired during period(1)..................................... 0 0 237 0
Stores opened during period.......................................... 34 10 3 6
Stores closed during period.......................................... 9 10 9 2
--- --- --- ---
Stores open at end of period......................................... 389 364 364 133
--- --- --- ---
--- --- --- ---
<CAPTION>
1993
-----
<S> <C>
Stores open at beginning of year..................................... 125
Stores acquired during period(1)..................................... 0
Stores opened during period.......................................... 10
Stores closed during period.......................................... 6
---
Stores open at end of period......................................... 129
---
---
</TABLE>
- ------------------------
(1) Contempo Casuals was acquired on July 1, 1995.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Management
believes that, in the event of a settlement or an adverse judgment of any
pending litigation, the Company is adequately covered by insurance. As of April
6, 1998, the Company was not engaged in any legal proceedings which are
expected, individually or in the aggregate, to have a material adverse effect on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through solicitations of
proxies or otherwise.
7
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock ("Common Stock") is listed on The Nasdaq
National Market ("Nasdaq") under the symbol "WTSLA." As of April 6, 1998, there
were 286 shareholders of record of the Company's Class A Common Stock.
Additionally, the number of beneficial owners of the Company's Common Stock was
estimated to be in excess of 4,500. The closing price of the Common Stock on
April 6, 1998 was $37 1/8.
The following table reflects the high and low sales prices of the Company's
Common Stock as reported by Nasdaq for the last two fiscal years.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
<S> <C> <C> <C> <C>
-------------- ---------------
<CAPTION>
QUARTER HIGH LOW HIGH LOW
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
First Quarter..................................... $27 1/4 $18 $16 $ 7 1/16
Second Quarter.................................... 31 5/8 22 1/2 27 1/4 11 1/2
Third Quarter..................................... 27 1/4 17 3/8 41 7/8 23 7/8
Fourth Quarter.................................... 31 1/2 22 3/4 31 13 1/4
</TABLE>
The Company has reinvested earnings in the business and has never paid any
cash dividends to holders of the Company's Common Stock. The declaration and
payment of future dividends, which are subject to the terms and covenants
contained in the Company's bank line of credit, are at the sole discretion of
the Board of Directors and will depend upon the Company's profitability,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following table of certain selected data regarding the Company should be
read in conjunction with the financial statements and notes thereto and with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The data for the fiscal years ended January 28, 1995 and January
29, 1994 are derived from the Company's financial statements for such years
which are not included herein.
8
<PAGE>
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
FISCAL YEAR 1997 1996 1995 1994 1993
- ------------------------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29,
FISCAL YEAR ENDED 1998 1997 1996(1) 1995 1994
- ------------------------------- -------------- -------------- -------------- -------------- --------------
OPERATING RESULTS
Sales.......................... $ 412,463,000 $ 374,942,000 $ 266,695,000 $ 132,997,000 $ 140,129,000
Income (loss) before provision
(benefit) for income taxes... 36,325,000 26,217,000 9,948,000 (1,366,000) (3,966,000)
Net income (loss).............. $ 21,250,000 $ 15,252,000 $ 5,815,000 $ (1,013,000) $ (2,378,000)
PER SHARE DATA
Net income (loss), basic....... $ 1.57 $ 1.15 $ 0.47 $ (0.08) $ (0.19)
Net income (loss), diluted..... $ 1.53 $ 1.13 $ 0.47 $ (0.08) $ (0.19)
Weighted average shares
outstanding, basic........... 13,552,502 13,219,284 12,387,140 12,234,502 12,227,781
Weighted average shares
outstanding, diluted......... 13,899,877 13,459,810 12,500,564 12,234,502 12,227,781
OTHER FINANCIAL INFORMATION
Net income (loss) as a percent
of sales..................... 5.2% 4.1% 2.2% (0.8)% (1.7)%
Return on average stockholders'
equity....................... 20.8% 20.5% 10.7% (2.0)% (4.5)%
Cash and marketable
securities................... $ 95,873,000 $ 89,183,000 $ 57,153,000 $ 25,369,000 $ 18,331,000
Working capital................ $ 66,452,000 $ 59,791,000 $ 26,051,000 $ 22,473,000 $ 18,874,000
Ratio of current assets to
current liabilities.......... 2.1 2.1 1.5 2.8 2.7
Total assets................... $ 184,223,000 $ 154,752,000 $ 117,564,000 $ 67,298,000 $ 66,434,000
Long-term debt................. 1,264,000 3,264,000 5,264,000 -- --
Total stockholders' equity..... $ 112,994,000 $ 91,120,000 $ 57,735,000 $ 50,724,000 $ 51,729,000
Number of stores open at year
end.......................... 389 364 364 133 129
Number of stores acquired
during the year.............. -- -- 237 -- --
Number of stores opened during
the year..................... 34 10 3 6 10
Number of stores closed during
the year..................... 9 10 9 2 6
Square footage of leased store
space at year end............ 1,637,347 1,539,777 1,530,891 596,685 583,462
Percent of increase in leased
square footage............... 6.3% 0.6% 156.6% 2.3% 7.1%
Avg. sales per square foot of
leased space(2).............. $ 263 $ 244 $ 229 $ 226 $ 247
Average sales per store(2)..... $ 1,112,000 $ 1,030,000 $ 976,000 $ 1,008,000 $ 1,092,000
Comparable store sales increase
(decrease)(3)................ 5.8% 8.8% (4.1)% (9.2)% (14.2)%
</TABLE>
- --------------------------
(1) The Company's fiscal 1995 data include the results of operations of Contempo
Casuals since July 1, 1995. Fiscal 1995 consisted of 53 weeks.
(2) In fiscal 1995, the 53rd week of sales was excluded from "Sales" for
purposes of calculating "Average sales per square foot" and "Average sales
per store" in order to make fiscal 1995 comparable to prior years.
(3) In fiscal 1996, "Comparable store sales" were calculated by excluding sales
during the first week of fiscal 1995 in order to make fiscal 1995 comparable
to fiscal 1996. In fiscal 1995, "Comparable store sales" were calculated by
adding the first week of fiscal 1995 to fiscal 1994 sales in order to make
fiscal 1994 comparable to fiscal 1995. Comparable store sales are defined as
sales in stores that were open throughout the full fiscal year and
throughout the full prior fiscal year.
9
<PAGE>
ITEM 7. 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 401 retail
stores in 40 states and Puerto Rico under the names "Wet Seal", "Contempo
Casuals", "Limbo Lounge" and "Next". The Company sells moderately priced,
fashionable, casual apparel and accessory items designed for consumers with a
young, active lifestyle.
On July 1, 1995, the Company acquired Contempo Casuals. 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 and reduced the percentage
of total stores the Company operates in California from more than 50% to
approximately 35%.
In connection with the acquisition of Contempo Casuals, the Company
established an accrual for combination costs which consisted of management's
estimates for the costs of closing and/or combining certain Contempo Casuals
facilities and operations into Wet Seal's, as well as the costs of integrating
management information and security systems. At February 1, 1997, the accrual
totaled $5,569,000. As of January 31, 1998, the Company has substantially
completed the combination of facilities and the acquisition of necessary
management information systems to fully integrate Contempo Casuals' operations
into Wet Seal's. Management estimates that the accrued combination costs
remaining at January 31, 1998 totaling $1,645,000 will be fully utilized by
mid-1998, at which time the Company's in-store security systems will be
integrated.
The Company's return to profitability in fiscal 1995 as well as its improved
profitability in fiscal 1996 and fiscal 1997 was directly related to the
acquisition of Contempo Casuals. Acquiring Contempo Casuals enabled the Company
to significantly reduce fixed expenses as a percentage of sales through the
consolidation and integration of the two companies' management teams, corporate
offices and distribution centers. This process was substantially completed at
the time of the acquisition. At the same time, the acquisition allowed the
Company to reduce the average depreciation per store due to the favorable
acquisition price. As a result of the acquisition of Contempo Casuals and the
Company's strong balance sheet, the Company believes it is well-positioned to
capitalize on the growth in the teenage population and the expected continuing
changes in the competitive environment of the retailing industry.
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 thereto.
RESULTS OF OPERATIONS
The following discussion and analysis of results of operations includes a
comparison of the results of operations for fiscal 1996, which contained the
full year results for both Wet Seal stores and Contempo Casuals stores, to
fiscal 1995, which contained the full year results of the Wet Seal stores and
the seven month results of the Contempo Casuals stores which were acquired on
July 1, 1995. Therefore, the results of operations for fiscal 1995 are not
directly comparable to those of fiscal 1996.
Comparable store sales are defined as sales in stores that were open
throughout the full fiscal year and throughout the full prior fiscal year. In
the last seven months of fiscal 1995, comparable store sales included sales
results of Contempo Casuals stores as compared to sales results of Contempo
Casuals stores in the corresponding period in the prior year during which time
Contempo Casuals was under different ownership.
10
<PAGE>
The following table sets forth selected income statement data of the Company
expressed as a percent of sales for the years indicated:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
FISCAL YEAR ENDED
-------------------------------------------
<S> <C> <C> <C>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------
Sales (including frequent buyer sales income).............................. 100.0% 100.0% 100.0%
Cost of sales (including buying, distribution and occupancy costs)......... 71.0 72.6 75.2
----- ----- -----
Gross margin............................................................... 29.0 27.4 24.8
Selling, general and administrative expenses............................... 21.1 21.1 21.6
----- ----- -----
Operating income........................................................... 7.9 6.3 3.2
Interest income, net....................................................... (0.9) (0.7) (0.5)
----- ----- -----
Income before provision for income taxes................................... 8.8 7.0 3.7
Provision for income taxes................................................. 3.6 2.9 1.5
----- ----- -----
Net income................................................................. 5.2% 4.1% 2.2%
----- ----- -----
----- ----- -----
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Sales in fiscal 1997 (52 weeks) were $412,463,000 compared to sales in
fiscal 1996 (52 weeks) of $374,942,000, an increase of $37,521,000 or 10%. The
dollar increase in sales in fiscal 1997 compared to fiscal 1996 was primarily
due to the increase in the comparable store sales and the increase in frequent
buyer sales income in fiscal 1997 compared to fiscal 1996. The Company
attributes the increase in comparable store sales of 5.8% to the continued
resurgence of fashion that began in fiscal 1996. The increase in sales was also
due to a slightly lesser extent to the impact of the 34 new store openings in
fiscal 1997 and the full year impact in 1997 of the 10 new store openings in
fiscal 1996. These increases were somewhat offset by the closing of nine stores
in fiscal 1997.
Cost of sales, including buying, distribution and occupancy costs, was
$292,644,000 in fiscal 1997 compared to $272,189,000 in fiscal 1996, an increase
of $20,455,000 or 7.5%. As a percentage of sales, cost of sales decreased to
71.0% in fiscal 1997, from 72.6% in fiscal 1996, a decrease of 1.6%. The dollar
increase in cost of sales in fiscal 1997 compared to fiscal 1996 was due
primarily to the increase in sales. Of the 1.6% decrease in cost of sales as a
percentage of sales, 1.0% related to a decrease in occupancy costs, 0.4% related
to a decrease in the cost of merchandise and 0.3% related to a decrease in
distribution costs, offset by a 0.1% increase in buying costs. The decrease in
occupancy costs was associated primarily with a decrease in store rental
expenses as a percent of sales as a result of the expense leverage related to
the increase in comparable store sales. The decrease of 0.4% in merchandise cost
was due to an increase in the initial markup rates related to a decrease in the
cost of merchandise. The 0.3% decrease in distribution costs was related to a
decrease in depreciation due to the impact of fully depreciated assets in the
current year and to cost efficiencies related to processing the merchandise.
These decreases were offset by a 0.1% increase in buying costs which was
associated with payroll and personnel increases during the year to support the
larger operations.
Selling, general and administrative expenses were $86,999,000 in fiscal 1997
compared to $79,238,000 in fiscal 1996, an increase of $7,761,000 or 9.8%. As a
percentage of sales, selling, general and administrative expenses remained the
same at 21.1% in fiscal 1997 as compared to fiscal 1996. The dollar increase in
selling, general and administrative expenses in fiscal 1997 compared to fiscal
1996 was primarily due to the increase in sales and an increase in management
expenses related to bonuses and retirement plans, offset by a decrease in office
depreciation related to the impact of fully-depreciated assets, proceeds related
to an insurance reimbursement and a decrease in non-payroll related selling
expenses as a result of the economies of scale associated with the increase in
comparable store sales.
11
<PAGE>
Interest income, net, was $3,505,000 in fiscal 1997 compared to $2,702,000
in fiscal 1996, an increase of $803,000. This increase was due primarily to an
increase in the average cash balance invested.
Income tax expense was $15,075,000 in fiscal 1997 compared to $10,965,000 in
fiscal 1996. The effective income tax rate in fiscal 1997 was 41.5% compared to
a rate of 41.8% in fiscal 1996.
Based on the factors noted above, net income was $21,250,000 in fiscal 1997
compared to $15,252,000 in fiscal 1996, an increase of $5,998,000 or 39.3%. As a
percentage of sales, net income was 5.2% in fiscal 1997 compared to 4.1% in
fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Sales in fiscal 1996 (52 weeks) were $374,942,000 compared to sales in
fiscal 1995 (53 weeks) of $266,695,000, an increase of $108,247,000 or 40.6%.
The dollar increase in sales in fiscal 1996 compared to fiscal 1995 was
primarily due to the acquisition of Contempo Casuals and, to a lesser extent, to
the increase in the comparable store sales in fiscal 1996 compared to fiscal
1995. The Company attributes the increase in comparable store sales of 8.8% to
the resurgence of fashion at the beginning of fiscal 1996. Further contributing
to the sales increases were the opening of 10 new stores in fiscal 1996 offset
to some extent by the closing of 10 stores as well as the fact that fiscal 1996
had one less week of sales than fiscal 1995.
Cost of sales, including buying, distribution and occupancy costs, was
$272,189,000 in fiscal 1996 compared to $200,626,000 in fiscal 1995, an increase
of $71,563,000 or 35.7%. As a percentage of sales, cost of sales decreased from
75.2% in fiscal 1995 to 72.6% in fiscal 1996, a decrease of 2.6%. The dollar
increase in cost of sales in fiscal 1996 compared to fiscal 1995 was due
primarily to the increase in the number of stores as a result of the acquisition
of Contempo Casuals. Of the 2.6% decrease in cost of sales as a percentage of
sales, 1.8% related to a decrease in occupancy and buying costs and 0.8% related
to a decrease in the cost of merchandise. The decrease in occupancy costs was
associated primarily with a decrease in depreciation resulting from the lower
net book value per store of the depreciable assets of Contempo Casuals, as
compared to Wet Seal. The decrease of 0.8% in merchandise cost was due to an
increase in the initial markup rates.
Selling, general and administrative expenses were $79,238,000 in fiscal 1996
compared to $57,531,000 in fiscal 1995, an increase of $21,707,000 or 37.7%. As
a percentage of sales, selling, general and administrative expenses decreased
from 21.6% in fiscal 1995 to 21.1% in fiscal 1996, a decrease of .5%. The dollar
increase in selling, general and administrative expenses in fiscal 1996 compared
to fiscal 1995 was primarily due to the increase in the number of stores as a
result of the acquisition of Contempo Casuals. The decrease as a percentage of
sales was related to the economies of scale the Company achieved primarily as a
result of the increase in comparable store sales in fiscal 1996.
Interest income, net, was $2,702,000 in fiscal 1996 compared to $1,410,000
in fiscal 1995, an increase of $1,292,000. This increase was due primarily to an
increase in the average cash balance invested.
Income tax expense was $10,965,000 in fiscal 1996 compared to $4,133,000 in
fiscal 1995. The effective income tax rate in fiscal 1996 was 41.8% compared to
a rate of 41.5% in fiscal 1995.
Based on the factors noted above, net income was $15,252,000 in fiscal 1996
compared to $5,815,000 in fiscal 1995, an increase of 162%. As a percentage of
sales, net income was 4.1% in fiscal 1996 compared to 2.2% in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at the end of fiscal 1997, 1996 and 1995 was $66,452,000,
$59,791,000 and $26,051,000, respectively. Net cash provided by operating
activities in fiscal 1997, 1996 and 1995 was $31,948,000, $28,187,000 and
$25,308,000, respectively. The increase in cash provided by operating activities
in fiscal 1997 was due to the increase in earnings. Further contributing to the
increase was the increase in accounts
12
<PAGE>
payable and accrued liabilities offset to some extent by the increase in
inventory. The increase in accounts payable was attributable to the increase in
payables associated with capital expenditures as well as to the timing of
inventory receipts. The increase in inventory over the prior year was related to
the increase in the number of stores as well as to inventory held for the new
catalog operations at the end of fiscal 1997. The increase in cash provided by
operating activities in fiscal 1996 was due primarily to the increase in net
earnings. Further contributing to the increase was the increase in accounts
payable offset to some extent by the related increase in inventory as well as
the increase in deferred taxes. The increase in accounts payable was related to
the timing of inventory receipts. The increase in inventory was planned in order
to bring the inventories to an appropriate level to support planned sales. The
increase in deferred taxes was related primarily to the difference between book
and tax depreciation.
Additions to property and equipment are the Company's most significant
investment activities. In fiscal 1997, 1996 and 1995 the Company invested
$22,973,000, $8,620,000 and $2,585,000, respectively, in property and equipment
and leasehold improvements. These expenditures related primarily to new store
openings and remodelings. In fiscal 1997, the Company constructed a new office
and distribution facility. Primarily as a result of the Company's expanded
operations, capital expenditures for fiscal 1998 are currently estimated to be
$35,000,000.
On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as
part of a public offering pursuant to a registration statement on Form S-3. The
net proceeds to the Company from the sale of shares were $14,459,000.
The Company has an unsecured revolving line of credit arrangement with Bank
of America National Trust and Savings Association ("Bank of America") in an
aggregate principal amount of $30,000,000 and a five year amortizing term loan
with Bank of America in the amount of $10,000,000, maturing on July 1, 2000. At
January 31, 1998, there were no outstanding borrowings under the credit
arrangement, and the Company believes it was in compliance with all terms and
covenants of the credit arrangement and the term loan. The Company invests its
excess funds primarily in 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 INFLATION
The Company's business is seasonal by nature with the Christmas season
(beginning the week of Thanksgiving and ending the first Saturday after
Christmas) and the back-to-school season (beginning the last week of July and
ending the first week of September) historically accounting for the largest
percentage of sales volume. In the Company's three fiscal years ended January
31, 1998, the Christmas and back-to-school seasons together accounted for an
average of approximately 33% of the Company's annual sales, after adjusting for
sales increases related to new stores. The Company does not believe that
inflation has had a material effect on the results of operations during the past
three years. However, there can be no assurance that the Company's business will
not be affected by inflation in the future.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The preceding "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections 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, 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
13
<PAGE>
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting
Comprehensive Income" which is effective for annual and interim periods
beginning after December 15, 1997. This statement requires that all items that
are to be recognized under accounting standards as comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which is effective for fiscal years
beginning after December 15, 1997. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous statements.
YEAR 2000 COMPLIANCE
During fiscal 1998 and fiscal 1999, the Company plans to convert
substantially all of its computer systems and hardware. Prior to the purchase of
the new systems and hardware the Company obtained or is in the process of
obtaining assurance from the vendors that the products purchased are in fact
Year 2000 compliant. The Company will also complete an independent review of
such systems to further verify Year 2000 compliance. The Company has performed a
preliminary review of its existing computer systems and hardware to identify
processes which may be affected by Year 2000 problems. At this time, no
significant issues have been identified, however the Company will complete a
more thorough review of its existing systems by mid-1998 in order to ensure an
adequate plan exists for Year 2000 compliance in the event the conversions fall
behind schedule.
During fiscal 1998 and fiscal 1999, the Company will also complete a Year
2000 review of its relationships with suppliers and financial institutions and
obtain assurance, where necessary, that these entities are Year 2000 compliant.
Because the majority of the Company's computer systems and hardware have been
purchased or developed recently and were designed to be Year 2000 compliant, the
Company does not expect to incur significant costs in addressing the Year 2000
issue.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Filed under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the information called for by Part III (Items 10 through 13) is
incorporated by reference from the Company's definitive Proxy Statement in
connection with its Annual Meeting of Stockholders to be held June 9, 1998,
filed pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements See "Index to Financial Statements and Financial
Statement Schedules".
2. Financial Statement Schedules See "Index to Financial Statements and
Financial Statement Schedules".
3. Exhibits See "Exhibit Index".
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended January 31, 1998.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
THE WET SEAL, INC. (REGISTRANT)
<S> <C> <C>
By: -----------------------------------------
Kathy Bronstein
VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By: -----------------------------------------
Edmond Thomas
PRESIDENT AND CHIEF OPERATING OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Director April 22, 1998
George H. Benter Jr.
- ------------------------------ Vice Chairman and Chief April 22, 1998
Kathy Bronstein Executive Officer and
Director (Principal
Executive Officer)
- ------------------------------ Secretary and Director April 22, 1998
Stephen Gross
- ------------------------------ Vice President of Finance April 22, 1998
Ann Cadier Kim and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
- ------------------------------ Director April 22, 1998
Walter F. Loeb
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Director April 22, 1998
Wilfred Posluns
- ------------------------------ Director April 22, 1998
Gerald Randolph
- ------------------------------ Director April 22, 1998
Alan Siegel
- ------------------------------ Chairman of the Board and April 22, 1998
Irving Teitelbaum Director
- ------------------------------ President and Chief April 22, 1998
Edmond Thomas Operating Officer and
Director
</TABLE>
17
<PAGE>
THE WET SEAL, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT AUDITORS' REPORT:
Report of Deloitte & Touche LLP............................................................................ 19
FINANCIAL STATEMENTS:
Balance sheets as of January 31, 1998 and February 1, 1997................................................. 20
Statements of operations for the years ended January 31, 1998, February 1, 1997 and February 3, 1996....... 21
Statements of stockholders' equity for the years ended January 31, 1998, February 1, 1997 and February 3,
1996..................................................................................................... 22
Statements of cash flows for the years ended January 31, 1998, February 1, 1997 and February 3, 1996....... 23
Notes to financial statements.............................................................................. 24
FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted as they are not required, or the required information is shown in the financial
statements or the notes thereto.
</TABLE>
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Wet Seal, Inc.:
We have audited the accompanying balance sheets of The Wet Seal, Inc. as of
January 31, 1998 and February 1, 1997 and the related statements of operations,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended January 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Wet Seal, Inc. as of
January 31, 1998 and February 1, 1997 and the results of its operations and its
cash flows for each of the three fiscal years in the period ended January 31,
1998, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 13, 1998
Costa Mesa, California
19
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents (Note 1).................................................... $76,056,000 $71,483,000
Short-term investments (Note 1)....................................................... 19,817,000 17,700,000
Other receivables..................................................................... 3,209,000 1,577,000
Merchandise inventories............................................................... 26,884,000 22,589,000
Prepaid expenses (Note 1)............................................................. 330,000 --
Deferred tax charges (Note 3)......................................................... 1,137,000 693,000
----------- -----------
Total current assets................................................................ 127,433,000 114,042,000
----------- -----------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements................................................................ 65,465,000 55,429,000
Furniture, fixtures and equipment..................................................... 24,965,000 21,742,000
Leasehold rights...................................................................... 3,692,000 3,342,000
Construction in progress.............................................................. 2,000 2,000
----------- -----------
94,124,000 80,515,000
Less accumulated depreciation......................................................... (49,171,000) (47,285,000)
----------- -----------
Net equipment and leasehold improvements............................................ 44,953,000 33,230,000
----------- -----------
LONG-TERM INVESTMENTS (Note 1)........................................................ 499,000 --
OTHER ASSETS:
Deferred tax charges and other assets (Notes 3 and 12)................................ 10,817,000 6,914,000
Goodwill, net of accumulated amortization of $611,000 and $566,000 as of January 31,
1998 and February 1, 1997, respectively............................................. 521,000 566,000
----------- -----------
Total other assets.................................................................. 11,338,000 7,480,000
----------- -----------
$184,223,000 $154,752,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $35,858,000 $26,035,000
Accrued liabilities (Note 11)......................................................... 20,570,000 24,064,000
Income taxes payable (Note 3)......................................................... 2,553,000 2,152,000
Current portion of long-term debt (Note 8)............................................ 2,000,000 2,000,000
----------- -----------
Total current liabilities........................................................... 60,981,000 54,251,000
----------- -----------
LONG-TERM LIABILITIES:
Long-term debt (Note 8)............................................................... 1,264,000 3,264,000
Deferred rent......................................................................... 6,254,000 6,117,000
Other long-term liabilities (Note 12)................................................. 2,730,000 --
----------- -----------
Total long-term liabilities......................................................... 10,248,000 9,381,000
----------- -----------
Total liabilities................................................................... 71,229,000 63,632,000
----------- -----------
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY: (Notes 4 and 5)
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; 10,656,578 and
10,628,874 shares issued and outstanding at January 31, 1998 and February 1, 1997,
respectively........................................................................ 1,066,000 1,063,000
Common Stock, Class B Convertible, $.10 par value, authorized 10,000,000 shares;
2,912,665 shares issued and outstanding at January 31, 1998 and February 1, 1997.... 291,000 291,000
Paid-in capital....................................................................... 57,217,000 56,596,000
Retained earnings..................................................................... 54,420,000 33,170,000
----------- -----------
Total Stockholders' Equity.......................................................... 112,994,000 91,120,000
----------- -----------
$184,223,000 $154,752,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
SALES........................................................... $ 412,463,000 $ 374,942,000 $ 266,695,000
COST OF SALES (including buying, distribution and occupancy
costs)........................................................ 292,644,000 272,189,000 200,626,000
-------------- -------------- --------------
GROSS MARGIN.................................................... 119,819,000 102,753,000 66,069,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 9)........... 86,999,000 79,238,000 57,531,000
-------------- -------------- --------------
OPERATING INCOME................................................ 32,820,000 23,515,000 8,538,000
INTEREST INCOME, NET (Note 8)................................... (3,505,000) (2,702,000) (1,410,000)
-------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................ 36,325,000 26,217,000 9,948,000
PROVISION FOR INCOME TAXES (Note 3)............................. 15,075,000 10,965,000 4,133,000
-------------- -------------- --------------
NET INCOME...................................................... $ 21,250,000 $ 15,252,000 $ 5,815,000
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME PER SHARE, BASIC (Note 13)........................... $ 1.57 $ 1.15 $ 0.47
NET INCOME PER SHARE, DILUTED (Note 13)......................... $ 1.53 $ 1.13 $ 0.47
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC (Note 1)............. 13,552,502 13,219,284 12,387,140
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED (Note 1)........... 13,899,877 13,459,810 12,500,564
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A CLASS B
---------------------- ---------------------
<CAPTION>
TOTAL
PAID-IN RETAINED STOCKHOLDERS'
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS EQUITY
---------- ---------- ---------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 29, 1995................ 4,328,937 $ 433,000 7,907,665 $791,000 $37,397,000 $12,103,000 $ 50,724,000
Stock issued pursuant to long-term
incentive plan (Note 5).................. 1,453 -- -- -- 11,000 -- 11,000
Exercise of stock options.................. 2,000 -- -- -- 7,000 -- 7,000
Conversion of Class B Common Stock to Class
A Common Stock (Note 4).................. 1,100,000 110,000 (1,100,000) (110,000 ) -- -- --
Issuance of Class A Common Stock pursuant
to acquisition of Contempo Casuals (Notes
2 and 4)................................. 254,676 25,000 -- -- 1,153,000 -- 1,178,000
Net income................................. -- -- -- -- -- 5,815,000 5,815,000
---------- ---------- ---------- --------- ----------- ----------- -------------
Balance at February 3, 1996................ 5,687,066 568,000 6,807,665 681,000 38,568,000 17,918,000 57,735,000
Issuance of Class A Common Stock pursuant
to Public Offering
(Note 4)................................. 765,000 76,000 -- -- 14,383,000 -- 14,459,000
Stock issued pursuant to long-term
incentive plan (Note 5).................. 5,308 1,000 -- -- 106,000 -- 107,000
Exercise of stock options (Note 5)......... 276,500 28,000 -- -- 1,712,000 -- 1,740,000
Tax benefit related to exercise of stock
options (Note 5)......................... -- -- -- -- 1,827,000 -- 1,827,000
Conversion of Class B Common Stock to Class
A Common Stock (Note 4).................. 3,895,000 390,000 (3,895,000) (390,000 ) -- -- --
Net income................................. -- -- -- -- -- 15,252,000 15,252,000
---------- ---------- ---------- --------- ----------- ----------- -------------
Balance at February 1, 1997................ 10,628,874 1,063,000 2,912,665 291,000 56,596,000 33,170,000 91,120,000
Stock issued pursuant to long-term
incentive plan (Note 5) 8,704 1,000 -- -- 265,000 -- 266,000
Exercise of stock options (Note 5)......... 19,000 2,000 -- -- 212,000 -- 214,000
Tax benefit related to exercise of stock
options (Note 5)......................... -- -- -- -- 144,000 -- 144,000
Net income................................. -- -- -- -- -- 21,250,000 21,250,000
---------- ---------- ---------- --------- ----------- ----------- -------------
Balance at January 31, 1998................ 10,656,578 $1,066,000 2,912,665 $291,000 $57,217,000 $54,420,000 $112,994,000
---------- ---------- ---------- --------- ----------- ----------- -------------
---------- ---------- ---------- --------- ----------- ----------- -------------
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $21,250,000 $15,252,000 $5,815,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 11,295,000 11,848,000 10,384,000
Loss on disposal of equipment and leasehold improvements............... -- 153,000 14,000
Stock issued pursuant to long-term incentive plan...................... 266,000 107,000 11,000
Deferred tax, net...................................................... (2,189,000) (3,084,000) (2,155,000)
Changes in operating assets and liabilities, net of effect of
acquisition:
Other receivables.................................................... (1,632,000) (1,054,000) 41,000
Tax refund receivable................................................ -- -- 59,000
Merchandise inventories.............................................. (4,295,000) (6,348,000) 2,436,000
Prepaid expenses..................................................... (330,000) 428,000 1,093,000
Other assets......................................................... (118,000) 38,000 (69,000)
Accounts payable and accrued liabilities............................. 6,329,000 9,276,000 3,529,000
Income taxes payable................................................. 545,000 625,000 3,117,000
Deferred rent........................................................ 137,000 946,000 1,033,000
Other long-term liabilities.......................................... 690,000 -- --
----------- ------------ ------------
Net cash provided by operating activities.............................. 31,948,000 28,187,000 25,308,000
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements....................... (22,973,000) (8,620,000) (2,585,000)
Investment in marketable securities...................................... (42,320,000) (17,700,000) --
Cash paid for acquisition, less cash acquired............................ -- -- (20,000)
Proceeds from sale of equipment and leasehold improvements............... -- -- 74,000
Proceeds from sale of marketable securities.............................. 39,704,000 -- --
----------- ------------ ------------
Net cash (used in) investing activities.................................. (25,589,000) (26,320,000) (2,531,000)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................................. -- -- 10,000,000
Principal payments on long-term debt..................................... (2,000,000) (3,736,000) (1,000,000)
Proceeds from issuance of common stock................................... 214,000 16,199,000 7,000
----------- ------------ ------------
Net cash (used in) provided by financing activities...................... (1,786,000) 12,463,000 9,007,000
----------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 4,573,000 14,330,000 31,784,000
CASH AND CASH EQUIVALENTS, beginning of year............................. 71,483,000 57,153,000 25,369,000
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year................................... $76,056,000 $71,483,000 $57,153,000
----------- ------------ ------------
----------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................................... $ 337,000 $ 538,000 $ 498,000
Income taxes, net...................................................... 16,720,000 13,424,000 2,829,000
SCHEDULE OF NONCASH TRANSACTIONS:
The Company acquired the assets of Contempo Casuals during the year ended
February 3, 1996. In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired............................................ -- -- $29,592,000
Cash paid to seller and transaction costs................................ -- -- 750,000
Common stock issued...................................................... -- -- 1,178,000
------------
Liabilities assumed.................................................... -- -- $27,664,000
</TABLE>
In connection with the acquisition, the Company recorded a net deferred tax
liability of $433,000.
During the fifty-two weeks ended January 31, 1998 and February 1, 1997, the
Company recorded an increase to paid-in capital of $144,000 and $1,827,000,
respectively, related to tax benefits associated with the exercise of
non-qualified stock options.
During the fifty-two weeks ended February 1, 1997, the Company reduced
certain estimated liabilities assumed in connection with the acquisition of
Contempo Casuals. As a result, a reduction in accounts payable of $1,481,000 was
recorded with a corresponding reduction in fixed assets. During the fifty-three
weeks ended February 3, 1996, the Company acquired the assets of Contempo
Casuals for common stock valued at $1,178,000.
See accompanying notes to financial statements.
23
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
The Wet Seal, Inc. (the Company) is a nationwide specialty retailer of
moderately priced, fashionable, casual apparel and accessory items designed for
consumers with a young, active lifestyle. On July 1, 1995, the Company acquired
Contempo Casuals, Inc., a 237-store retail junior women's chain. This
acquisition substantially increased the Company's size. The Company's success is
largely dependent upon its ability to gauge the fashion tastes of its customers
and to provide merchandise that satisfies customer demand. The Company's failure
to anticipate, identify or to react to changes in fashion trends could adversely
affect the Company. Approximately 30% of the voting stock of the Company is held
by a group of companies directly or indirectly controlled by two directors of
the Company, one of which is the Chairman of the Board. Effective February 2,
1997, Contempo Casuals, Inc. was merged with and into The Wet Seal, Inc. forming
one legal entity.
The Company's fiscal year ends on the Saturday closest to the end of
January. In fiscal 1995, the reporting period included 53 weeks as compared to
52 weeks in each of fiscal years 1996 and 1997.
INVESTMENTS
Short-term investments consist of highly liquid interest bearing deposits
purchased with an initial maturity exceeding three months with a remaining
maturity at January 31, 1998 less than twelve months. Long-term investments
consist of highly liquid interest bearing securities which mature beyond twelve
months from the balance sheet date. It is management's intent to hold short-term
and long-term investments to maturity. Short-term and long-term investments are
carried at amortized cost plus accrued income, which approximates market at
January 31, 1998.
Investments are comprised of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION MATURITY DATES COST GAINS LOSSES FAIR VALUE
- ------------------------------------- ------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
JANUARY 31, 1998
Commercial paper..................... Within one year $ 14,905,000 $ -- $ -- $ 14,905,000
Corporate bonds...................... Within one year 1,372,000 1,000 -- 1,373,000
Municipal bonds...................... Within one year 3,540,000 -- 7,000 3,533,000
Corporate bonds...................... One to two years 499,000 1,000 -- 500,000
------------- ----------- ----------- -------------
$ 20,316,000 $ 2,000 $ 7,000 $ 20,311,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
FEBRUARY 1, 1997
Commercial paper..................... Within one year $ 17,700,000 $ -- $ -- $ 17,700,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (first-in,
first-out) or market. Cost is determined using the retail inventory method.
24
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Expenditures for
betterment or improvement are capitalized, while expenditures for repairs that
do not significantly increase the life of the asset are expensed as incurred.
Depreciation is provided using primarily the straight-line method over the
estimated useful lives of the assets. Furniture, fixtures and equipment are
typically depreciated over 3 to 5 years. Leasehold improvements and the cost of
acquiring leasehold rights are depreciated over the lesser of the term of the
lease or 10 years.
LONG-LIVED ASSETS
The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS No. 121"). In accordance with SFAS No. 121, long-lived
assets to be held are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. At January 31, 1998,
the Company believes there has been no impairment of the value of such assets.
INTANGIBLE ASSET
Excess of cost over net assets acquired (goodwill) is being amortized on the
straight-line method over 25 years. The goodwill was established in fiscal 1984.
The Company assesses the recoverability of goodwill at each balance sheet date
by determining whether the amortization of the balance over its remaining useful
life can be recovered through projected undiscounted future operating cash
flows.
RENTAL EXPENSE
Any defined rental escalations are averaged over the term of the related
lease in order to provide level recognition of rental expense.
STORE PRE-OPENING COSTS
Store opening and pre-opening costs are charged to expense as they are
incurred.
ADVERTISING COSTS
Costs for advertising related to retail operations are expensed as incurred.
Direct response advertising costs consisting primarily of catalog book
production and printing costs are capitalized and amortized over the expected
life of the catalog, not to exceed 6 months. Direct response advertising costs
reported as prepaid assets are $330,000 at January 31, 1998. Total advertising
expenses in fiscal 1997, 1996 and 1995 were $1,676,000, $1,728,000 and
$1,391,000, respectively.
INCOME TAX
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Deferred tax charges are provided
25
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on items, principally depreciation and rent, for which there are temporary
differences in recording such items for financial reporting purposes and for
income tax purposes.
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") beginning with the Company's fourth
quarter of fiscal 1997. All prior period earnings per common share data have
been restated to conform to the provisions of this statement. Net income per
share, basic, is computed based on the weighted average number of common shares
outstanding for the period. Net income per share, diluted, is computed based on
the weighted average number of common and potentially dilutive common equivalent
shares outstanding for the period. (See Note 13.)
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid interest-earning deposits purchased with an initial maturity of
three months or less to be cash equivalents. At January 31, 1998 and February 1,
1997, cash equivalents totaled $72,212,000 and $69,611,000, respectively,
bearing interest at rates ranging from approximately 5.4% to 5.6% at January 31,
1998 and from approximately 5.1% to 5.4% at February 1, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" which is effective for annual and
interim periods beginning after December 15, 1997. This statement requires that
all items that are to be recognized under accounting standards as comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which is effective for fiscal years
beginning after December 15, 1997. This statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes the carrying amounts of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to the short
maturity of these financial instruments. Long-
26
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
term debt bears a variable rate of interest; therefore, management believes the
carrying amount for the outstanding borrowings at January 31, 1998 and February
1, 1997 approximate fair value.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." (See Note 5.)
NOTE 2: ACQUISITION
On July 1, 1995, the Company acquired the business, assets and properties of
Contempo Casuals, Inc., a 237-store retail junior women's chain with stores in
34 states and Puerto Rico. The purchase price consisted of (a) the issuance of
254,676 shares of the Company's Class A Common Stock which had a value of
$1,178,000 on the date of the acquisition, and (b) $100,000 in cash. The
transaction was accounted for under the purchase method. In connection with the
acquisition, the Company assumed certain liabilities which were estimated by the
seller. The total amount of these assumed liabilities may not, in fact, be paid
as the actual payments will be based on the future claims and losses which are
actually submitted and which are related to pre-acquisition events. (See Note
11.)
During the fifty-two weeks ended February 1, 1997, the Company reduced
certain estimated liabilities assumed in connection with the acquisition of
Contempo Casuals. As a result, a reduction in accounts payable of $1,481,000 was
recorded with a corresponding reduction in fixed assets.
NOTE 3: PROVISION FOR INCOME TAXES
SFAS No. 109 requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of deferred items is based
on enacted tax laws. In the event that the future consequences of differences
between financial reporting bases and the tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation
of the probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
27
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 3: PROVISION FOR INCOME TAXES (CONTINUED)
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CURRENT:
Federal............................................................. $ 12,886,000 $ 10,674,000 $ 5,170,000
State............................................................... 4,378,000 3,375,000 1,127,000
------------- ------------- -------------
17,264,000 14,049,000 6,297,000
------------- ------------- -------------
DEFERRED:
Federal............................................................. (1,535,000) (2,569,000) (1,926,000)
State............................................................... (654,000) (515,000) (238,000)
------------- ------------- -------------
(2,189,000) (3,084,000) (2,164,000)
------------- ------------- -------------
$ 15,075,000 $ 10,965,000 $ 4,133,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
A reconciliation of the income tax provision to the amount of the provision
that would result from applying the federal statutory rate (35%) to income
before taxes is as follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Provision for income taxes at federal statutory rate....................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit...................... 7.2 7.1 6.5
Tax exempt interest........................................................ (2.0) (0.5) --
Change in valuation allowance.............................................. -- -- (1.1)
Other...................................................................... 1.3 0.2 1.1
--- --- ---
Effective tax rate......................................................... 41.5% 41.8% 41.5%
--- --- ---
--- --- ---
</TABLE>
As of January 31, 1998 and February 1, 1997, the Company's net deferred tax
asset was $9,585,000 and $7,396,000 respectively. The major components of the
Company's net deferred taxes at January 31, 1998 and February 1, 1997 are as
follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
------------ ------------
<S> <C> <C>
Deferred rent......................................................................... $ 2,782,000 $ 2,706,000
Acquisition related reserves.......................................................... 650,000 2,508,000
Inventory cost capitalization......................................................... 808,000 653,000
Difference between book and tax basis of fixed assets................................. 4,643,000 1,445,000
State income taxes.................................................................... (136,000) (63,000)
Other................................................................................. 838,000 147,000
------------ ------------
$ 9,585,000 $ 7,396,000
------------ ------------
------------ ------------
</TABLE>
28
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 4: STOCKHOLDERS' EQUITY
The 2,912,665 shares of the Company's Class B Common Stock outstanding as of
February 1, 1997 are convertible on a share-for-share basis into shares of the
Company's Class A Common Stock at the option of the holder. The Class B Common
Stock has two votes per share while the Class A Common Stock has one vote per
share.
During the year ended February 1, 1997, major stockholders converted
3,895,000 shares of Class B Common Stock to Class A Common Stock. These shares
were sold to the public through registration statements on Form S-3. The Company
did not receive any proceeds from these transactions.
On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as a
part of a public offering pursuant to a registration statement on Form S-3. The
net proceeds to the Company from the sale of shares were $14,459,000.
During the year ended February 3, 1996, a major stockholder converted
1,100,000 shares of Class B Common Stock to Class A Common Stock. These shares
were then sold to the public through a registration statement on Form S-3. The
Company did not receive any proceeds from this transaction.
On July 1, 1995, 254,676 shares of the Company's Class A Common Stock were
issued pursuant to the acquisition of Contempo Casuals, Inc. (See Note 2.)
NOTE 5: LONG-TERM INCENTIVE PLAN
Under the Company's long-term incentive plans (the "plans"), the Company may
grant stock options which are either incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options. The plans provide that the per share exercise price
of an incentive stock option may not be less than the fair market value of the
Company's Class A Common Stock on the date the option is granted. Options become
exercisable over periods of up to five years and generally expire ten years from
the date of grant or 90 days after employment or services are terminated. The
plans also provide that the Company may grant restricted stock and other
stock-based awards. An aggregate of 1,475,000 shares of the Company's Class A
Common Stock may be issued pursuant to the plans. As of January 31, 1998,
148,539 shares were available for future grants.
29
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 5: LONG-TERM INCENTIVE PLAN (CONTINUED)
Stock option activity for each of the three years in the period ended
January 31, 1998 was as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------- -----------------
<S> <C> <C>
Outstanding at January 29, 1995................................. 615,000 $ 5.06
Granted....................................................... 30,000 6.08
Canceled...................................................... (8,000) 3.88
Exercised..................................................... (2,000) 3.88
-----------
Outstanding at February 3, 1996................................. 635,000 5.12
Granted....................................................... 60,000 20.86
Canceled...................................................... (6,000) 4.13
Exercised..................................................... (276,500) 6.29
-----------
Outstanding at February 1, 1997................................. 412,500 6.64
Granted....................................................... 595,000 20.00
Canceled...................................................... (21,000) 17.70
Exercised..................................................... (19,000) 11.24
-----------
Outstanding at January 31, 1998................................. 967,500 $ 14.53
-----------
-----------
</TABLE>
At January 31, 1998, February 1, 1997 and February 3, 1996 there were
119,500, 19,500 and 185,000 outstanding options exercisable at a weighted
average exercise price of $4.65, $4.40 and $7.36, respectively.
Additional information regarding options outstanding as of January 31, 1998
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
NUMBER NUMBER
OUTSTANDING WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
AS OF AVERAGE AVERAGE AS OF AVERAGE
RANGE OF JAN. 31, REMAINING EXERCISE JAN. 31, EXERCISE
EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE
- ----------------- ------------ ----------------------- ----------- ------------ -----------
$ 3.00 - $ 3.63 37,000 6.36 $ 3.49 15,000 $ 3.54
4.13 - 5.13 292,500 6.22 4.20 99,500 4.22
8.00 - 17.44 16,000 8.39 12.72 2,000 8.00
20.00 - 22.00 622,000 9.33 20.09 3,000 22.00
------------ ------------
$ 3.00 - $22.00 967,500 8.26 $ 14.53 119,500 $ 4.65
</TABLE>
During the years ended January 31, 1998 and February 1, 1997, the Company
recognized tax benefits of $144,000 and $1,827,000, respectively, resulting from
the exercise of certain non-qualified stock options.
ADDITIONAL LONG-TERM INCENTIVE PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee incentive stock options or non-qualifed stock options.
30
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 5: LONG-TERM INCENTIVE PLAN (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 48 months following
vesting; stock volatility, 72.23% in fiscal 1997, 65.95% in fiscal 1996 and
48.34% in fiscal 1995; risk free interest rates, 6.10% in fiscal 1997, 6.38% in
fiscal 1996 and 5.71% in fiscal 1995; and no dividends during the expected term.
The Company's calculations are based on a valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the fiscal 1997, fiscal
1996 and fiscal 1995 awards had been amortized to expense over the vesting
period of the awards, net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income.......................................... As reported $ 21,250,000 $ 15,252,000 $ 5,815,000
Pro forma $ 20,745,000 $ 15,192,000 $ 5,811,000
Net Income Per Share, Basic......................... As reported $ 1.57 $ 1.15 $ 0.47
Pro forma $ 1.53 $ 1.15 $ 0.47
Net Income Per Share, Diluted....................... As reported $ 1.53 $ 1.13 $ 0.47
Pro forma $ 1.49 $ 1.13 $ 0.47
</TABLE>
The impact of outstanding non-vested stock options granted prior to 1995 has
been excluded from the pro forma calculation; accordingly, the above pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
As of January 31, 1998, the Company has granted an aggregate of 61,461
shares of Class A Common Stock, net of forfeitures, to a group of its key
employees under the performance grant award plan which was instituted pursuant
to the Company's plans. Under the performance grant award plan, key employees of
the Company receive Class A Common Stock in proportion to their salary. These
bonus shares vest at the rate of 33.33% per year and non-vested shares are
subject to forfeiture if the participant terminates employment. Compensation
expense, equal to the market value of the shares as of the issue date, is being
charged to earnings over the period that the employees provide service. In each
of the years ended January 31, 1998, February 1, 1997 and February 3, 1996,
8,704, 5,308 and 1,453 shares, respectively, were fully vested and issued. In
connection with the issuance of these shares, the Company recorded compensation
expense of $267,000, $107,000 and $11,000 for the years ended January 31, 1998,
February 1, 1997 and February 3, 1996, respectively.
31
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 6: COMMITMENTS
LEASES
The Company leases retail stores, automobiles, computers and corporate
office and warehouse facilities under operating lease agreements expiring at
various times through 2009. Substantially all of the leases require the Company
to pay maintenance, insurance, property taxes and percentage rent ranging from
4% to 10%, based on sales volume over certain minimum sales levels. Effective
February 1998, the Company entered into a sublease agreement for its former
warehouse facility which expires in August 2002.
Minimum annual rental commitments under non-cancelable leases, including the
new corporate office and warehouse facility lease executed at the end of fiscal
1997, are as follows:
<TABLE>
<CAPTION>
MINIMUM LEASE SUBLEASE NET LEASE
COMMITMENTS INCOME COMMITMENTS
--------------- ------------ --------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDING: 1999....................................... $ 44,209,000 $ 647,000 $ 43,562,000
2000....................................... 41,239,000 647,000 40,592,000
2001....................................... 38,178,000 647,000 37,531,000
2002....................................... 32,874,000 647,000 32,227,000
2003....................................... 26,077,000 377,000 25,700,000
Thereafter................................. 69,355,000 -- 69,355,000
--------------- ------------ --------------
$ 251,932,000 $ 2,965,000 $ 248,967,000
--------------- ------------ --------------
--------------- ------------ --------------
</TABLE>
Rental expense, including common area maintenance, was $64,384,000,
$62,391,000 and $46,010,000, of which $377,000, $345,000 and $152,000 was paid
as percentage rent based on sales volume, for the years ended January 31, 1998,
February 1, 1997 and February 3, 1996, respectively.
EMPLOYMENT CONTRACTS
The Company has employment contracts with two officers, which provide for
minimum annual salaries, customary benefits and allowances, and incentive
bonuses if specified Company earnings levels are achieved. The agreements
provide these same officers with severance benefits which approximate three
years' salary if the agreements are terminated without cause before expiration
of their terms or if the individual's duties materially change following a
change in control of the Company.
LITIGATION
The Company is a defendant in various lawsuits arising in the ordinary
course of its business. While the ultimate liability, if any, arising from these
claims cannot be predicted with certainty, the Company is of the opinion that
their resolution will not likely have a material adverse effect on the Company's
financial statements.
LETTERS OF CREDIT
At January 31, 1998, the Company had outstanding letters of credit amounting
to approximately $3,293,000.
32
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 7: REVOLVING CREDIT ARRANGEMENT
Under an unsecured revolving line-of-credit arrangement with a bank, the
Company may borrow up to a maximum of $30 million on a revolving basis through
July 1, 1998. The cash borrowings under the arrangement bear interest at the
bank's prime rate or, at the Company's option, LIBOR plus 1.75%.
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 the
bank approve the payment of dividends and restrict the level of capital
expenditures. At January 31, 1998 and February 1, 1997, the Company was in
compliance with these covenants. The Company had no borrowings outstanding under
the credit arrangement at January 31, 1998 or February 1, 1997.
NOTE 8: LONG-TERM DEBT
In June 1995, the Company entered into an unsecured five-year, $10 million
term loan. The loan bears interest at the bank's prime rate plus .25% or, at the
Company's option, LIBOR plus 1.75% (7.3438% at fiscal year end). The estimated
annual principal payments on the loan are $2,000,000 payable in quarterly
installments of $500,000 beginning October 31, 1995.
The term loan imposes quarterly and annual financial covenants requiring the
Company to maintain certain financial ratios and achieve certain levels of
annual income. In addition, the term loan requires that the bank approve the
payment of dividends and restricts the level of capital expenditures. At January
31, 1998 and February 1, 1997, the Company was in compliance with these
covenants.
NOTE 9: RELATED PARTY TRANSACTIONS
Certain officers of Suzy Shier, Inc. provide management services to the
Company. For these services, the officers earned in the aggregate a management
fee of $250,000 during each of the years ended January 31, 1998, February 1,
1997 and February 3, 1996, respectively.
NOTE 10: RETIREMENT PLAN
Effective June 1, 1993, the Company established a qualified defined
contribution retirement plan under the Internal Revenue Code, Section 401(k).
The Wet Seal Retirement Plan (the "Plan") is available to all employees who meet
the Plan's eligibility requirements. The Plan is funded by employee
contributions, and additional contributions may be made by the Company at its
discretion. As of January 31, 1998 the Company has not made any contributions to
the Plan.
33
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 11: ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
------------- -------------
<S> <C> <C>
Reserve for self insurance..................................... $ 3,219,000 $ 4,057,000
Accrued wages, bonuses and benefits............................ 5,972,000 4,735,000
Combination costs.............................................. 1,645,000 5,569,000
Gift certificate and credit memo liability..................... 2,911,000 2,331,000
Sales tax payable.............................................. 1,204,000 2,348,000
Other.......................................................... 5,619,000 5,024,000
------------- -------------
$ 20,570,000 $ 24,064,000
------------- -------------
------------- -------------
</TABLE>
In connection with the acquisition of Contempo Casuals, Inc., the Company
assumed certain accruals, including the reserve for self insurance, which were
estimated by the seller. The total amount of these assumed accruals may not, in
fact be paid as the actual payments will be based on the future claims and
losses which are actually submitted and which are related to pre-acquisition
events. The accrual for combination costs consisted of management's estimates
for the costs of closing and/or combining certain Contempo Casuals facilities
and operations into Wet Seal's, as well as the costs of integrating management
information and security systems. At February 1, 1997, the accrual totaled
$5,569,000. As of January 31, 1998, the Company has substantially completed the
combination of facilities and the acquisition of necessary management
information systems to fully integrate Contempo Casuals' operations into Wet
Seal's. Management estimates that the accrued combination costs remaining at
January 31, 1998 totaling $1,645,000 will be fully utilized by mid-1998, at
which time the Company's in-store security systems will be integrated.
NOTE 12: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
The Company maintains a defined benefit supplemental employee retirement
plan (the "SERP") for certain of its key employees and a director. The SERP
provides for preretirement death benefits through life insurance and for
retirement benefits. The Company funded the SERP in 1997 through contributions
to a trust fund known as a "Rabbi" trust. Assets held in the Rabbi trust
($261,000 at January 31, 1998) are subject to claims of the Company's creditors
but otherwise must be used only for purposes of providing benefits under the
SERP.
Components of the net defined benefit pension expense are as follows:
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------
<S> <C>
Service cost................................................................ $ 335,000
Interest cost............................................................... 191,000
Net amortization and deferrals.............................................. 164,000
--------
Total pension expense....................................................... $ 690,000
--------
--------
</TABLE>
34
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 12: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (CONTINUED)
The funded status of the SERP is as follows:
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations................................................ $ 2,730,000
Accumulated benefit obligation............................................ 2,730,000
Projected benefit obligation................................................ 2,730,000
Unrecognized prior service cost............................................. 2,042,000
Unrecognized net gain....................................................... (2,000)
Additional liability recognized............................................. (2,040,000)
----------------
Pension liability........................................................... $ 2,730,000
----------------
----------------
</TABLE>
The following assumptions were used to determine the annual pension expense
and benefit obligations:
<TABLE>
<CAPTION>
JANUARY 31, 1998
-------------------
<S> <C>
Discount rate............................................................... 7%
Long-term rate of return on assets.......................................... N/A
</TABLE>
NOTE 13: NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income per share is as follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income: Basic and diluted....................................... $ 21,250,000 $ 15,252,000 $ 5,815,000
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares:
Basic............................................................... 13,552,502 13,219,284 12,387,140
Effect of dilutive securities--stock options........................ 347,375 240,526 113,424
------------- ------------- -------------
Diluted............................................................. 13,899,877 13,459,810 12,500,564
Net income per share:
Basic............................................................... $ 1.57 $ 1.15 $ 0.47
Effect of dilutive securities--stock options........................ 0.04 0.02 --
------------- ------------- -------------
Diluted............................................................. $ 1.53 $ 1.13 $ 0.47
</TABLE>
Unexercised stock options to purchase 90,000 shares of common stock as of
February 3, 1996 were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the Company's common stock during fiscal 1995.
35
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996
NOTE 14: SHAREHOLDER RIGHTS PLAN
On August 19, 1997, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan") designed to protect company stockholders in the
event of takeover action that would deny them the full value of their
investment. Terms of the Rights Plan provide for a dividend distribution of one
right for each share of common stock to holders of record at the close of
business on August 29, 1997. The rights become exercisable only in the event,
with certain exceptions, an acquiring party accumulates 12 percent or more of
the Company's voting stock, or if a party announces an offer to acquire 20
percent or more of the Company's voting stock. Unless earlier redeemed, the
rights will expire on August 29, 2007. Each right will entitle the holder to buy
one one-hundredth of a share of a new series of preferred stock at a price of
$73.00, subject to adjustment upon the occurrence of certain events. The Company
will be entitled to redeem the rights at $0.01 per right at any time until the
tenth day following the acquisition of a 12 percent position in its voting
stock.
NOTE 15: UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
NET INCOME NET INCOME
PER SHARE, PER SHARE,
QUARTER SALES GROSS MARGIN NET INCOME BASIC DILUTED
- --------------------------------------- -------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
First Quarter.......................... $ 95,563,000 $ 25,441,000 $ 3,515,000 $ 0.26 $ 0.25
Second Quarter......................... 94,254,000 25,337,000 3,417,000 0.25 0.25
Third Quarter.......................... 104,435,000 30,432,000 5,479,000 0.40 0.39
Fourth Quarter......................... 118,211,000 38,609,000 8,839,000 0.65 0.63
-------------- -------------- -------------
For the Year........................... $ 412,463,000 $ 119,819,000 $ 21,250,000 $ 1.57 $ 1.53
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
FISCAL YEAR ENDED FEBRUARY 1, 1997
<TABLE>
<CAPTION>
NET INCOME NET INCOME
PER SHARE, PER SHARE,
QUARTER SALES GROSS MARGIN NET INCOME BASIC DILUTED
- --------------------------------------- -------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
First Quarter.......................... $ 80,575,000 $ 19,038,000 $ 722,000 $ 0.06 $ 0.06
Second Quarter......................... 94,356,000 24,786,000 3,315,000 0.25 0.25
Third Quarter.......................... 95,571,000 26,419,000 4,194,000 0.31 0.30
Fourth Quarter......................... 104,440,000 32,510,000 7,021,000 0.52 0.51
-------------- -------------- -------------
For the year........................... $ 374,942,000 $ 102,753,000 $ 15,252,000 $ 1.15 $ 1.13
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
Net Income per share is computed independently for each of the quarters
presented and therefore may not sum to the totals for the year.
36
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S>
*3.1 -- Restated Certificate of Incorporation of the Company.
*3.2 -- Bylaws of the Company.
*4.1 -- Specimen Certificate of the Class A Stock, par value $.10 per share.
*4.2 -- Specimen Certificate of the Class B Stock, par value $.10 per share.
*******4.3 -- Shareholder Rights Plan.
10.1 -- Lease between the Company and Foothill-Parkstone I, LLC, dated November 21, 1996.
*10.3 -- First amendment to Services Agreement between the Company and Kathy Bronstein, dated December 30,
1988.
**10.3.1 -- Second amendment to Services Agreement between the Company and Kathy Bronstein, dated March 23,
1992.
***10.3.2 -- Services Agreement between the Company and Edmond Thomas, dated June 22, 1992.
****10.3.3 -- Third amendment to Services Agreement between the Company and Kathy Bronstein, dated November 17,
1994.
****10.3.4 -- First amendment to Services Agreement between the Company and Edmond Thomas, dated November 17,
1994.
****10.3.5 -- Fourth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 13,
1995.
****10.3.6 -- Second amendment to Services Agreement between the Company and Edmond Thomas, dated January 13,
1995.
*****10.3.7 -- Fifth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 30,
1995.
*****10.3.8 -- Sixth amendment to Services Agreement between the Company and Kathy Bronstein, dated February 2,
1996.
*****10.3.9 -- Third amendment to Services Agreement between the Company and Edmond Thomas, dated February 2,
1996.
*10.4 -- 1990 Long-Term Incentive Plan.
**10.5 -- Credit Agreement between the Company and Bank of America, dated as of April 20, 1992.
***10.5.1 -- Credit Agreement between the Company and Bank of America, dated June 23, 1993, as amended.
****10.5.2 -- Amendments No. 1 and No. 2 to Credit Agreement between the Company and Bank of America, dated
January 25, 1994 and June 1, 1994, respectively.
*****10.5.3 -- Business Loan Agreement between the Company and Bank of America, containing Term Loan and
Revolving Line of Credit, dated June 30, 1995.
*****10.5.4 -- Business Loan Agreement between the Company and Bank of America, containing Revolving Line of
Credit for Contempo Casuals, dated June 30, 1995.
**10.6 -- Key Man life insurance policy for Kathy Bronstein.
******10.6.1 -- Key Man life insurance policy for Edmond Thomas.
***10.7 -- 1994 Long-Term Incentive Plan.
*10.8 -- Stock Purchase and Stock Transfer Restriction Agreement among Kathy Bronstein, Suzy Shier, Inc.
and the Company dated December 30, 1988.
****10.9 -- Indemnification Agreement between the Company and various Executives and Directors, dated January
3, 1995, and schedule listing all parties thereto.
******10.10 -- 1996 Long-Term Incentive Plan.
10.11 -- Supplemental Employee Retirement Plan.
*****21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP, independent auditors.
27.1 -- Financial Data Schedule--Fiscal year end 1997
27.2 -- Financial Data Schedule--Fiscal year ends 1995, 1996 and Quarters 1, 2, 3 of 1996 (Restated)
27.3 -- Financial Data Schedule--Quarters 1, 2, 3 of 1997 (Restated)
</TABLE>
- ------------------------------
<TABLE>
<C> <S>
* Denotes exhibits incorporated by reference to the Company's Registration Statement File No. 33-34895.
** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended January 30, 1993.
*** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994.
**** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended January 28, 1995.
***** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended February 3, 1996.
****** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended February 1, 1997.
******* Denotes exhibits incorporated by reference to the Company's Current Report on Form 8-K filed on August 25,
1997.
</TABLE>
<PAGE>
LEASE
BETWEEN
FOOTHILL-PARKSTONE I, LLC
A CALIFORNIA LIMITED LIABILITY COMPANY
("LANDLORD")
AND
THE WET SEAL, INC.
A DELAWARE CORPORATION
("TENANT")
November 21, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1. BASIC LEASE PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 1
1.1. LANDLORD'S ADDRESS . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. TENANT'S ADDRESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. USE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4. DEMISED PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.6. OPTION TO EXTEND . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.7. INITIAL GUARANTEED MINIMUM MONTHLY RENTAL. . . . . . . . . . . . . . 2
1.8. SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2. PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1. DEMISED PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2. REVISION OF SITE PLAN. . . . . . . . . . . . . . . . . . . . . . . . 2
2.3. MEASUREMENT OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . 2
2.4. TITLE DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 3. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1. COMMENCEMENT OF TERM . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2. FAILURE OF COMMENCEMENT. . . . . . . . . . . . . . . . . . . . . . . 3
3.3. OPTION TO EXTEND TERM. . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE 4. RENTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1. GUARANTEED MINIMUM MONTHLY RENTAL. . . . . . . . . . . . . . . . . . 5
4.2. ADDITIONAL RENTAL AND IMPOUNDS . . . . . . . . . . . . . . . . . . . 5
ARTICLE 5. LATE CHARGE AND PROCESSING FEE. . . . . . . . . . . . . . . . . . . 6
ARTICLE 6. REAL ESTATE TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.1. GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.2. ALLOCATION FOR DEMISED PREMISES. . . . . . . . . . . . . . . . . . . 6
6.3. PRORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.4. DEFINITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.5. RENTAL TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.6. DUE DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.7. COMMUNITY FACILITIES DISTRICT. . . . . . . . . . . . . . . . . . . . 8
6.8. CONTESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 7. PERSONAL PROPERTY TAXES . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE 8. CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
<PAGE>
TABLE OF CONTENTS (cont'd)
Page
ARTICLE 9. COMMON AREAS; MAINTENANCE AND COSTS . . . . . . . . . . . . . . . . 9
9.1. COMMON AREAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9.2. USE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9.3. VEHICLE PARKING. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
9.4. MAINTENANCE OF COMMON AREAS. . . . . . . . . . . . . . . . . . . . . 9
9.5. TENANT'S PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . .10
9.6. TENANT'S ELECTION TO MAINTAIN. . . . . . . . . . . . . . . . . . . .10
ARTICLE 10. USES PROHIBITED. . . . . . . . . . . . . . . . . . . . . . . . . .11
ARTICLE 11. ALTERATIONS AND FIXTURES . . . . . . . . . . . . . . . . . . . . .12
11.1. NO ALTERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .12
11.2. PAYMENT OF COSTS. . . . . . . . . . . . . . . . . . . . . . . . . .12
11.3. REMOVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
ARTICLE 12. BUILDING MAINTENANCE, REPAIR AND TRASH COLLECTION. . . . . . . . .13
12.1. TENANT'S OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . .13
12.2. LANDLORD'S OBLIGATION . . . . . . . . . . . . . . . . . . . . . . .14
12.3. TENANT'S OPTION . . . . . . . . . . . . . . . . . . . . . . . . . .14
ARTICLE 13. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . .14
13.1. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . .14
13.2. NOISES AND TOXIC WASTES . . . . . . . . . . . . . . . . . . . . . .15
ARTICLE 14. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
14.1. LANDLORD'S INSURANCE. . . . . . . . . . . . . . . . . . . . . . . .16
14.2. REIMBURSEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . .17
14.3. INSURABLE INTEREST. . . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE 15. INDEMNIFICATION - LIABILITY INSURANCE BY TENANT. . . . . . . . . .17
15.1. TENANT'S INSURANCE REQUIREMENTS . . . . . . . . . . . . . . . . . .17
15.2. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . .18
15.3. DAMAGE TO TENANT'S PROPERTY . . . . . . . . . . . . . . . . . . . .19
15.4. WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . . . . . . . .19
ARTICLE 16. FREE FROM LIENS. . . . . . . . . . . . . . . . . . . . . . . . . .19
ARTICLE 17. ABANDONMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE 18. SIGNS AND AUCTIONS . . . . . . . . . . . . . . . . . . . . . . . .20
18.1. SIGN CRITERIA . . . . . . . . . . . . . . . . . . . . . . . . . . .20
18.2. DISPLAYS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ii
<PAGE>
TABLE OF CONTENTS (cont'd)
Page
ARTICLE 19. UTILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE 20. ENTRY AND INSPECTION . . . . . . . . . . . . . . . . . . . . . . .21
ARTICLE 21. DAMAGES AND DESTRUCTION OF PREMISES. . . . . . . . . . . . . . . .21
21.1. OBLIGATION TO REPAIR. . . . . . . . . . . . . . . . . . . . . . . .21
21.2. WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
ARTICLE 22. ASSIGNMENT, SUBLETTING AND ENCUMBRANCE . . . . . . . . . . . . . .22
22.1. LANDLORD'S CONSENT REQUIRED . . . . . . . . . . . . . . . . . . . .22
22.2. TENANT'S APPLICATION (ASSIGNMENT AND SUBLEASE). . . . . . . . . . .24
22.3. COLLECTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
22.4. WAIVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
22.5. ASSUMPTION OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . .25
ARTICLE 23. DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
23.1. DAMAGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
23.2. MITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
23.3. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
23.4. ASSIGNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
23.5. FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . .26
23.6. FORM OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . .27
23.7. NO WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
ARTICLE 24. SURRENDER OF LEASE . . . . . . . . . . . . . . . . . . . . . . . .27
ARTICLE 25. SALE OF PREMISES BY LANDLORD . . . . . . . . . . . . . . . . . . .27
ARTICLE 26. ATTORNEYS' FEES. . . . . . . . . . . . . . . . . . . . . . . . . .27
26.1. THIRD PARTY LITIGATION. . . . . . . . . . . . . . . . . . . . . . .27
26.2. BETWEEN LANDLORD AND TENANT . . . . . . . . . . . . . . . . . . . .28
ARTICLE 27. HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . .28
ARTICLE 28. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
ARTICLE 29. SUCCESSORS IN INTEREST . . . . . . . . . . . . . . . . . . . . . .28
ARTICLE 30. FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE 31. PARTIAL INVALIDITY . . . . . . . . . . . . . . . . . . . . . . . .29
iii
<PAGE>
TABLE OF CONTENTS (cont'd)
Page
ARTICLE 32. CAPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE 33. TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
ARTICLE 34. SUBORDINATION, ATTORNMENT. . . . . . . . . . . . . . . . . . . . .30
34.1. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . .30
34.2. ATTORNMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
34.3. ESTOPPEL CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . . .30
ARTICLE 35. CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . . . . . .31
ARTICLE 36. ACKNOWLEDGMENT . . . . . . . . . . . . . . . . . . . . . . . . . .32
ARTICLE 37. LANDLORD'S LIMITED LIABILITY . . . . . . . . . . . . . . . . . . .32
ARTICLE 38. NO ORAL AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . .32
ARTICLE 39. BINDING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
ARTICLE 40. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . . . . . .33
ARTICLE 41. INTEREST ON PAST DUE OBLIGATIONS . . . . . . . . . . . . . . . . .34
ARTICLE 42. OPTION TO LEASE, NO OPTION . . . . . . . . . . . . . . . . . . . .34
ARTICLE 43. PRIOR RECORDED DOCUMENTS . . . . . . . . . . . . . . . . . . . . .34
ARTICLE 44. BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
ARTICLE 45. CONFIDENTIALITY OF LEASE . . . . . . . . . . . . . . . . . . . . .35
ARTICLE 46. HELICOPTER PAD ACCESS. . . . . . . . . . . . . . . . . . . . . . .35
ARTICLE 47. FINANCING SPREAD . . . . . . . . . . . . . . . . . . . . . . . . .36
</TABLE>
iv
<PAGE>
LEASE
THIS LEASE is made and entered into as of November 21, 1996, by and
between FOOTHILL-PARKSTONE I, LLC, a California limited liability company
("Landlord"), and THE WET SEAL, INC., a Delaware corporation ("Tenant").
ARTICLE 1.
BASIC LEASE PROVISIONS
1.1. LANDLORD'S ADDRESS. Foothill-Parkstone I, LLC, 1936 East Deere
Avenue, Suite 216, Santa Ana, California 92705, Attn: Robert Searles, with
copies to Offenbloch-Parkstone Partners I, 25200 La Paz Road, Suite 210, Laguna
Hills, California 92653, Attn: Chris A. Downey, and to Latham BC Watkins, 650
Town Center Drive, Twentieth Floor, Costa Mesa, California 92626, Attn: Kenneth
A. Wolfson.
1.2. TENANT'S ADDRESS. The Wet Seal, Inc., 64 Fairbanks, Irvine,
California 92718, Attn: Edmond Thomas, President, with a copy to Aaronson &
Aaronson, 16133 Ventura Boulevard, Suite 1080, Encino, California 91436, Attn:
Edward D. Aaronson.
1.3. USE. A business specializing in light manufacturing, storage and
distribution of clothing and office and administrative functions related
thereto.
1.4. DEMISED PREMISES. A building containing approximately One Hundred
Eighty-Eight Thousand Two Hundred (188,200) square feet (the "Building"),
together with the parcel of real estate upon which such Building is located and
containing approximately Four Hundred Sixty-Seven Thousand Eight Hundred
Thirty-Four (467,834) net usable square feet of land (the "Parcel") in the
unincorporated community of Foothill Ranch, in the County of Orange, State of
California, and generally as shown on the site plan attached hereto as EXHIBIT
A. The demised premises shall include an approximately 20,500 square foot office
mezzanine to be constructed by Landlord, but shall not include a merchandise
access platform and garment rack system to be built by Tenant within the demised
premises containing approximately 95,000 usable square feet (collectively, the
"Merchandise Access Platform"), all in accordance with the provisions of EXHIBIT
B hereto. Tenant acknowledges that a lot line adjustment is being processed
which will result in the Parcel being one or more separate legal lots pursuant
to the California Subdivision Map Act. Tenant shall execute any documents
reasonably requested by Landlord to effectuate such lot line adjustment. Tenant
further acknowledges that Landlord will not obtain fee title to the Parcel until
such lot line adjustment is recorded.
1.5. TERM. Ten (10) years from the commencement date described in
Section 3.1.
1.6. OPTION TO EXTEND. One (1) option to extend for five (5) years.
<PAGE>
1.7. INITIAL GUARANTEED MINIMUM MONTHLY RENTAL. Forty-Three and
five/tenths cents ($0.435) per gross leasable square foot of the Building per
month for the first sixty (60) months, then forty-seven and five/tenths cents
($0.475) per gross leasable square foot of the Building per month for the next
sixty (60) months.
1.8. SECURITY DEPOSIT. No security deposit will be required from
Tenant under this Lease.
ARTICLE 2.
PREMISES
2.1. DEMISED PREMISES. The premises leased to Tenant, together with
appurtenances associated with such premises (collectively, the "demised
premises"), are more particularly described or referred to in Section 1.4 above.
2.2. REVISION OF SITE PLAN. The site plan attached hereto as EXHIBIT A
is preliminary only, and prior to the commencement of the term hereof Landlord
may modify said site plan with Tenant's consent, but Tenant shall not withhold
such consent so long as such modification does not materially alter the site of
the Building, materially interfere with the access by Tenant or any of Tenant's
employees or invitees to the Building or the visibility of the Building,
materially affect the use by Tenant of the Building, materially increase
Tenant's obligations, or materially decrease Tenant's rights hereunder.
2.3. MEASUREMENT OF PREMISES. Following substantial completion of the
Building and prior to commencement of the Lease term as provided in Section 3.1,
Landlord shall cause the gross leasable square footage of the Building to be
determined. For purposes hereof, the gross leasable square footage of the
Building shall be measured from the exterior face of all exterior walls and
shall include the ground floor and the office mezzanine, but shall exclude the
Merchandise Access Platform. Landlord shall certify in writing to Tenant the
gross leasable square footage as so determined, which shall then be multiplied
by the Lease rental rates set forth in Section 1.7 in order to establish the
amount of Guaranteed Minimum Monthly Rental hereunder.
2.4. TITLE DISCLOSURE. Landlord has disclosed to Tenant all
encumbrances known by Landlord to exist on the demised premises by providing to
Tenant preliminary title report no. OR-9638583 dated as of September 4, 1996 as
issued by First American Title Insurance Company.
ARTICLE 3.
TERM
3.1. COMMENCEMENT OF TERM. The initial term of this Lease shall be for
the period set forth in Section 1.5 above. Such term, and Tenant's obligation to
pay all sums provided for herein including Guaranteed Minimum Monthly Rental,
shall commence on the
2
<PAGE>
later date to occur (the "commencement date") of the following: (a) October 1,
1997, (b) one hundred twenty (120) days after the date Landlord makes the
Building available for Tenant to commence Tenant's work described below with
respect to the Merchandise Access Platform, after Tenant receives at least
thirty (30) days' prior written notice from Landlord or (c) the date on which
all exterior and interior improvements to be constructed by Landlord (as set
forth in Article 8 below and EXHIBIT B attached hereto) have been substantially
completed and as to which a temporary certificate of occupancy has been issued
(the "substantial completion"). Landlord agrees to make the Building available
for Tenant to commence Tenant's work described below with respect to the office
mezzanine at least seventy-five (75) days prior to the date of substantial
completion. Should such commencement date not occur on the first day of a
calendar month, the term hereunder shall be extended by the remaining days in
said month. Tenant shall fully fixturize and improve its facility on the demised
premises, and construct the Merchandise Access Platform as provided in Article 8
below, in a first class manner, all pursuant to plans and specifications
approved by Landlord as provided in Article 8 below and EXHIBIT B hereto.
Subject to delays due to matters of force majeure, Landlord and Tenant shall use
their good faith efforts to comply with the construction schedule attached
hereto as EXHIBIT C.
3.2. FAILURE OF COMMENCEMENT. If Landlord, after using good faith
efforts, has not obtained a building permit for the construction of the Building
on or before that date which is three (3) months after the date first written
above, then either Landlord or Tenant may terminate this Lease by giving written
notice of such election to the other party at any time prior to the obtaining of
such building permit. If this Lease is terminated pursuant to this Section, the
parties shall have no further obligation to each other.
3.3. OPTION TO EXTEND TERM. Tenant is hereby granted the option to
extend the term of this Lease for one (1) additional period of five (5) years
(the "extended term"; as used in this Lease, "term" shall include the extended
term, if applicable, unless the context clearly indicates otherwise) upon all
the terms and conditions of this Lease, subject to the following terms,
conditions and exceptions:
(a) Tenant shall notify Landlord in writing of Tenant's election
to extend the term of this Lease at least nine (9) months but no more than
fifteen (15) months prior to the expiration of the then existing term.
(b) If this Lease is terminated at any time, the option to extend
shall also be terminated.
(c) If Tenant is in default under any of the terms and conditions
of this Lease beyond any applicable notice and cure period on the date of giving
written notice of exercise of such option or on the day preceding the first day
of the extended term, at Landlord's option the notice shall be null and void,
the extended term shall not commence and this Lease shall expire at the end of
the original term.
(d) The Guaranteed Minimum Monthly Rental in effect as of
commencement of the extended term shall be adjusted to ninety five percent (95%)
of the then fair market rental value (as determined below) of the demised
premises. If Landlord and Tenant
3
<PAGE>
are unable to agree upon the then fair market rental value of the demised
premises. then no later than seven (7) months prior to the first day of the
extended term, Tenant shall, at Tenant's sole expense, send to Landlord a
written appraisal report, prepared by an appraiser of Tenant's choice, which
states the appraiser's estimate of the fair market rental value of the demised
premises as of the date that the extended term will commence. If Tenant fails to
provide such report at least seven (7) months prior to the beginning of the
extended term, Landlord shall within thirty (30) days of such failure obtain, at
Landlord's sole expense, an appraisal of the fair market rental value of the
demised premises from an appraiser of Landlord's choice, and such appraiser
shall determine the fair market rental value of the demised premises as of the
first day of the extended term, which determination shall be binding on the
parties hereto, If Tenant provides such appraisal report within the time period
specified and Landlord disagrees with such appraisal report, Landlord shall
within thirty (30) days after receipt of such appraisal report obtain, at
Landlord's sole expense, an appraisal of the fair market rental value from an
appraiser of Landlord's choice. If Landlord and Tenant are unable to agree upon
the fair market rental value of the demised premises after receiving the two (2)
appraisal reports, then the two (2) appraisers shall select a third appraiser
whose expense shall be borne equally by the parties; if the two (2) appraisers
cannot agree on a third appraiser, the third appraiser shall be appointed, on
petition of either party, by the presiding Superior Court judge in Orange
County, California, the costs . thereof to be borne equally by the parties.
Landlord and Tenant shall instruct the three (3) appraisers to complete their
determinations of the fair market rental value of the demised premises not later
than five (5) months prior to the first day of the extended term. If the three
(3) appraisers cannot agree upon the fair market rental value of the demised
premises, the fair market rental value of the demised premises shall be the
arithmetic average of the two (2) of the three (3) appraisals which are closest
in amount and the third appraisal shall be disregarded. For purposes of the
appraisals set forth herein, (i) all appraisers shall have at least five (5)
years' experience in the appraisal of commercial/industrial real property in the
area in which the demised premises is located and shall be members of
professional organizations such as MAI or its equivalent, and (ii) "fair market
rental value" shall mean the price that a ready and willing tenant would pay, as
of the first day of the extended term, as minimum monthly rent, to a ready and
willing landlord of property comparable to the demised premises as it exists at
such time if such property were exposed for lease on the open market for a
reasonable period of time (including, but only to the extent customarily
applicable to similar leases at such time, market concessions such as free rent,
tenant improvement allowances and moving allowances).
(e) The option to extend set forth in Section 3.3 shall be for
the benefit of Tenant and any permitted successors and assigns of Tenant.
However, if any such permitted successors or assigns (other than an entity
controlling, controlled by or under common control with Tenant) exercise such
option, the Guaranteed Minimum Monthly Rental provided for in Section 3.3(d)
shall be one hundred percent (100%) of the then fair market rental value.
4
<PAGE>
ARTICLE 4.
RENTAL
4.1. GUARANTEED MINIMUM MONTHLY RENTAL. Commencing as of the
commencement date as contemplated in Section 3.1 and during the remainder of the
term of this Lease, Tenant shall pay to Landlord as Guaranteed Minimum Monthly
Rental for the demised premises the applicable sum set forth in Section 1.7
above, which sum shall be paid in advance on the first day of each calendar
month. If the term of this Lease commences on a day other than the first day of
a calendar month, Tenant shall pay Guaranteed Minimum Monthly Rental in advance
for such fractional month prorated based upon the remaining days in such
fractional month as compared to the total number of days in such month. All
rental to be paid by Tenant to Landlord shall be paid without deduction, offset,
prior notice or demand to the address provided in Article 28.
4.2. ADDITIONAL RENTAL AND IMPOUNDS.
(a) In addition to the Guaranteed Minimum Monthly Rental, Tenant
shall pay to Landlord, at the time and in the manner herein specified,
Additional Rental as follows:
(i) Real Estate Taxes, rental taxes and business taxes
as set forth in Article 6 of this Lease;
(ii) Personal property taxes as set forth in Article 7
of this Lease;
(iii) Expenses in connection with the common areas as
set forth in Article 9 of this Lease;
(iv) Fire insurance and extended coverage as set forth
in Article 14 of this Lease (unless Tenant elects to obtain such insurance
for the Building as permitted by Article 14) and other insurance costs as
set forth in Article 15 of this Lease; and
(v) Utilities as set forth in Article 19 of this
Lease.
(b) Rather than bill and collect the foregoing Additional Rental
after the expenses are incurred, Landlord may estimate Tenant's share of all or
any portion of said costs and expenses for a period of not more than twelve (12)
months in advance, and may collect and impound Tenant's estimated share in
advance on a monthly basis. As soon as reasonably possible after each year,
Landlord shall provide to Tenant a reconciliation of any of Tenant's accounts
which are impounded for the twelve (12) month period ending the preceding
December 31. Said reconciliation statement shall set forth in reasonable detail
the costs and expenses paid by Landlord, and shall include a computation as to
Tenant's pro rata share (as determined pursuant to Section 6.2). In the event
Tenant has overpaid its share of said costs and
5
<PAGE>
expenses in payment of impounds, Landlord shall credit Tenant's account for the
amount of said overpayment (or if at the end of the Lease term there remains
unreimbursed credits due Tenant as a result of any such overpayments theretofore
having been made by Tenant, Landlord shall then pay to Tenant a sum equal to the
sum of such unused credits), and in the event of an underpayment, Tenant shall
pay to Landlord the amount of said underpayment within twenty (20) days after
the date of mailing of the statement of reconciliation. Tenant may, at its sole
cost and expense, once with respect to each year cause an audit of the books and
records of Landlord (but only to the extent relating to the computation of
Additional Rental) to be made by an independent certified public accountant or
other qualified representative of Tenant, and if the computation of such
Additional Rental previously made by Landlord shall be found to be inaccurate,
then there shall be an adjustment and one party shall pay to the other within
twenty (20) days of demand such sums as may be necessary to settle in full the
accurate amount of said Additional Rental as should have been paid to Landlord
for the period or periods covered by such inaccurate statement or statements.
Additionally, Landlord will provide to Tenant copies of all real estate tax and
assessment bills, as well as copies of any insurance premium invoices which
serve as a basis for the determination of Additional Rental.
ARTICLE 5.
LATE CHARGE AND PROCESSING FEE
In addition to Article 41, if Tenant fails to pay any sum due to
Landlord under this Lease within five (5) days of its due date, Tenant shall pay
to Landlord, as Additional Rental, a late charge equal to five percent (5%) of
the overdue amount. In the event Tenant makes payment by check for any payment
due hereunder and such check is returned by Landlord's or Tenant's financial
institution for any reason, the amount paid by such check shall be past due and
subject to the above-referenced late charge, plus Tenant shall pay to Landlord
as Additional Rental a processing fee of Fifty Dollars ($50.00). If Tenant's
check is so returned more than twice during any consecutive twelve (12) month
period, Landlord may thereafter, by written notice to Tenant, require that all
future payments to be made by Tenant be made by cashier's check or money order.
ARTICLE 6.
REAL ESTATE TAXES
6.1. GENERAL. During the term of this Lease, Tenant shall pay as
Additional Rental to Landlord annual real estate taxes and assessments levied
upon the demised premises.
6.2. ALLOCATION FOR DEMISED PREMISES. In the event the Parcel is not
separately assessed, the applicable taxes and assessments levied upon the
demised premises and the Parcel shall be determined by (a) with respect to the
taxes and assessments levied upon land, the ratio that the gross land area of
the demised premises bears to the total gross land area within the entire tax
parcel for which a separate assessment is made as such taxes are assessed in
6
<PAGE>
that separate tax parcel plus (b) with respect to the taxes and assessments
levied on buildings, the amount so levied on the Building.
6.3. PRORATION. Any such tax or assessment for the year in which the
term of this Lease commences or ends shall be prorated. With respect to any
assessment which may be levied against or upon the demised premises and which,
under the laws then in force, may be evidenced by improvement or other bonds
payable in annual installments, only the annual payments on said assessment
shall be included in computing Tenant's obligation for taxes and assessments.
6.4. DEFINITION. The term "real estate taxes and assessments" as used
herein shall be deemed to mean all taxes and assessments imposed upon the real
property and improvements constituting the demised premises and the tax parcel
which includes the demised premises, including any taxes resulting from
reassessment of the real property to fair market value upon completion of
construction of the Building and related improvements as contemplated herein,
but excluding any taxes resulting from reassessment of the real property to fair
market value due to a change of ownership of the real property subsequent to the
completion of construction of the Building and related improvements contemplated
herein. The term "real estate taxes and assessments" shall also be deemed to
mean any transfer taxes charged in conjunction with the recordation of a
Memorandum of Lease, but shall not include personal income taxes, personal
property taxes, inheritance taxes, gift taxes, capital levies or franchise taxes
levied against Landlord, but not directly against said demised premises. "Real
estate taxes and assessments" also include any charge or fee replacing any tax
or assessment previously included within the definition of real estate taxes and
assessments, and any tax or charge for fire protection, streets, sidewalks, road
maintenance, refuse or other services provided to the demised premises by any
governmental agency. In addition to the foregoing, Tenant acknowledges that the
demised premises are, or will be, subject to that certain Second Completely
Amended and Restated Declaration of Covenants, Conditions and Restrictions
recorded on April 30, 1992 as Instrument 92-283832 in the Official Records of
Orange County, California, as amended (the "CC&Rs"), also referred to in Section
43 below. There shall also be included in the real estate taxes and assessments
the amount of assessments levied pursuant to the CC&Rs and applicable to the
demised premises, determined by utilizing the allocations set forth in the
CC&Rs.
6.5. RENTAL TAXES. Tenant shall pay as Additional Rental to Landlord
any and all excise, privilege and other taxes, other than net income taxes, gift
taxes, capital levies and estate taxes, levied or assessed by any federal, state
or local authority upon the rent and other amounts payable by Tenant to Landlord
hereunder, and Tenant shall bear a pro rata share, as equitably determined by
Landlord, of any business tax levied upon Landlord by any governmental authority
which is based or measured in whole or in part by the amount charged or received
by Landlord from Tenant under this Lease or from Landlord's ownership of the
demised premises (referred to herein as "rental taxes").
6.6. DUE DATE. Said Additional Rental under this Article 6 is due
twenty (20) days after the date of mailing of a statement therefor.
7
<PAGE>
6.7. COMMUNITY FACILITIES DISTRICT. Tenant acknowledges that the
demised premises are within the boundaries of the County of Orange Community
Facilities District No. 87-4 ("CFD 87-4") and that a special tax will be
included in the annual property tax bill for the repayment of bonded
indebtedness incurred by CFD 87-4, all as more specifically set forth in a
Notice of Special Tax ("Notice") in the form attached hereto and incorporated
herein as Exhibit D. Concurrently with the execution of this Lease, Tenant shall
execute and deliver to Landlord the Notice.
6.8. CONTESTS. Tenant shall have the right to contest the amount of
real estate taxes and assessments levied against the demised premises, provided
that no such contest shall subject Landlord or the demised premises to any risk
of foreclosure or any interest or penalties with respect to such real estate
taxes and assessments. Without limiting the foregoing, Tenant acknowledges that
Tenant will be required to pay such real estate taxes and assessments timely,
but under protest, if Tenant elects to contest the amount thereof.
ARTICLE 7.
PERSONAL PROPERTY TAXES
During the term of this Lease, Tenant shall pay prior to delinquency
all taxes assessed against and levied upon fixtures, furnishings, equipment and
all other personal property of Tenant contained in or on the demised premises,
and when possible Tenant shall cause said fixtures, furnishings, equipment and
other personal property to be assessed and billed separately from the real
property of Landlord. In the event any or all of Tenant's fixtures, furnishings,
equipment and other personal property shall be assessed and taxed with
Landlord's real property, Tenant shall pay as Additional Rental to Landlord its
share of such taxes.
ARTICLE 8.
CONSTRUCTION
Landlord, at its sole cost and expense, shall commence and pursue to
completion the construction of all improvements to be erected by Landlord to the
extent required in EXHIBIT B hereto. Except for the construction of improvements
by Landlord and the Tenant allowances provided by Landlord as set forth on
EXHIBIT B hereto, Tenant shall be solely responsible for the costs of all
improvements on or in the demised premises, including but not limited to the
Merchandise Access Platform and any and all permit fees, utility connection fees
and charges, license fees, or other fees or charges in connection with the use
and improvement of the demised premises by Tenant and the operation of Tenant's
business on or in the demised premises; provided, that Landlord and NOT Tenant
shall be responsible for payment of such non-recurring fees as traffic impact,
transportation corridor and development fees which are payable upon issuance of
Tenant's building permit for construction during the initial Lease term of the
Merchandise Access Platform.
8
<PAGE>
ARTICLE 9.
COMMON AREAS; MAINTENANCE AND COSTS
9.1. COMMON AREAS. As used in this Lease, "Common Areas" shall mean
all areas upon the Parcel except for the Building, including but not limited to
(except as shown on Exhibit A) all parking areas, driveways, sidewalks, loading
areas, access roads, corridors, landscaping and planted areas.
9.2. USE. Tenant shall have the exclusive right to use the Common
Areas for the purposes intended, subject to such reasonable, non-discriminatory
rules and regulations as Landlord may establish from time to time. Such right
shall be irrevocable unless Tenant is in default of its obligations under this
Lease beyond any applicable notice and cure period. Tenant shall abide by such
rules and regulations and shall cause others who use the Common Areas with
Tenant's express or implied permission to abide by Landlord's rules and
regulations. At any time, Landlord may temporarily close any Common Areas to
perform any acts in the Common Areas as, in Landlord's judgment, are desirable
to make repairs to the Common Areas or to avoid a dedication of the Common Areas
to the public. Tenant shall not materially adversely interfere with the rights
of Landlord. Except as contemplated above or as otherwise permitted by this
Lease, Landlord shall not take any actions which materially adversely interfere
with the rights of Tenant to use the Common Areas.
9.3. VEHICLE PARKING. All parking stalls provided to Tenant in the
Common Areas shall be limited to vehicles no larger than standard-size
automobiles or pickup utility vehicles, and shall be subject to Landlord's
reasonable, non-discriminatory rules and regulations. Tenant shall not cause
large trucks or other large vehicles to be parked within the Common Areas,
except for those locations specifically designated for such purpose on EXHIBIT
A.
9.4. MAINTENANCE OF COMMON AREAS. Unless Tenant elects to assume such
obligations pursuant to Section 9.6 below, Landlord shall maintain the Common
Areas in good order, condition and repair. Tenant shall pay all costs incurred
by Landlord for the operation and maintenance of the Common Areas. Costs of
operating and maintaining the Common Areas include, but are not limited to, the
following: gardening and landscaping within the Common Areas; utilities, water
and sewage charges in connection with the Common Areas; maintenance of signs;
premiums for liability, property damage, fire and other types of casualty
insurance on the Common Areas and worker's compensation insurance; all property
taxes and assessments levied on or attributable to the Common Areas (provided
that any real estate taxes and assessments governed by Article 6 above shall not
be included in this Section 9.4); all personal property taxes levied on or
attributable to personal property used in connection with the Common Areas;
straight-line depreciation on personal property (but not any real property)
owned by Landlord which is consumed or used in the operation or maintenance of
the Common Areas; rental or lease payments paid by Landlord for rented or leased
personal property used in the operation or maintenance of the Common Areas; fees
for required licenses and permits; repairing, resurfacing, repaving,
maintaining, painting, lighting, cleaning, refuse removal, security and similar
items in connection with the Common Areas; and a reasonable allowance to
9
<PAGE>
Landlord for Landlord's overhead and supervision of the Common Areas as set
forth below ("Landlord's Allowance"). Landlord's Allowance for the initial
twelve (12) months of the term of this Lease shall be Fourteen Thousand Dollars
($14,000). Effective on each annual anniversary date of the commencement date,
commencing on that date which is one (1) year after the commencement date (or
the first day of the next succeeding month if the term of this Lease does not
commence as of the first day of a month), Landlord's Allowance shall be
increased by multiplying Landlord's Allowance then in effect by a fraction, the
numerator of which shall be the Consumer Price Index for the month two (2)
months prior to each such adjustment date and the denominator of which shall be
the Consumer Price Index for the same month for the prior year. The Consumer
Price Index to be used is the Consumer Price Index For All Urban Consumers - All
Items, for the Los Angeles/Anaheim/ Riverside metropolitan area, published
monthly by the United States Department of Labor, in which 1982-1984 equals 100.
If the 1982-1984 base is no longer utilized for the Consumer Price Index at the
adjustment date, then the adjustment shall be based upon applicable conversion
tables. If no such conversion tables are available or if said Consumer Price
Index is no longer published, Landlord shall substitute an index which is
published by the Bureau of Labor Statistics or similar agency and which is most
nearly equivalent to the Index described above. Landlord may cause any or all of
such services to be provided by third parties and the cost of such services
shall be included in the costs of. operating and maintaining the Common Areas.
If Landlord hires a third party to perform the overall supervision of the Common
Areas, any management fees paid to such third party shall be deducted from
Landlord's Allowance otherwise to be paid to Landlord as provided above.
Notwithstanding the foregoing, costs of operating and maintaining the Common
Areas shall not include the following: capital expenditures and any depreciation
or amortization thereof other than those expenditures and depreciation incurred
with respect to personal property consumed or used in the operation and
maintenance of the Common Areas; reserves for future expenditures; fees and
expenses for attorneys which may be incurred in lease negotiations and eviction
proceedings, as well as brokers' commissions and similar professional expenses
incurred in connection with lease negotiations; costs associated with the
financing or refinancing of the Building or the Common Areas or any portion
thereof; mortgage payments and ground rents payable by Landlord; repairs and
restoration due to casualty or condemnation; costs associated with correcting
construction defects or repairs due to poor workmanship; costs of correcting
environmental problems; costs incurred with respect to legally mandated
improvements or changes; management or administrative fees in excess of the
then-market rate; and insurance deductibles and self-insurance costs.
9.5. TENANT'S PAYMENT. Tenant shall pay all of the costs of operating
and maintaining the Common Areas (prorated for any fractional month) upon
written notice from Landlord that such costs are due and payable, and in any
event prior to delinquency.
9.6. TENANT'S ELECTION TO MAINTAIN. Notwithstanding the foregoing
provisions of this Article 9, so long as Tenant is not in default of any
provision of this Lease beyond any applicable notice and cure period, then
Tenant may elect by giving Landlord at least thirty (30) days' prior written
notice to assume Landlord's obligations to maintain the Common Areas in good
order, condition and repair pursuant to Section 9.4 above. In such event, Tenant
shall maintain the Common Areas to the same level and standards as Landlord has
previously
10
<PAGE>
been maintaining the Common Areas (or, if Tenant makes such election prior to
Landlord commencing the maintenance of the Common Areas, then to such level and
standards as Landlord may impose, which levels and standards will be consistent
with similar areas within Foothill Ranch). Provided that Tenant has elected to
maintain insurance pursuant to Section 14.1 below and to maintain the Common
Areas pursuant to this Section 9.6, no allowance shall be paid to Landlord or to
Tenant (including Landlord's Allowance) for such periods during which Tenant is
so maintaining such insurance and such Common Areas. If Tenant fails to maintain
the Common Areas as required after so electing to do so, then in addition to any
remedies provided for in Article 23 below, Landlord shall have the right to take
over such maintenance of the Common Areas, in which event Tenant's rights
pursuant to this Section 9.6 shall terminate and be of no further force or
effect.
ARTICLE 10.
USES PROHIBITED
Tenant shall not use, or permit the demised premises or any part
thereof to be used, for any purpose other than the purpose for which the demised
premises are hereby leased as set forth in Section 1.3 above; and no use shall
be made or permitted to be made of the demised premises, nor acts done, which
will increase the existing rate of insurance upon the Building (once said rate
is established), or cause a cancellation of any insurance policy covering said,
Building or any part thereof, nor shall Tenant sell or permit to be kept, used
or sold in or about the demised premises any article which may be prohibited by
standard form of insurance policies. For purposes hereof, the use of the demised
premises by Tenant as contemplated in Section 1.3 above will not, per se, be a
use which will cause the cancellation of any insurance policy covering the
Building or any part thereof or constitute a use which will increase the
existing rate of insurance on the Building (once said rate is established).
Tenant shall, at its sole cost, comply with any and all requirements (pertaining
to the use of the demised premises) of any insurance organization or company
necessary for the maintenance of reasonable fire and public liability insurance
covering the demised premises and appurtenances. Notwithstanding anything to the
contrary contained herein, except as provided below in this Article, there shall
not be sold, leased, licensed or otherwise conveyed, or permitted to be sold,
leased, licensed or otherwise conveyed, at retail, any merchandise or services
in or from the demised premises, excluding (i) Tenant's fixtures, equipment or
property which are not stock in trade, and (ii) food, beverage and cigarette
sales made through vending devices on the demised premises. For purposes of this
restriction, "at retail" shall mean the sale, lease, license or other conveyance
of merchandise or services to ultimate consumers. Notwithstanding the foregoing,
Tenant shall be permitted to conduct sales at retail from the demised premises,
provided that such sales shall not occur more than once in any calendar quarter
and shall not last for more than three (3) consecutive days at any time.
11
<PAGE>
ARTICLE 11.
ALTERATIONS AND FIXTURES
11.1. NO ALTERATIONS. Subject to the provisions of EXHIBIT B hereto,
Tenant shall not make or suffer to be made any alterations of the demised
premises, or any part thereof, including the addition of any equipment to be
placed on the roof, without the prior written consent of Landlord, which consent
shall not be unreasonably withheld, delayed or conditioned by Landlord, and the
prior receipt by Landlord of a copy of Tenant's building permit, if applicable.
Notwithstanding the foregoing, Tenant may, without Landlord's prior written
consent, make non-structural interior alterations of the Building; provided that
(a) with respect to the racking system to be installed in the Merchandise Access
Platform, such alterations do not exceed Seventy-Five Thousand Dollars ($75,000)
during any consecutive twelve (12) month period and (b) with respect to all
other alterations, such alterations do not exceed Twenty Thousand Dollars
($20,000) individually, or Fifty Thousand Dollars ($50,000) in the aggregate
during any consecutive twelve (12) month period. Any such alterations shall be
in conformance with the requirements of all municipal, state and federal
governmental authorities.
11.2. PAYMENT OF COSTS. Tenant is solely responsible for all costs
associated with any additions or alterations to the demised premises performed
by or for Tenant, including any and all permit fees, license fees, utility
charges or other fees or charges, except those costs expressly agreed to be paid
by Landlord under the terms of this Lease.
11.3. REMOVAL. Upon the expiration or earlier termination of this
Lease, Tenant shall not remove any original equipment installed by Landlord or
permanent partitions, electrical or plumbing items or other alterations or
additions added by Tenant which cannot be removed without irreparable or
material damage to the Building; provided, however, if requested by Landlord,
Tenant shall be obligated and entitled to remove any and all machinery,
equipment, furnishings, trade fixtures and other personal property installed by
Tenant. Notwithstanding the foregoing, at the time of request by Tenant for
consent from Landlord to make any alterations or additions to the demised
premises (or, if Landlord's consent is not required, then at the time of making
any alterations or additions to the demised premises), Tenant may request that
Landlord inform Tenant as to whether Tenant will be required to remove such
alterations or additions at the expiration or earlier termination of this Lease.
If Tenant makes any such request, Landlord shall so inform Tenant, and such
decision shall be binding upon the expiration or earlier termination of this
Lease. Additionally, except for the racking system to be installed by Tenant in
the Merchandise Access Platform (which Tenant shall remove upon the expiration
or earlier termination of this Lease), Tenant shall not be required to remove
any of the improvements contemplated to be installed by Tenant pursuant to
EXHIBIT B in connection with the initial construction of the Building. Any
damage done to the demised premises in connection with any such removal by
Tenant shall be repaired at Tenant's sole cost and expense. Unless removed as
specified in this paragraph, all such property left on the demised premises
shall at the expiration or earlier termination of this Lease become the property
of Landlord and remain upon the demised premises. All costs incurred by Landlord
in the subsequent removal of such property
12
<PAGE>
required to be removed by Tenant hereunder, and the repair of any damage
associated with such removal, shall be reimbursed by Tenant to Landlord upon
completion of such removal.
ARTICLE 12.
BUILDING MAINTENANCE, REPAIR AND TRASH COLLECTION
12.1. TENANT'S OBLIGATIONS. As of the earlier of the commencement
date or the date Tenant takes occupancy of the demised premises for purposes of
conducting its business, Tenant shall be deemed to have accepted the demised
premises as being in good and sanitary order, condition and repair; except that
Tenant shall have (a) sixty (60) days after entering the demised premises to
give Landlord written notice of any patent defects in the demised premises and
(b) one (1) year after entering the demised premises to give Landlord written
notice of any latent defects in the demised premises and Landlord shall
forthwith correct any such defects delineated by Tenant. Subject to the
provisions of Article 9 above and Section 12.2 below, Tenant shall at all times
during the term of this Lease, and at Tenant's sole cost and expense, keep,
maintain and repair (including, but subject to the provisions of Article 21, any
damage caused as a result of any burglary or by natural elements) the Building
and other improvements upon the demised premises in good and sanitary order,
condition and repair, including without limitation, the maintenance and repair
of the heating and air conditioning system for the Building, all elevators
serving the Building, all interior walls, windows or other glass, glazing,
casements, doors, plumbing, pipes, electrical wiring and conduits. Subject to
Landlord's obligations in Article 9 above with respect to the Common Areas,
Tenant shall at all times during the term of this Lease, and at Tenant's sole
cost and expense, keep, maintain and repair (including any injury caused by
disease, infestation or natural elements) all landscaping and other improvements
within the demised premises at least to the standard required by the CC&Rs more
fully described in Article 43. If Landlord has any warranties which remain in
effect with respect to any repairs which Tenant is obligated to make, Landlord
shall, upon request, assign to Tenant the right to enforce any such applicable
warranties. Subject to Article 9 and Section 12.2, if any portion of the demised
premises, or any system or equipment exclusively serving the demised premises,
or any landscaping or other improvement within the demised premises for which
Tenant is responsible to maintain cannot be fully repaired, then Tenant shall,
at Tenant's sole cost and expense, promptly replace the same with new or
reconditioned equipment, landscaping or other item, as applicable, of like kind
and quality. Tenant shall also, at its sole cost and expense, be responsible for
any nonstructural alterations or improvements (including, without limitation,
any alterations or improvements which are primarily nonstructural but which
require penetration or other minor modification of the structure in order to
complete) to the demised premises necessitated as a result of the requirement of
any municipal, state or federal authority which may be imposed due to Tenant's
specific use of the demised premises. Tenant hereby waives all rights provided
for by Sections 1941 and 1942 of the Civil Code of the State of California to
make said repairs which Landlord is obligated to make under this Lease; provided
that if Landlord fails to make any such repairs after the giving of notice and
the expiration of any applicable time period provided for herein, then Tenant
may make such repairs and sue Landlord for the cost thereof (provided that in no
event may Tenant offset any amounts incurred by Tenant in connection with the
making of any such repairs against any
13
<PAGE>
amount owing by Tenant to Landlord under this Lease). On the last day of the
term of this Lease or sooner termination of this Lease, Tenant shall surrender
the demised premises with all appurtenances, in good condition and repair,
reasonable wear and tear and damage not required to be repaired pursuant to
Article 21 or Article 35 excepted, but subject to Section 11.3 above.
12.2. LANDLORD'S OBLIGATION. Notwithstanding the provisions of Section
9.3 and Section 12.1 above and subject to Tenant's option set forth in Section
12.3 below, Landlord shall, at Landlord's sole cost and expense, maintain and
keep in good repair (and replace, as necessary) the exterior walls, roof,
gutters, downspouts and foundation of the Building. In no event will Tenant go,
or authorize any person to go, onto the roof of the Building without the prior
written consent of Landlord, which consent will be given only upon Landlord's
satisfaction that any repairs necessitated as a result of Tenant's action will
be made by Tenant, at Tenant's expense, and will be made in such a manner so as
not to invalidate any guarantee relating to said roof. Landlord shall not be
required to make any repairs to the exterior walls, roof or foundation unless
and until Tenant has notified Landlord in writing of the need for such repairs,
or Landlord otherwise obtains actual knowledge of the need for such repairs, and
Landlord shall commence actions to effectuate such repair within ten (10) days
thereafter and shall diligently pursue such repair to completion. If Tenant has
warranties with respect to any repairs which Landlord is obligated to make,
Tenant shall on request assign to Landlord the right to enforce any such
applicable warranties.
12.3. TENANT'S OPTION. Notwithstanding the foregoing provisions of
Section 12.2, so long as at least two (2) years remain in the then-existing term
and Tenant is not in default of any provision of this Lease beyond any
applicable notice and cure period, then Tenant may elect, by giving Landlord at
least thirty (30) days' prior written notice, for Tenant to maintain and repair:
(a) the exterior walls and foundation (but not the roof) of the Building, and
(b) all structural systems within the Building. In such event, Tenant shall be
under the same duty of care as Landlord in maintaining the Building in good
order, condition and repair as provided in Section 12.2 above. For such purpose,
Tenant shall execute a service contract with a management company or servicer,
subject to Landlord's prior written approval, which approval shall not be
unreasonably withheld or delayed. Tenant shall not make any such repairs of a
structural nature or exceeding $20,000 in each case or $50,000 in the aggregate
unless and until Landlord has approved the same in writing (which approval shall
not be unreasonably withheld, delayed or conditioned by Landlord) and Tenant has
provided Landlord with a copy of Tenant's building permit, if required. Landlord
shall reimburse Tenant for the entire cost of all such approved repairs and
maintenance of the Building walls and foundation incurred by Tenant, within
twenty (20) days after receiving from Tenant a reasonably detailed statement
therefor.
ARTICLE 13.
COMPLIANCE WITH LAWS
13.1. GENERAL PROVISIONS. Tenant shall, at its sole cost and expense,
comply with all requirements of all municipal, state and federal governmental
authorities now in force or which may hereafter be in force pertaining to the
use of the demised premises, and shall
14
<PAGE>
faithfully observe in said use all municipal ordinances and state and federal
statutes now in force or which shall hereinafter be in force. The judgment of
any court of competent jurisdiction, or the admission of Tenant in any action or
proceeding against Tenant, whether Landlord is a party thereto or not, that
Tenant has violated any such order, code or statute in said use, shall be
conclusive of that fact as between Landlord and Tenant. Subject to nonstructural
alterations or improvements to be made by Tenant pursuant to Section 12.1 above,
Landlord shall, at its sole cost and expense, comply with all governmental
requirements regarding all capital improvements and upgrades to any portion of
the Building and the Common Areas which are based upon any fire, safety,
handicap (including but not limited to the federal Americans With Disabilities
Act, 42 U.S.C. Section 12101 ET SEG.), building or other codes, ordinances or
laws; provided, that such improvements or upgrades do not result from Tenant's
specific use or layout of the demised premises (as opposed to the general use of
the demised premises as a corporate headquarters with a warehouse) or any
negligent or willful misconduct of Tenant.
13.2. NOISES AND TOXIC WASTES.
(a) Tenant shall not commit, or suffer to be committed, any waste
upon the demised premises, or any nuisance or other act or thing which may
disturb the quiet enjoyment of any other occupant in the vicinity of the demised
premises. No noise, vibrations or offensive odors shall be emitted outside of
the demised premises as a result of Tenant's use of the demised premises;
provided that Landlord acknowledges that there will be noise, vibrations and
odors from Tenant's delivery trucks moving to and from the demised premises as
customary for uses such as Tenant's contemplated use, and such items shall not
be deemed a breach of this sentence.
(b) Except for normal cleaning substances customarily used in the
industry, Tenant shall not use, store or permit toxic waste or other toxic or
hazardous substances on the demised premises during the term of this Lease,
without the prior written consent of Landlord. Except for normal cleaning
substances customarily used in the industry, in the event Tenant desires to use
or store toxic or hazardous substances on the demised premises (including but
not limited to petroleum based fuels), Tenant shall request such use in an
application to Landlord which shall explain in detail the types of substances
which Tenant desires to use, the proposed location and manner of storage of same
and the manner of disposition of such substances or by-products or remains
thereof. Tenant shall deliver to Landlord copies of all studies, reports and
other information submitted by Tenant to any governmental entity or agency
regulating the use of such substances, concurrently with the delivery of same to
such governmental agency or entity. In no event shall Tenant store any toxic or
hazardous substances in underground tanks. The proposed use of such toxic or
hazardous substances shall be approved, if necessary, by the local fire
department and the exterior of the demised premises shall clearly set forth a
label as to the toxic or hazardous substances located within the demised
premises. In the event that any such toxic or hazardous substances are
hereinafter found on, under or about the demised premises except as expressly
allowed by Landlord, Tenant shall take all necessary and appropriate actions and
shall spend all necessary sums to cause the same to be cleaned up and
immediately removed from and about the demised premises, and Landlord shall in
no event be liable or responsible for any costs or expenses incurred in so
doing. Tenant shall
15
<PAGE>
at all times observe and satisfy the requirements of, and maintain the demised
premises in compliance with, all federal, state and local environmental
protection, occupational, health and safety and similar laws, ordinances,
restrictions, licenses and regulations, including but not limited to, the
Federal Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), Resource
Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), Safe Drinking
Water Act (42 U.S.C. Section 3000(f) et seq.), Toxic Substances Control Act (15
U.S.C. Section 2601 et seq.), Clean Air Act (42 U.S.C. Section 7401 et seq.),
Comprehensive Environmental Response of Compensation and Liability Act (42
U.S.C. Section 9601 et seq.), California Health and Safety Code (Section 25100
et seq., Section 39000 et seq.), and California Water Code (Section 13000 et
seq.). Should Tenant at any time receive any notice of violation of any laws,
including those aforementioned, or be given a citation with respect thereto,
Tenant shall (i) immediately notify Landlord of such violation or citation, (ii)
provide Landlord with a copy of same, (iii) commence to cure the deficiency set
forth in the violation or citation within five (5) days after the date of
receipt thereof and complete such cure diligently (but in any event within
thirty (30) days after receipt of such violation or citation) and (iv)
immediately provide Landlord with proof of the curing of such deficiency or
complained of matter. Should Tenant at anytime default in or fail to perform or
observe any of its obligations under this Article 13, Landlord shall have the
right, but not the duty, without limitation upon any of Landlord's other rights
pursuant hereto, to perform the same, and Tenant agrees to pay to Landlord,
within twenty (20) days of demand, all costs and expenses incurred by Landlord
in connection therewith, including without limitation, attorneys' fees, together
with interest from the date of expenditure at the highest rate allowed by law.
Tenant hereby indemnifies Landlord and agrees to defend with counsel selected by
Landlord and hold Landlord harmless for any loss incurred by or liability
imposed on Landlord by reason of Tenant's failure to perform or observe any of
its obligations or agreements under this Article 13. Landlord may enter the
demised premises (including the Building) at any reasonable time, upon prior
notice to Tenant, for the purpose of ascertaining compliance by Tenant with the
requirements of this Article 13. Notwithstanding anything to the contrary
contained above in this paragraph, Tenant shall have no obligation to take any
actions, spend any sums or indemnify Landlord with respect to any toxic or
hazardous substances (x) which are brought onto the demised premises by Landlord
or (y) which existed on the demised premises prior to the commencement of the
term of this Lease (unless such toxic or hazardous substances were brought onto
the demised premises by Tenant, its consultants, representatives or agents). For
purposes hereof, toxic or hazardous substances shall include any toxic or
hazardous material or substance as defined in any Federal, State of California
or local law, ordinance, rule or statute.
ARTICLE 14.
INSURANCE
14.1. LANDLORD'S INSURANCE. Unless Tenant elects to maintain such
insurance as provided below in this Section 14.1, Landlord shall maintain
throughout the term of this Lease casualty insurance on the Building for an
amount equal to one hundred percent (100%) of the full replacement cost of the
Building and otherwise satisfying the conditions set forth in EXHIBIT E attached
hereto and any conditions imposed by any lender with a deed of trust encumbering
the Parcel. Such insurance shall contain no co-insurance or contribution
clauses, a
16
<PAGE>
replacement cost endorsement and deductibles as set forth in Exhibit E hereto.
Landlord may, but shall not be obliged to, take out and carry any other form or
forms of insurance as it or the mortgagees of Landlord may require from time to
time. Notwithstanding the contributions by Tenant to the cost of insurance
premiums with respect to the Building or any alterations of the demised
premises, as are provided herein, Tenant acknowledges that it has no right to
receive any proceeds from any such insurance policies carried by Landlord.
During the term of this Lease, Landlord may also maintain a rental income
insurance policy, at Tenant's expense, with loss payable to Landlord in an
amount equal to one (1) year's Guaranteed Minimum Monthly Rental and Additional
Rental (including without limitation, estimated Common Area maintenance charges,
real estate taxes and assessments and insurance premiums).
Notwithstanding the foregoing provisions of this Section 14.1, so long
as Tenant is not in default of any provision of this Lease beyond any applicable
notice and cure period, then Tenant may elect by giving Landlord at least thirty
(30) days' prior written notice to maintain the foregoing insurance on the
Building using a carrier reasonably satisfactory to Landlord pursuant to a
policy or policies meeting the requirements of this Section 14.1 and of Sections
15.1(c) through (e) below; provided that the deductible amount of any such
insurance maintained by Tenant may be up to Ten Thousand Dollars ($10,000) for
each loss except for (a) damages resulting from sewer back-up which may have a
deductible of up to Twenty-Five Thousand Dollars ($25,000), (b) damages
resulting from flood which may have a deductible of up to Fifty Thousand Dollars
($50,000), and (c) damages resulting from earthquake which may have a,
deductible of up to the greater of five percent (5%) of value or Two Hundred
Fifty Thousand Dollars ($250,000).
14.2. REIMBURSEMENT. Tenant shall pay to Landlord, as Additional
Rental hereunder, the cost of said insurance maintained by Landlord; unless
Tenant maintains such insurance as permitted in Section 14.1 above. Said
Additional Rental is due twenty (20) days after Tenant's receiving from Landlord
a reasonably detailed statement therefor.
14.3. INSURABLE INTEREST. With respect to said casualty insurance,
Landlord and Tenant agree that Landlord's insurable interest in the demised
premises includes all improvements to the demised premises, except Tenant's
removable trade fixtures or Tenant's personal property which are insured by
Tenant's personal property insurance.
ARTICLE 15.
INDEMNIFICATION - LIABILITY INSURANCE BY TENANT
15.1. TENANT'S INSURANCE REQUIREMENTS. Tenant shall, at its sole cost
and expense, commencing as of the date Tenant is given access to the demised
premises for any purpose and throughout the entire term of this Lease, procure,
pay for and keep in full force and effect:
(a) Comprehensive liability insurance with respect to the demised
premises and the operations of or on behalf of Tenant in, on or about the
demised premises,
17
<PAGE>
including but not limited to personal injury, product liability (if applicable),
blanket contractual, owner's protective, broad form property damage liability
coverage, host liquor liability and owned and non-owned automobile liability in
an amount not less than $3,000,000.00 combined single limit. Such policy shall
contain the following provisions:
(i) Severability of interest;
(ii) Cross liability;
(iii) An endorsement stating "such insurance as is
afforded by this policy for the benefit of the Landlord shall be primary as
respects any liability or claims arising out of the occupancy of the
demised premises by Tenant, or Tenant's operations and any insurance
carried by Landlord shall be excess and noncontributory"; and
(iv) With respect to improvements, alterations and the
like required or permitted to be made by Tenant hereunder, contingent
liability and builder's risk insurance.
(b) Worker's compensation coverage as required by law, together
with employer's liability coverage.
(c) All policies of insurance required to be carried by Tenant
pursuant to these requirements shall be written by responsible insurance
companies authorized to do business in the State of California. All such
insurance required by Tenant hereunder may be furnished by Tenant under any
blanket policy carried by it or under a separate policy therefor. A copy of each
paid up policy evidencing such insurance or a certificate of insurance
evidencing such policy shall be delivered to Landlord prior to the date Tenant
is given the right of possession of the demised premises, and upon renewals,
prior to the expiration of such coverage. In no event shall the then limits of
any policy be considered as limiting the liability of Tenant under this Lease.
(d) Each policy evidencing above insurance shall contain a
provision including Landlord, Landlord's managing agent and any lenders on the
demised premises as additional insureds.
(e) In the event that Tenant fails to maintain and pay for
insurance required by this Article, Landlord may (but without obligation to do
so) procure such insurance and pay the premiums therefor, in which event Tenant
shall repay Landlord all sums so paid by Landlord within twenty (20) days
following Landlord's written demand to Tenant for such payment.
15.2. INDEMNIFICATION. Unless caused by the negligent or intentional
act or omission of Landlord, or any agent, representative, contractor or
employee of Landlord, or by the breach of this Lease by Landlord, Tenant shall
defend, indemnify and hold harmless Landlord against and from all claims,
damages, costs (including attorneys' fees and court costs,
18
<PAGE>
even if on appeal), judgments and liabilities arising from Tenant's use of the
demised premises or the conduct of its business arising from any act, neglect,
fault or omission of Tenant, or of its agents, employees or invitees. Unless
caused by the negligent or intentional act or omission of Tenant or any agent,
representative, contractor or employee of Tenant, or by the breach of this Lease
by Tenant, Landlord shall defend. indemnify and hold harmless Tenant against and
from all claims, damages, costs (including attorneys' fees and court costs, even
if on appeal). judgments and liabilities arising from any act, neglect, fault or
omission of Landlord, or of its agents, employees or invitees on or about the
demised premises.
15.3. DAMAGE TO TENANT'S PROPERTY. Unless caused by the negligent or
intentional act or omission of Landlord, or any agent, representative,
contractor or employee of Landlord, or by the breach of this Lease by Landlord,
Landlord or its agents shall not be liable for any damage to property entrusted
to employees of Tenant, nor the loss of or damage to any property by theft or
otherwise, nor for any injury or damage to persons or property resulting from
fire, explosion, falling plaster, steam, gas, electricity, water or rain which
may leak from any part of the Building or from the pipes, appliances or plumbing
works therein or from the roof, street or subsurface or from any other place or
resulting from dampness or any other patent or latent cause whatsoever. Unless
caused by the negligent or intentional act or omission of Landlord, or any
agent, representative, contractor or employee of Landlord, or by the breach of
this Lease by Landlord, Landlord or its agents shall not be liable for
interference with the light or other incorporeal hereditaments. Tenant shall
give prompt notice to Landlord in case of fire or accidents in the Building or
of defects therein or in the fixtures or equipment.
15.4. WAIVER OF SUBROGATION. Neither Landlord nor Tenant (or any of
their officers, directors or shareholders) shall be liable for any damage by
fire or other peril includable in the casualty insurance policy required to be
maintained pursuant to Section 14.1 above or includable in any casualty
insurance policy actually maintained by either with respect to the demised
premises (whether or not required to be maintained pursuant to this Lease), no
matter how caused, it being understood that the damaged party will look solely
to its insurer for reimbursement. Landlord's and Tenant's policies of casualty
insurance shall contain a waiver of subrogation confirming the foregoing. Any
waiver of rights required by this Section shall be ineffective if such waiver
shall be unobtainable, or shall result in a breach of the insurance contract or
in a material increase in the cost of insurance of the waiving party, unless the
other party shall pay such increase within twenty (20) days after notice
thereof.
ARTICLE 16.
FREE FROM LIENS
Tenant shall keep the demised premises free from any liens arising
out of any work performed, material furnished or obligation incurred by Tenant.
In the event a mechanic's or materialmen's lien is filed against the demised
premises as a result of any work performed by or through Tenant, Tenant shall
promptly remove such lien either through payment in full or through the
recording of a release bond in the statutory amount. Failure by Tenant to remove
the lien to the reasonable satisfaction of Landlord and to the satisfaction of
Landlord's title insurance
19
<PAGE>
company within ten (10) days after written demand therefor from Landlord shall
entitle Landlord to remove the lien as set forth in the preceding sentence.
Tenant shall, within ten (10) days after written demand therefor from Landlord,
reimburse Landlord for all costs and expenses (including attorneys' fees)
incurred by Landlord in connection with the removal of the lien.
ARTICLE 17.
ABANDONMENT
Tenant shall not vacate or abandon the demised premises at any time
during the term of this Lease. The demised premises shall be deemed abandoned by
Tenant within the meaning of Section 1951.2 of the California Civil Code and
this Lease shall terminate, without prejudice to any of Landlord's other rights
hereunder, if Landlord gives written notice of its belief of abandonment in
compliance with Section 1951.3 of the California Civil Code and Tenant fails to
give Landlord written notice of its intent not to abandon the demised premises
in compliance with Section 1951.3 of the California Civil Code.
ARTICLE 18.
SIGNS AND AUCTIONS
18.1. SIGN CRITERIA. Tenant shall at its sole cost and expense prepare
sign construction drawings, in accordance with Landlord's sign criteria as
described in the CC&Rs defined in Section 43, which drawings shall be submitted
to Landlord for Landlord's prior written approval, which approval shall not be
unreasonably withheld, delayed or conditioned by Landlord. Tenant agrees to
install signs for the Building which shall conform with the approved sign
drawings within thirty (30) days after the commencement date of this Lease.
18.2. DISPLAYS. Without Landlord's prior written consent, Tenant shall
not display or sell merchandise outside the defined exterior walls and permanent
doorways of the Building.
ARTICLE 19.
UTILITIES
Subject only to Article 9 with respect to the Common Areas, Tenant
shall pay before delinquency all charges for water, gas, heat, electricity,
power, telephone service, and all other services and utilities, including any
connection, use or other fees required to be paid as a result of Tenant's use of
the demised premises, used in, upon or about the demised premises by Tenant or
any of its subtenants, licensees or concessionaires during the term of this
Lease.
20
<PAGE>
ARTICLE 20.
ENTRY AND INSPECTION
Landlord and its agents may enter into and upon the demised premises
(including the Building) at all reasonable times upon at least twenty-four (24)
hours' advance notice to Tenant (except in the case of an emergency in which
event no prior notice shall be required) for the purpose of: (a) inspecting the
same, (b) maintaining the Building, (c) posting notices of nonresponsibility for
alterations, additions or repairs, or (d) placing upon the Parcel or Building
any "For Sale" signs. No entry made by Landlord or its agent pursuant to this
Article 20 may materially adversely interfere with access to or visibility of
the demised premises by Tenant or its employees or invitees or with Tenant's use
of the demised premises. Tenant shall permit Landlord, at any time within ninety
(90) days prior to the expiration of this Lease, to place upon the demised
premises any "For Lease" signs, and during such ninety (90) day period, Landlord
or its agents may, during normal business hours, enter upon the demised premises
(including the Building) and exhibit same to prospective tenants and purchasers.
ARTICLE 21.
DAMAGES AND DESTRUCTION OF PREMISES
21.1. OBLIGATION TO REPAIR. In the event of (a) partial or total
destruction of the demised premises which requires repairs to the demised
premises, or (b) the Building being declared unsafe or unfit for occupancy by
any authorized public authority, in either event for any reason other than
Tenant's act, use or occupation, which declaration requires repairs to the
Building, Landlord shall forthwith make said repairs to substantially the same
condition as Landlord originally constructed the demised premises pursuant to
the terms of this Lease (but subject to any changes in laws, codes and
ordinances in the interim). Landlord shall promptly commence such repairs upon
receiving actual knowledge of the occurrence of an event described in the
preceding sentence which creates the necessity for such repairs, but in any
event not later than twenty (20) days following receipt of written notice from
Tenant. Such repairs shall be completed in an expedient manner as quickly as
reasonably possible, but in any event within twelve (12) months from receipt of
Tenant's notice. No such destruction (including any destruction necessary in
order to make repairs required by any declaration made by any public authority)
shall in any way annul or void this Lease, except that Tenant shall be entitled
to a proportionate reduction of the Guaranteed Minimum Monthly Rental and
Additional Rental while such repairs are being made, such proportionate
reduction to be based upon the extent to which such destruction or the making of
such repairs shall interfere with the business carried on by Tenant in the
Building. However, if (i) during the last two (2) years of the term of this
Lease (A) the demised premises are damaged as a result of fire or any other
insured casualty or any casualty required to be insured against under this
Lease, (B) such damage is to an extent which results in Tenant being unable to
reasonably conduct its operations in the Building (which determination Tenant
shall make and give written notice to Landlord with respect to within twenty
(20) days after the date of such casualty), and (C) the necessary repairs are
reasonably anticipated by Landlord to take greater than fifty percent (50%) of
the remaining term of this
21
<PAGE>
Lease to complete; or (ii) the demised premises are damaged at any time by a
casualty not insured or required to be insured against and such damage is to an
extent which results in Tenant being unable to reasonably conduct its operations
in the Building (which determination Tenant shall make and give written notice
to Landlord with respect to within twenty (20) days after the date of such
casualty), either party may within thirty (30) days following the date such
damage occurs terminate this Lease by written notice to the other party.
Additionally, in the event of any damage which would result in Landlord having
the right to terminate this Lease as provided in subparagraph (i) above, Tenant
shall have ten (10) days after demand from Landlord to exercise any remaining
option to extend the term of this Lease pursuant to Section 3.3. Notwithstanding
the provisions of Section 3.3 above, Tenant shall give written notice of such
election to exercise within such ten (10) day period. If Tenant timely exercises
any such option to extend the term of this Lease, then the provisions of
subparagraph (i) above shall not apply with respect to such casualty. If either
party elects to terminate this Lease, all rentals shall be prorated between
Landlord and Tenant as of the date of such destruction. Notwithstanding anything
to the contrary contained in this Lease, if this Lease is not terminated as set
forth above after the occurrence of any casualty, then Tenant shall pay to
Landlord, prior to Landlord being obligated to commence any repair or
reconstruction work as set forth above, an amount equal to the deductible amount
of any insurance policy covering such casualty with respect to insured
casualties, and an amount equal to the costs of such repair and/or
reconstruction with respect to any uninsured casualty.. Additionally, in the
event of damage or destruction to all or any portion of the Common Areas, if
such damage or destruction results in a material interference with Tenant's use
of or access to the demised premises, Tenant shall be entitled to a
proportionate reduction of the Guaranteed Minimum Monthly Rental and Additional
Rental while such repairs are being made, to be determined as set forth above in
this Section 21.1 with respect to other casualties. The foregoing provisions of
this Section 21.1 relating to the payment of deductibles and relating to payment
for uninsured casualties shall apply equally with respect to damage or
destruction of the Common Areas.
21.2. WAIVER. In respect to any partial or total destruction
(including any destruction necessary in order to make repairs required by any
such declaration of any authorized public authority) which Landlord is obligated
to repair or may elect to repair under the terms of Section 21.1, Tenant waives
any statutory right it may have to cancel this Lease as a result of such
destruction, including, without limitation, any such rights Tenant may otherwise
have pursuant to California Civil Code Section 1932 or 1933. Notwithstanding the
foregoing, Tenant shall have the right to make such repairs if Landlord fails to
do so within the time periods required above, and in such event, Tenant shall
have the right to sue Landlord for reimbursement for the cost incurred by Tenant
in making such repairs, but Tenant shall have no right to offset such amounts
against any amounts payable by Tenant pursuant to the terms of this Lease.
ARTICLE 22.
ASSIGNMENT, SUBLETTING AND ENCUMBRANCE
22.1. LANDLORD'S CONSENT REQUIRED. Tenant shall not voluntarily or by
operation of law assign, license, franchise, transfer, mortgage, hypothecate, or
otherwise
22
<PAGE>
encumber all or any part of Tenant's interest in this Lease or in the demised
premises. and shall not sublet, franchise, change ownership or license all or
any part of the demised premises, without the prior written consent of Landlord
in each instance, which consent shall not be unreasonably withheld, delayed or
conditioned and any attempted assignment, license, franchise, transfer,
mortgage, encumbrance, subletting or change of ownership without such consent
shall be wholly void and shall confer no rights upon any third parties. Without
in any way limiting Landlord's right to refuse to give such consent for any
other reason or reasons, Landlord reserves the right to refuse to give such
consent if in Landlord's reasonable discretion and opinion the type or quality
of the business operation conducted on the demised premises or throughout any
other portion of the land adjacent to the demised premises is or may be in any
way adversely affected during the term of the Lease by such proposed assignment,
license, franchise, transfer, mortgage, encumbrance or subletting, or the
financial worth of the proposed new tenant is less than that of Tenant as of the
date this Lease is executed. Furthermore, Landlord shall not be entitled to
condition Landlord's consent to any sublease upon Tenant's duty to pay over to
Landlord any rent or other consideration received by Tenant from any such
subtenant, either initially or over the term of the sublease, in excess of the
rent called for hereunder nor shall Landlord be entitled to receive any such
excess rent, or. in case of the sublease of a portion of the demised premises,
in excess of such rent fairly allocable to such portion. For purposes of this
Lease, no sale, transfer, issuance, encumbrance or other assignment of shares of
the capital stock of Tenant or of any entity controlling Tenant shall be deemed
a transfer or assignment of this Lease or a subletting or change of ownership of
the demised premises or any part thereof. Notwithstanding anything to the
contrary contained in this Lease, Tenant shall have the right, without the prior
consent of Landlord, to assign this Lease or sublet the demised premises to a
corporation or other entity which: (i) is Tenant's parent corporation; or (ii)
is a wholly-owned subsidiary of Tenant; or (iii) is a corporation which Tenant
or Tenant's parent corporation owns or the shareholders of Tenant or Tenant's
parent corporation own in excess of fifty percent (50%) of the outstanding
capital stock; or (iv) as a result of a consolidation, merger or other
reorganization with Tenant and/or Tenant's parent corporation, shall own all or
substantially all of the assets of Tenant or Tenant's parent corporation; or (v)
acquires or is acquiring all or substantially all of the assets of Tenant. Any
assignment or subletting pursuant to the above shall be subject to the following
conditions: (a) Tenant shall remain fully liable during the unexpired term of
this Lease; and (b) any such assignment or subletting shall be subject to all of
the terms, covenants and conditions of this Lease. Additionally, notwithstanding
anything to the contrary contained in this Lease, Tenant shall have the right,
without the prior consent of Landlord, to assign this Lease or sublet the
demised premises to an entity which has a net worth computed pursuant to
generally accepted accounting principles consistently applied (as shown in
financial statements to be delivered to Landlord by such entity prior to the
effective date of such assignment or subletting) of at least Fifty Million
Dollars ($50,000,000) (subject to adjustment as set forth below); provided that
such entity expressly assumes all of Tenant's obligations hereunder in a writing
reasonably acceptable to Landlord. Such $50,000,000 amount shall be increased at
the same times, and using the same formula, as Landlord's Allowance is increased
pursuant to Section 9.4 above. Provided the foregoing conditions relating to net
worth and written assumption of obligations are satisfied, Tenant shall be
released from its obligations hereunder upon consummation of such assignment.
23
<PAGE>
22.2. TENANT'S APPLICATION (ASSIGNMENT AND SUBLEASE). In the event
that Tenant desires at any time to assign this Lease or to sublet the demised
premises or any portion thereof, Tenant shall submit to Landlord, at least sixty
(60) days prior to the proposed "effective date" of the assignment or sublease,
in writing: (a) unless Landlord's consent is not required for such assignment or
subletting pursuant to Section 22.1 above, a notice of request for permission to
assign or sublease, setting forth the proposed effective date, which shall be no
less than sixty (60) days or more than one hundred eighty (180) days after the
sending of such notice; (b) the name of the proposed subtenant or assignee; (c)
the nature of the proposed subtenant's or assignee's business to be carried on
in the demised premises; (d) a current financial statement of Tenant and the
proposed subtenant or assignee; and (e) such other information as Landlord may
reasonably request. Each such request by Tenant shall be accompanied by a One
Hundred Fifty Dollar ($150.00) payment to Landlord as the cost for processing
such request.
22.3. COLLECTION. Any rental payments or other sums received from
Tenant or any other person in connection with this Lease shall be conclusively
presumed to have been paid by Tenant or on Tenant's behalf. Landlord shall have
no obligation to accept any rental payments or other sum from any person other
than Tenant, unless (a) Landlord has been given prior written notice to the
contrary by Tenant, and (b) if Landlord's consent is required to any such
assignment or sublease, Landlord has consented to payment of such sums by such
person other than Tenant. If this Lease be assigned, or if the demised premises
or any part thereof be sublet or occupied by anybody other than Tenant, Landlord
may (but shall not be obligated to) collect rent from the assignee, subtenant or
occupant and apply the net amount collected to the rent and other sums herein
required and retain any excess rent so collected, but no such assignment,
subletting, occupancy or collection shall be deemed a waiver of Tenant's
covenant set forth in the first sentence of Section 22.1 above, nor shall such
assignment, subletting, occupancy or collection be deemed an acceptance by
Landlord of the assignee, subtenant or occupant as tenant, or a release of
Tenant from further performance by Tenant of covenants on the part of Tenant
herein contained except as otherwise expressly provided in Section 22.1 above.
Except as otherwise expressly provided in Section 22.1 above, no assignment or
subletting shall affect the continuing primary liability of Tenant hereunder
(which, following assignment, shall be joint and several with the assignee), and
Tenant shall not be released from performing any of the terms, covenants and
conditions of this Lease.
22.4. WAIVER. Notwithstanding any assignment or sublease, or any
indulgences, waivers or extensions of time granted by Landlord to any assignee
or sublessee, or any failure by Landlord to take action against any assignee or
sublessee, Tenant waives notice of any default of any assignee or sublessee and
agrees that Landlord may, at its option, proceed against Tenant without having
taken action against or joined such assignee or sublessee, except that Tenant
shall have the benefit of any indulgences, waivers and extensions of time
granted to any such assignee or sublessee. Consent by Landlord to one
assignment, subletting, occupation or use by another person shall not be deemed
a consent to any subsequent assignment, subletting, occupation or use by another
person.
24
<PAGE>
22.5. ASSUMPTION OF OBLIGATIONS. Each assignee or transferee, other
than Landlord, shall assume all obligations of Tenant under this Lease and shall
be and remain liable jointly and severally with Tenant (except as otherwise
expressly provided in Section 22.1 above) for the payment of the rent, and for
the due performance of all the terms, covenants, conditions and agreements
herein contained on Tenant's part to be performed, for the term of this Lease.
No assignment shall be binding on Landlord unless such assignee or Tenant shall
deliver to Landlord an executed instrument on Landlord's form or on such other
form as may be reasonably acceptable to Landlord. The failure or refusal of the
assignee to execute such instrument of assumption shall not release or discharge
the assignee from its liability, and shall provide Landlord with an option to
terminate said assignment.
ARTICLE 23.
DEFAULT
23.1. DAMAGES. If Tenant fails to make any rental or Additional Rental
or other payment required by the provisions of this Lease within ten (10) days
after written notice that the same was not paid when due, or, subject to Section
34.3(b), fails within fifteen (15) days after written notice thereof to commence
actions to correct any breach or default in performing any covenants, terms or
conditions of this Lease other than nonpayment of rent or Additional Rental or
fails to continuously and diligently prosecute such actions to completion after
commenced (with diligence being determined based on customary industry
practice), or if Tenant abandons the demised premises before the end of the
term, Landlord shall have the right at any time thereafter to elect to terminate
this Lease and Tenant's right to possession hereunder. The foregoing cure
periods (including pursuant to Section 34.3(b)) shall run concurrently with, and
shall not be in addition to, any statutory cure periods. Upon such termination,
Landlord shall. have the right to recover against Tenant:
(a) The worth at the time of award of the unpaid rent which had
been earned at the time of termination;
(b) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided;
(c) The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; and
(d) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom.
The "worth at the time of award" of the amounts referred to in subparagraphs (a)
and (b) above shall be computed by allowing interest at ten percent (10%) per
annum. The worth at the time of award of the amount referred to in subparagraph
(c) shall be computed by discounting such
25
<PAGE>
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%).
23.2. MITIGATION. Such efforts as Landlord may make to mitigate the
damage caused by Tenant's breach of this Lease shall not constitute a waiver of
Landlord's right to recover damages against Tenant hereunder, nor shall anything
herein contained affect Landlord's right to indemnification against Tenant for
any liability arising prior to the termination of this Lease for personal
injuries or property damage.
23.3. TERMINATION.
(a) Notwithstanding any of the foregoing, the breach of this
Lease by Tenant, or an abandonment of the demised premises by Tenant, shall not
constitute a termination of this Lease, or of Tenant's right of possession
hereunder, unless and until Landlord elects to do so, and until such time
Landlord shall have the right to enforce all of its rights and remedies under
this Lease, and otherwise at law, including the right to recover rent, and all
other payments to be made by Tenant hereunder, as they become due; provided,
however, that until such time as Landlord elects to terminate this Lease, and
Tenant's right of possession hereunder, Tenant shall have the right to sublet
the demised premises or to assign its interests in this Lease, or both, subject
only to the written consent of Landlord, which consent shall not be unreasonably
withheld.
(b) The parties hereto agree that acts of maintenance or
preservation or efforts to re-lease the demised premises, or the appointment of
a receiver upon the initiative of Landlord to protect its interests under this
Lease shall not constitute a termination of Tenant's right of possession for the
purposes of this Section unless accompanied by a written notice from Landlord to
Tenant of Landlord's election to so terminate.
23.4. ASSIGNMENT. As security for the performance by Tenant of all of
its duties and obligations hereunder, Tenant does hereby assign to Landlord the
right, power and authority, during the continuance of this Lease, to collect the
rents, issues and profits of the demised premises, and retain said rents, issues
and profits as they become due and payable. Upon any such breach or default,
Landlord shall have the right at any time thereafter, without notice except as
provided for above, either in person, by agent or by a receiver to be appointed
by a court, to enter and take possession of said demised premises and collect
such rents, issues and profits, including those past due and unpaid, and apply
the same, less costs and expenses of operation and collection, including
reasonable attorneys' fees, upon any indebtedness secured hereby, and in such
order as Landlord may determine.
23.5. FINANCIAL CONDITION. Tenant acknowledges that Landlord has
executed this Lease in reliance on the financial information furnished by Tenant
to Landlord as to Tenant's financial condition. In the event that it is
determined at any time subsequent to the date of this Lease that any of the
financial information furnished by Tenant is substantially untrue or inaccurate,
Tenant shall be deemed to be in default under this Lease, which default shall
not be subject to cure, and which shall entitle Landlord to exercise all
remedies reserved to Landlord under this Lease or otherwise available to
Landlord by law.
26
<PAGE>
23.6. FORM OF PAYMENT. In the event of a default of any rental payment
or other payment due under this Lease, Landlord may in Landlord's notice to
Tenant of such default require that Tenant's payment to cure the default be in
cash, cashier's check and/or certified check. Landlord and Tenant agree that
should Landlord so elect to require payment by cash, cashier's check or
certified check in Landlord's notice to Tenant, a tender of money to cure the
default which is not in the form requested by Landlord shall be deemed a failure
to cure the default.
23.7. NO WAIVER. Nothing contained in this Article 23 shall in any way
diminish or be construed as waiving any of Landlord's other remedies elsewhere
in this Lease or by law or in equity.
ARTICLE 24.
SURRENDER OF LEASE
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to Landlord of any or all of
such subleases or subtenancies.
ARTICLE 25.
SALE OF PREMISES BY LANDLORD
In the event of any sale of the demised premises by Landlord, provided
that the transferee expressly assumes in writing the obligations of Landlord
accruing hereunder after the consummation of such transfer, Landlord shall be
and is hereby entirely freed and relieved of all liability under any and all of
its covenants and obligations contained in or derived from this Lease arising
out of any act, occurrence or omission occurring after the consummation of such
sale; and the purchaser at such sale or any subsequent sale of the demised
premises shall be deemed, without any further agreement between the parties or
their successors in interest or between the parties and any such purchaser, to
have assumed and agreed to carry out any and all of the covenants and
obligations of Landlord under this Lease.
ARTICLE 26.
ATTORNEYS' FEES
26.1. THIRD PARTY LITIGATION. If Landlord is involuntarily made a
party defendant to any litigation concerning this Lease or the demised premises
by reason of any act or omission of Tenant, then Tenant shall defend and hold
harmless Landlord from all liabilities by reason thereof, including reasonable
attorneys' fees and all costs incurred by Landlord in such litigation.
27
<PAGE>
26.2. BETWEEN LANDLORD AND TENANT. If either Landlord or Tenant or
their successors and assigns shall commence any legal proceedings either in
court or by arbitration against the other with respect to the enforcement or
interpretation of any of the terms and conditions of this Lease, the
nonprevailing party therein shall pay to the other all expenses of said
litigation, including reasonable attorneys' fees as may be fixed by the court or
arbitrator having jurisdiction over the matter. The parties hereto agree that
the State of California is the proper jurisdiction for litigation of or
performance under any matters relating to this Lease, with venue in Orange
County, and service mailed to the address of Tenant set forth herein shall be
adequate service for such litigation.
ARTICLE 27.
HOLDING OVER
Any holding over after the expiration of the term of this Lease, with
the consent of Landlord, shall be construed to be a tenancy from month to month,
cancelable upon thirty (30) days written notice, and upon the same terms and
conditions as exist during the last year of the term hereof except the
Guaranteed Minimum Monthly Rental shall be increased to (a) one hundred
twenty-five percent (125%) of the Guaranteed Minimum Monthly Rental during the
last year of the term hereof if Landlord and Tenant are then actively
negotiating an extension of the term hereof or (b) one hundred fifty percent
(150%) of the Guaranteed Minimum Monthly Rental during the last year of the term
hereof if Landlord and Tenant are not then actively negotiating an extension of
the term hereof.
ARTICLE 28.
NOTICES
All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand delivery or professional messenger
service) to either party or may be sent by certified mail, with postage prepaid,
return receipt requested, or delivered by U.S. Express Mail. or by Federal
Express or any other commercial courier service guaranteeing overnight delivery,
charges prepaid, and addressed as set forth in Sections 1.1 and 1.2, as
appropriate. Any such notice shall be effective when received. Any party may
change its address for purposes of this Section by giving notice to the other
party as herein provided.
ARTICLE 29.
SUCCESSORS IN INTEREST
The covenants herein contained shall, subject to the provisions as to
assignment, apply to and bind the heirs, successors, executors, administrators
and assigns of all the parties hereto; and all of the parties hereto shall be
jointly and severally liable hereunder.
28
<PAGE>
ARTICLE 30. FORCE MAJEURE
If either party hereto shall be delayed or prevented from the
performance of any act required hereunder by reason of acts of God, strikes,
lockouts, labor troubles, inability to procure materials, restrictive
governmental laws or regulations or other cause without fault and beyond the
control of the party obligated (financial inability excepted), performance of
such act shall be excused for the period of the delay and the period for the
performance of any such act shall be extended for a period equivalent to the
period of such delay; provided, however, nothing in this Article 30 contained
shall excuse Tenant from the prompt payment of any rental or other charge
required of Tenant hereunder except as may be expressly provided elsewhere in
this Lease and nothing in this Article 30 contained shall result in an extension
of the period set forth in Section 3.1(b) above if Tenant's work is delayed or
prevented due to an event specified herein. Notwithstanding the foregoing, if
Landlord is unable to substantially complete that portion of the Office Work
required to be constructed by Landlord pursuant to EXHIBIT B hereto on a timely
basis for any reason other than Tenant's actions or inactions (including
Tenant's failure to satisfy the schedule attached hereto as EXHIBIT C to the
extent applicable to such work), then Landlord shall not be deemed to have
substantially completed its work pursuant to Section 3.1(c) above and the
commencement date shall be delayed accordingly.
ARTICLE 31.
PARTIAL INVALIDITY
If any term, covenant, condition or provision of this Lease is held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the provisions hereof shall remain in full force and effect and
shall in no way be affected, impaired or invalidated thereby.
ARTICLE 32.
CAPTIONS
The various headings and numbers herein and the grouping of the
provisions of this Lease into separate sections and paragraphs are for the
purpose of convenience only and shall not be considered a part hereof.
ARTICLE 33.
TIME
Time is of the essence of this Lease.
29
<PAGE>
ARTICLE 34.
SUBORDINATION, ATTORNMENT
34.1. SUBORDINATION. This Lease, at Landlord's option, shall be
subordinate to the lien of any deed of trust, mortgage or ground lease
subsequently placed upon the Parcel or any part thereof, and to any and all
advances made on the security thereof, and to all renewals, modifications,
consolidations, replacements and extensions thereof. As a condition of such
subordination, the beneficiary, mortgagee or ground lessor, as applicable (the
"Lender") shall execute and deliver to Tenant a commercially reasonable
non-disturbance and attornment agreement binding upon Lender and its successors
and assigns which shall, among other items, provide that (a) Tenant shall not be
dispossessed of its right to quiet enjoyment of the demised premises in the
event of a foreclosure or other action under the deed of trust, mortgage or
ground lease as long as Tenant shall not be in default under this Lease beyond
any applicable notice and cure period, and (b) such Lender agrees that, if the
Lender (or its successor as a result of the enforcement or foreclosure of the
mortgage, deed of trust or ground lease) comes into possession or acquires title
to the demised premises as a result of the enforcement or foreclosure of the
mortgage, deed of trust, or ground lease, the Lender (or such successor) agrees
to recognize. Tenant and agrees not to disturb Tenant in its possession of the
demised premises for any reason other than one which would entitle Landlord to
disturb Tenant pursuant to this Lease. Said agreement shall further provide that
Tenant and Lender (or such successor) shall be bound each to the other under all
of the terms, covenants and conditions of this Lease accruing during the balance
of the term thereof. If any Lender shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Tenant, this Lease shall be deemed prior to such mortgage,
deed of trust or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording hereof; provided, that such Lender executes a commercially reasonable
nondisturbance and attornment agreement with Tenant as contemplated above.
Subject to the foregoing, upon the request of Landlord, Tenant shall execute and
return to Landlord, within twenty (20) days after demand therefor, a
subordination agreement in recordable form subordinating this Lease to existing
or future secured interests.
34.2. ATTORNMENT. In the event any proceedings are brought for
foreclosure, or in the event of the exercise of the power of sale under any
mortgage or deed of trust made by Landlord covering the demised premises, Tenant
shall attorn to the purchaser upon any such foreclosure or sale and recognize
such purchaser as Landlord under this Lease, subject to the provisions of
Section 34.1 above. Tenant shall not be obligated to attorn to the purchaser or
transferee upon any foreclosure sale or sale or transfer in lieu of foreclosure
unless and until such purchaser or transferee acknowledges in writing the
privity of contract between it, as Landlord, and Tenant.
34.3. ESTOPPEL CERTIFICATE.
(a) If upon any sale, assignment or hypothecation of the demised
premises or the Parcel by Landlord, an estoppel certificate, and/or financial
statement and/or
30
<PAGE>
assignment of rights shall be requested of Tenant, Tenant agrees, within twenty
(20) days thereafter, to deliver Tenant's last regularly published financial
statement, and to deliver such estoppel certificate (in recordable form)
addressed to any such proposed mortgagee or purchaser or to Landlord certifying
the requested information to the extent relating to this Lease, including among
other things, the dates of commencement and termination of this Lease, the
amounts of security deposits (if any), that this Lease is in full force and
effect (if such be the case) and that to Tenant's knowledge there are no
defenses, offsets or defaults of Landlord, or noting such defenses, offsets or
defaults as actually exist. Such mortgagee and purchaser shall have the right to
rely on such estoppel certificate and financial statement. Tenant shall in the
same manner acknowledge and execute any assignment of rights to receive rents as
required by any mortgagee of Landlord.
(b) Should Tenant fail to provide such estoppel certificate,
financial statement or assignment of rights within twenty (20) days of the
service on Tenant of a request therefor, then Landlord shall give Tenant a
second request to provide such estoppel certificate, financial statement or
assignment of rights referring to this Lease and this Section 34.3(b) and
stating that failure to return such estoppel certificate is a material breach of
this Lease. If Tenant fails to provide such estoppel certificate, financial
statement or assignment of rights within ten (10) days of the service on Tenant
of such second request therefor, then such failure shall be deemed to be a
material breach of this Lease by Tenant, which breach shall not have any further
cure periods notwithstanding the provisions of Section 23.1.
ARTICLE 35.
CONDEMNATION
In the event that by a condemnation or a transfer in lieu thereof by
power of eminent domain by a public or quasi-public authority, twenty percent
(20%) or more of the Building is taken, either party may upon written notice
given within thirty (30) days after such taking or transfer in lieu thereof
terminate this Lease. Notwithstanding the foregoing, if Tenant is willing to
remain upon the demised premises after such condemnation without any abatement
of rent or other matters hereunder, then Landlord shall not have the right to
terminate this Lease as a result of the immediately preceding sentence.
Additionally, in the event of (a) condemnation of less than twenty percent (20%)
of the Building or (b) a condemnation of Common Area which restricts access to
the Building or takes parking spaces, and which in any of such events also
results in a material, adverse effect on the business of Tenant being conducted
from the Building, Tenant shall have the right to terminate this Lease upon
written notice to Landlord given within thirty (30) days after such taking or
transfer in lieu thereof. If this Lease is not terminated as a result of such
taking or transfer in lieu thereof, the terms and conditions of this Lease shall
remain unchanged. Tenant and Landlord shall each have the right to pursue any
and all claims which either may have for compensation from the condemning
authority as a result of such condemnation. Landlord shall only be required to
restore the demised premises after an event of condemnation to the extent of
proceeds actually received by Landlord in consideration of the condemnation of
the demised premises and Tenant shall pay to Landlord, prior to Landlord being
obligated to commence any restoration work, an amount equal to the excess of the
costs of such
31
<PAGE>
restoration over the proceeds actually received by Landlord in consideration of
the condemnation of the demised premises.
ARTICLE 36.
ACKNOWLEDGMENT
Upon written request from Landlord, Tenant agrees to acknowledge the
rent and term start date within thirty (30) days after the commencement of the
lease term pursuant to Article 3 herein.
ARTICLE 37.
LANDLORD'S LIMITED LIABILITY
The liability of Landlord under this Lease shall be limited to
Landlord's equity interest in the demised premises as well as the rents, issues,
profits, and income derived or to be derived from Landlord's ownership,
operation and leasing of the demised premises. Tenant agrees to look solely to
Landlord's equity interest in the demised premises and such rents, issues,
profits and income for the satisfaction of any liability, duty or obligation of
Landlord with respect to this Lease, or the relationship of Landlord and Tenant
hereunder, and no other assets of Landlord shall be subject to any liability
therefor. In no event shall Tenant seek, and Tenant does hereby waive, any
recourse against the shareholders and/or constituent partners of Landlord and
the partners, directors, officers or shareholders thereof, or any of their
respective personal assets for such satisfaction.
ARTICLE 38.
NO ORAL AGREEMENT
THIS LEASE COVERS IN FULL EACH AND EVERY AGREEMENT OF EVERY KIND OR
NATURE WHATSOEVER BETWEEN THE PARTIES AND THEIR RESPECTIVE AGENTS AND
REPRESENTATIVES HERETO CONCERNING THIS LEASE, AND ALL PRELIMINARY NEGOTIATIONS
AND AGREEMENTS OF WHATSOEVER KIND OR NATURE ARE MERGED HEREIN, AND THERE ARE NO
ORAL AGREEMENTS. LANDLORD SPECIFICALLY DOES NOT WARRANT THAT ANY OTHER OCCUPANT,
PRESENT OR FUTURE, IN THE VICINITY OF THE DEMISED PREMISES SHALL REMAIN AN
OCCUPANT DURING THE TERM OF THIS LEASE. TENANT SHALL HOLD LANDLORD HARMLESS FROM
ALL DAMAGES (INCLUDING ATTORNEYS' FEES AND COSTS) RESULTING FROM ANY CLAIMS THAT
MAY BE ASSERTED AGAINST LANDLORD BY ANY BROKER, FINDER, OR OTHER PERSON WITH
WHOM TENANT HAS OR PURPORTEDLY HAS DEALT, EXCEPT THE LEASING AGENT FOR THE
DEMISED PREMISES DULY APPOINTED BY LANDLORD.
32
<PAGE>
ARTICLE 39. BINDING
If Tenant is a corporation, Tenant represents and warrants that each
individual executing this Lease on behalf of Tenant is duly authorized to
execute and deliver this Lease on behalf of Tenant and shall deliver appropriate
certification to that effect, if requested. If Tenant is a partnership, joint
venture, or other unincorporated association, each individual executing this
Lease on behalf of Tenant thereby represents that this Lease is binding on
Tenant. Furthermore, Tenant agrees that the execution of any written consent
hereunder, or of any written modification or termination of this Lease, by any
general partner of Tenant or any other authorized agent of Tenant shall be
binding on Tenant. All parties to this Lease as Tenant shall be jointly and
severally liable for all obligations of Tenant. This Lease may be executed in
more than one counterpart with the same effect as if all parties had executed
the same instrument.
ARTICLE 40.
RIGHT OF FIRST REFUSAL
If Landlord decides to market the demised premises for sale, Landlord
covenants to promptly give Tenant notice of such decision. If Landlord receives
a bonafide offer from a third party which is not affiliated (directly or
indirectly) with Landlord or Landlord's members or their owners to purchase the
demised premises (but excluding an offer to joint venture or form a similar type
of entity with Landlord or any such affiliate of Landlord or Landlord's members
or their owners, in which event such joint venture or similar type of entity
shall remain subject to this Article 40 as if it were the original Landlord
hereunder) and Landlord desires to accept such offer, Landlord shall give
written notice to Tenant (the "Original Notice") indicating the purchase price
and terms upon which Landlord is willing to sell the demised premises. Tenant
shall then have the right and option to purchase the demised premises at the
price and upon the terms offered in the Original Notice provided that Tenant
gives Landlord written notice of Tenant's election to so acquire the demised
premises on or before five (5) business days after the date Landlord gives the
Original Notice to Tenant. Tenant's failure to elect to acquire the demised
premises upon such terms and conditions within such five (5) business day period
shall be deemed to be an election by Tenant to not exercise such right. If
Tenant timely exercises such right, then Tenant shall purchase, and Landlord
shall sell, the demised premises to Tenant upon the terms and conditions set
forth in the Original Notice. If Tenant does not timely exercise such right,
then Landlord shall have the right to sell the demised premises on terms not
less favorable to Landlord than those set forth in the Original Notice, provided
that such sale is consummated within one hundred eighty (180) days after the
expiration of such five (5) business day period.
33
<PAGE>
ARTICLE 41.
INTEREST ON PAST DUE OBLIGATIONS
Any amount due from Tenant to Landlord hereunder which is not paid
when due (including, without limitation, amounts due as reimbursement to
Landlord for costs incurred by Landlord in performing obligations of Tenant
hereunder upon Tenant's failure to so perform) shall bear interest at the
reference rate then being charged by Bank of America, N.A. in its San Francisco,
California office plus five percent (5%), but in no event higher than the
highest rate then allowed under the usury laws of the State of California, from
the date due until paid, unless otherwise specifically provided herein.
ARTICLE 42.
OPTION TO LEASE, NO OPTION
THE SUBMISSION OF THIS LEASE TO TENANT IS FOR EXAMINATION PURPOSES
ONLY AND DOES NOT CONSTITUTE A RESERVATION OF, OR OPTION FOR TENANT TO LEASE, OR
OTHERWISE CREATE ANY INTEREST OF TENANT IN THE DEMISED PREMISES. EXECUTION OF
THIS LEASE BY TENANT AND ITS RETURN TO LANDLORD SHALL CONSTITUTE AN OFFER TO
LEASE WHICH LANDLORD SHALL HAVE NO OBLIGATION TO ACCEPT. LANDLORD'S ACCEPTANCE
SHALL ONLY BE EVIDENCED BY LANDLORD'S EXECUTION OF THIS LEASE AND DELIVERY TO
TENANT.
ARTICLE 43.
PRIOR RECORDED DOCUMENTS
Tenant acknowledges that this Lease and Tenant's rights and
obligations hereunder are subject to the provisions of certain recorded
documents which exist of record as of the date hereof and which are prior to
this Lease. Such documents include, without limitation, that certain Second
Completely Amended and Restated Declaration of Covenants, Conditions and
Restrictions recorded in the Official Records of Orange County, California on
April 30, 1992 as Instrument No. 92-283832, as amended (herein called the
"CC&Rs"). To the extent of any ambiguity between any provision of the CC&Rs and
this Lease, the provisions which impose the greatest restrictions and burdens on
Tenant shall prevail.
ARTICLE 44.
BROKERS
Except for CB Commercial Real Estate Group, Inc., to which Landlord
shall pay a lease commission in the amount set forth in Landlord's published
commission schedule previously delivered to CB Commercial Real Estate Group,
Inc., Landlord represents and
34
<PAGE>
warrants to Tenant and Tenant represents and warrants to Landlord that no broker
or finder has been engaged by Landlord or Tenant, respectively, in connection
with the transaction contemplated by this Lease, and that no broker or finder is
in any way connected with such transaction. Except as expressly set forth above,
in the event of any claim for brokers' or finders' fees or commissions in
connection with the negotiation, execution or consummation of this Lease or the
transactions contemplated hereby, Tenant shall indemnify, hold harmless and
defend Landlord from and against such claim if it shall be based upon any
statement, representation or agreement made by Tenant, and Landlord shall
indemnify, hold harmless and defend Tenant from and against such claim if it
shall be based upon any statement, representation or agreement made by Landlord.
ARTICLE 45.
CONFIDENTIALITY OF LEASE
Landlord and Tenant each agrees that the terms and conditions of this
Lease are confidential, that their disclosure could adversely affect its
respective relationships with other parties, and that neither party shall
disclose the terms and conditions of this Lease to any other person without the
prior written consent of the other party. Subsequent to execution of this Lease,
each party will cooperate with the other in making a public announcement after
prior consultation and review of the language which either party proposes to use
in such announcement. Notwithstanding the foregoing, either party may disclose
such terms and conditions: (a) to its attorneys, accountants, potential
transferees, brokers or lenders, or (b) as required by law or in connection with
any legal action to enforce or interpret this Lease. The parties agree that
damages would be an inadequate remedy for the breach of this provision, and that
either party may obtain specific performance of this provision and seek
injunctive relief to prevent its breach or continued breach.
ARTICLE 46.
HELICOPTER PAD ACCESS
Landlord shall use commercially reasonable efforts to cooperate with
Tenant in the provision of a community helicopter pad on other land in the
general vicinity of the Parcel, for the nonexclusive use of Landlord, Tenant and
other tenants or permittees of Landlord. Landlord is not making any
representation or warranty as to whether any such helicopter pad will be
permitted by the applicable governmental agencies. Further, Landlord shall not
be obligated to incur any cost or liability in connection with the provision of
such helicopter pad. However, Landlord will assist Tenant in connection with the
provision of such helicopter pad, including coordinating the processing of all
necessary governmental authorizations therefor. If such pad is created, Landlord
shall provide Tenant with access thereto, subject to reasonable rules and
regulations related thereto.
35
<PAGE>
ARTICLE 47.
FINANCING SPREAD
Landlord has informed Tenant that Landlord intends to obtain a
permanent loan after the completion of construction of the Building. Upon the
determination of the same (if Landlord elects to obtain a permanent loan),
Landlord shall give Tenant written notice (the "Terms Notice") of the material
terms (including financial and non-financial terms) upon which Landlord can
obtain such permanent financing. Tenant shall have five (5) business days after
the giving of the Terms Notice to give written notice to Landlord that Tenant
can provide or arrange for such financing on terms which are financially more
advantageous to Landlord, and upon other terms and conditions which are no less
favorable to Landlord, than those set forth in the Terms Notice. If Tenant
timely gives such notice to Landlord, then Tenant shall be obligated to provide
or arrange for such financing on the terms and conditions set forth in such
Tenant's notice. Failure of Tenant to timely give such Tenant's notice shall be
deemed a waiver of all rights of Tenant with respect to making or arranging for
such original permanent loan. However, if Tenant does not elect to make or
arrange for such financing with respect to the original permanent loan, Tenant
shall have the right, at any time but only once, to provide or arrange for
refinancing of such permanent loan (or any replacement permanent loan) on terms
and conditions which are financially more advantageous to Landlord, and upon
other terms and conditions which are no less favorable to Landlord, than those
then existing in any permanent loan Landlord then has with respect to the
demised premises. If Landlord is not otherwise refinancing the permanent loan at
such time, Tenant shall pay directly to all third parties, or shall reimburse
Landlord for, all costs incurred in connection with such refinancing, including,
without limitation, prepayment penalties, points, loan fees, attorneys' fees,
appraisal expenses and all other applicable fees and expenses. Such payment
shall be made when required by such third party or, in the event of a
reimbursement to Landlord, within twenty (20) days of demand. If Tenant makes or
arranges for such financing as contemplated by this Article, then Landlord shall
pay to Tenant, at such time as Landlord otherwise would have been obligated to
make such payments pursuant to the permanent financing set forth in the Terms
Notice (or any then applicable replacement permanent loan), the difference
between the amount that Landlord is obligated to pay to the lender obtained by
Tenant and the amount which Landlord would have been obligated to pay to
Landlord's lender. Notwithstanding the foregoing, Landlord shall not be required
to make any such payment until five (5) business days after Landlord receives
the rental payment from Tenant for such month. Landlord shall only be obligated
to make such payments during such period that the financing made or arranged for
by Tenant actually remains in place (i.e., such obligation terminates if such
financing is refinanced or prepaid). Tenant shall only have the right to provide
or arrange for such financing one (1) time during the term of this Lease.
Notwithstanding the foregoing, Landlord shall not be obligated to accept any
such financing provided by Tenant if such financing is unacceptable to
Landlord's construction lender for the construction of the Building.
36
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Lease together
with the herein referred to Exhibits which are attached hereto and incorporated
herein by this reference, on the day and year first above written.
"LANDLORD"
FOOTHILL-PARKSTONE I, LLC, a California
limited liability company
By: OFFENBLOCH-PARKSTONE PARTNERS I, a
California limited partnership, Member
By: BUCK EQUITIES, LTD., a California
limited partnership, General
Partner
By: BUCK CORPORATION, INC.,
a California corporation,
general partner
By: /s/ Chris Downey
---------------------------
Print Name: Chris Downey
-------------------
Its: V.P.
--------------------------
By: DB VENTURES LLC,
a California limited liability company
By:/s/ Robert J. Searles
------------------------------------------
Print Name: ROBERT J. SEARLES
----------------------------------
Its: MANAGING MEMBER
-----------------------------------------
"TENANT"
THE WET SEAL, INC., a Delaware corporation
By:/s/ Edmond S. Thomas
------------------------------------------
Print Name: Edmond S. Thomas
----------------------------------
Its: President & COO
-----------------------------------------
By:/s/ Kathy Bronstein
------------------------------------------
Print Name: Kathy Bronstein
----------------------------------
Its: Vice Chairman-CEO
-----------------------------------------
37
<PAGE>
THE WET SEAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective as of February 3, 1997
<PAGE>
THE WET SEAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ESTABLISHMENT AND PURPOSES
The Wet Seal, Inc. hereby establishes effective as of February 3,
1997, an unfunded, nonqualified deferred compensation plan for a select group of
key directors and officers of the Company. The purpose of the plan is to
provide such key directors and officers with an enhanced retirement benefit in
order to ensure that such directors and officers receive an appropriate level of
replacement income at retirement while at the same time incentivizing such
directors and officers to continue their efforts to increase the overall
profitability of the Company. All benefits under the plan shall be paid out of
the general assets of the Company. The Company may establish and fund a grantor
trust to provide benefits under the plan.
2
<PAGE>
THE WET SEAL, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE 1. DEFINITIONS
1.1. "ANNUAL ACCRUED BENEFIT" shall have the meaning set forth in
Section 3.1.
1.2. "BENEFICIARY" means any person, persons, or entity designated
by a Participant to receive any benefits payable in the event of the
Participant's death. If no valid Beneficiary designation is in effect at the
Participant's death, or if no person, persons or entity so designated survives
the Participant, or if each surviving validly designated Beneficiary is legally
impaired or prohibited from taking, the Participant's Beneficiary shall be his
surviving spouse, if any, or if the Participant has no surviving spouse, then
his estate. If the Committee is in doubt as to the right of any person to
receive such amount, it may retain such amount, without liability for any
interest thereon, until the rights thereto are determined, or the Committee may
pay such amount into any court of appropriate jurisdiction and such payment
shall be a complete discharge of the liability of the Plan.
1.3. "BOARD" means the Board of Directors of the Company.
1.4. "CAUSE" means the Participant's (i) gross negligence,
recklessness or malfeasance in the performance of his duties, or (ii) conviction
of any criminal act, act of fraud or other misconduct resulting or intended to
result directly or indirectly in gain or personal enrichment at the expense of
the Company; provided however, that if any Participant is employed by the
Company pursuant to the terms of an employment agreement with the Company, the
definition of "Cause" contained in such agreement, if any, shall be incorporated
herein by reference and shall control in lieu of the preceding definition.
1.5. "CHANGE OF CONTROL" shall have the meaning set forth in
Article 5.
1.6. "COMMITTEE" means the Irving Teitelbaum, Kathy Bronstein and
Alan Siegel, provided, however, that if Irving Teitelbaum at any time cannot
serve as a member of the Committee, Stephen Gross shall be designated as his
replacement.
1.7. "COMPANY" means The Wet Seal, Inc., a Delaware corporation, or
any successor thereto.
1.8. "EARLY RETIREMENT DATE" means the first day of the month
following the date a Participant's Service with the Company is terminated prior
to his or her Normal Retirement Date.
1.9. "EFFECTIVE DATE" means February 3, 1997.
3
<PAGE>
1.10. "NORMAL RETIREMENT AGE" means the date the Participant attains
(or would attain) 22.5 Years of Service.
1.11. "NORMAL RETIREMENT DATE" means the first day of the month
following the date a Participant's Service with the Company is terminated and
which occurs at or after the date a Participant attains Normal Retirement Age.
1.12. "PARTICIPANT" means any person included in the membership of
the Plan who has been designated as a Participant by the Board of Directors or
its delegate.
1.13. "PLAN" means The Wet Seal, Inc. Supplemental Executive
Retirement Plan.
1.14. "PRE-TAX PERCENTAGE" means the ratio, expressed as a
percentage, that Pre-Tax Profits bears to the Company's gross revenues
(excluding interest income) in any fiscal year of the Company.
1.15. "PRE-TAX PROFIT" shall mean the Company's earnings (other than
investment income before taxes on or with respect to income. The Pre-Tax Profit
shall be determined by the Company's annual income statement prepared by the
accountants for the Company in accordance with generally accepted accounting
principles consistently applied.
1.16. "RETIREE" means a Participant who has retired from the Company
and is eligible to receive a benefit under the Plan.
1.17. "SERVICE" means service with the Company as an officer and/or
director whether before or after the Effective Date.
4
<PAGE>
ARTICLE 2. PARTICIPATION
2.1. BOARD DETERMINATION. The Board shall, in its sole discretion,
determine from among the directors and officers of the Company those individuals
who shall be Participants in the Plan. Such individuals shall become
Participants under the Plan effective on the date designated by the Board. The
determination of the Board with respect to participation under the Plan shall be
final.
5
<PAGE>
ARTICLE 3. ACCRUED BENEFITS
3.1. DETERMINATION OF ANNUAL ACCRUED BENEFIT. A Participant's
Annual Accrued Benefit shall be $250,000. The Annual Accrued Benefit shall be
adjusted, if applicable based on the Pre-Tax Profit Percentage for the three
full fiscal years of the Company preceding the date the Participant's service
with the Company is terminated, in accordance with the following schedule:
<TABLE>
<CAPTION>
3-Year Average Pre-Tax Percentage Annual Accrued Benefit
--------------------------------- ----------------------
<S> <C>
if less than 4.25% $250,000
if 4.25% or greater but less $300,000
less than 4.75%
if 4.75% or greater but less $350,000
less than 5.25%
if 5.25% or greater but less $400,000
less than 5.75%
if 5.75% or greater but less $450,000
less than 7.00%
if 7.00% or greater $500,000
</TABLE>
3.2. NORMAL RETIREMENT. A Participant shall be entitled to receive
a benefit equal to his Annual Accrued Benefit as determined under Section 3.1
commencing on his Normal Retirement Date and ending with the payment due for the
month in which the Participant dies.
3.3. EARLY RETIREMENT. A Participant shall be entitled to receive,
commencing on his Early Retirement Date and ending with the payment due for the
month in which the Participant dies, a benefit equal to his Annual Accrued
Benefit determined under Section 3.1 as of his Early Retirement Date, reduced by
1/2 of 1% per month for the number of months his Early Retirement Date preceeds
his Normal Retirement Date.
3.4. FORM OF BENEFIT. In the absence of a valid election under
Section 3.5 of the Plan, the Participant's Annual Accrued Benefit shall be a
straight life annuity for the period commencing on the Normal Retirement Date or
Early Retirement Date, as the case may be, and ending in the month in which the
Participant dies. The Annual Accrued Benefit shall be payable in 12 equal
monthly installments per annum.
6
<PAGE>
3.5. OPTIONAL FORMS OF BENEFIT PAYMENT
(a) A Participant may elect to receive his Annual Accrued
Benefit in the form of a "50% Joint and Survivor Annuity" (as defined below),
provided that the Participant makes and submits to the Committee an irrevocable
election of such optional form not later than 90 days prior to becoming a
Retiree. For purposes of this Section 3.5, a "50% Joint and Survivor Annuity"
shall mean an immediate annuity for the life of the Participant with a survivor
annuity for the life of the Beneficiary which is 50% of the amount of the
annuity which is payable during the joint lives of the Participant and the
Beneficiary and which is the actuarial equivalent of the straight life annuity
form of benefit.
(b) If a Participant elects to receive his Annual Accrued
Benefit in the form of a 50% Joint and Survivor Annuity, and his joint annuitant
dies before the Participant's benefit payments have commenced, then the
Participant's election under this Section 3.5 shall be null and void and a
Participant may elect, in accordance with procedures established by the
Committee, to receive his Annual Accrued Benefit in the form of a straight life
annuity or designate a different Beneficiary.
7
<PAGE>
ARTICLE 4. EFFECT OF TERMINATION OF SERVICE
4.1. DEATH. If a Participant's Service terminates by reason of the
death of the Participant, the Participant's Beneficiary shall be entitled to
receive a death benefit in an amount equal to the present value of the benefits
the Participant would have received if he had retired on his date of death.
4.2. DISABILITY. A Participant who is disabled and receiving
payments under the Company's long term disability plan, if any, shall continue
to accrue Service under the Plan until the earlier of (i) the date his long-term
disability benefit terminates or (ii) his Normal Retirement Age. No benefit
under this Plan shall be payable to a Participant while he is receiving such
long-term disability benefit payments.
4.3. WITHOUT CAUSE. If a Participant's Service is terminated by
the Company without Cause, the Participant shall be eligible for the following
benefits under the Plan:
(a) If the Participant has attained his Normal Retirement
Age on the date of termination, he shall be eligible to receive a benefit as
described in Section 3.2, in the form of a single life annuity, as soon as
practicable following the Participant's date of termination.
(b) If the Participant has not attained his Normal
Retirement Age on the date of termination, he shall be eligible to receive a
reduced benefit as described in Section 3.3, in the form of a single life
annuity, as soon as practicable following the Participant's date of termination.
4.4. FOR CAUSE. In the event that a Participant's Service is
terminated by the Company for Cause, the Participant shall forfeit all benefits
under the Plan regardless of his eligibility to receive such benefits under the
Plan.
8
<PAGE>
ARTICLE 5. EFFECT OF CHANGE OF CONTROL
5.1. CHANGE OF CONTROL.
(a) In the event of a "Change of Control" (as defined
below), then whether or not a Participant is otherwise eligible to receive a
retirement benefit under the Plan on the date of such Change of Control, the
Company shall pay each Participant, within 60 days of the date of the Change of
Control, a lump-sum retirement benefit in an amount equal to the present value
of the Annual Accrued Benefit provided under Section 3.1, calculated as if the
Participant had retired on his Early Retirement Date without any reduction as
provided in Section 3.3. For purposes of this Section 5.1, a "Change of
Control" shall be deemed to have occurred if both of the following conditions
occur: (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) or "group" (as such term is used in
Rule 13d-5(b)(1) under said Act) of such persons, (other than (i) any such
person or group who, as of January 1, 1997 is the "beneficial owner" (as defined
in Rule 13d-3 under said Act), directly or indirectly, of securities of the
Company representing 20% or more of the total voting power represented by the
Company's outstanding voting securities as of January 1, 1997, (ii) a trustee or
other fiduciary holding securities under an employee benefits plan of the
Company or (iii) a corporation owned directly or indirectly by the shareholders
of the Company in substantially the same proportions as their beneficial
ownership of stock of the Company), after January 1, 1997 becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities representing 20% or more of the total voting power
represented by the Company's then outstanding voting securities, and (b) at any
time after the event described in (a) above, either Irving Teitelbaum or Stephen
Gross do not continue as directors on the Board as a result of the vote of the
beneficial owner with respect to which the event in (a) occurred.
(b) To the extent that any payments accruing to any
Participant become subject to Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), to any successor section, or to any other federal,
state or local excise tax (exclusive of regular employment withholding taxes
under Subtitle C of the Code or similar state or local taxes), the amounts
payable to the Participants shall be increased by the amounts necessary to
result in the Participant receiving the same amounts or rights which would be
payable if such taxes were not in effect.
9
<PAGE>
ARTICLE 6. GENERAL PROVISIONS
6.1. ADMINISTRATION. The Committee shall have full power and
authority to administer and interpret the Plan. The Committee may from time to
time establish rules for the administration of the Plan that are not
inconsistent with the provisions of the Plan. The Committee, with the advice of
an actuary, shall also prescribe all actuarial factors for converting any
benefits payable under the Plan to a lump sum or effectuating any election by a
participant to receive an optional form of benefit.
6.2. CLAIMS PROCEDURE. All claims for benefits under the Plan
shall be administered in the same manner as provided under the Company's
qualified retirement plan and the Committee shall have the same powers and
authority with respect to the disposition of claims under this Plan as the
applicable fiduciary of Company's qualified retirement plan. The determination
of the Committee as to any disputed questions arising under this Plan, including
but not limited to claims for benefits and questions of construction and
interpretation, shall be final, binding and conclusive upon all persons.
6.3. ARBITRATION. If a Participant has exhausted his remedies with
respect to a claim for benefits under Section 6.2, such Participant may seek
review of the Committee's determinations with respect thereto through binding
arbitration in New York City, New York in accordance with the rules and
constitution of the American Arbitration Association. Notwithstanding the
foregoing, any final determination of the Committee pursuant to Section 6.2
shall be binding unless the Arbitrator determines that such determination was
arbitrary and capricious. Judgment upon any such arbitration award may be
entered in a court of competent jurisdiction in New York City, New York and the
Participant submits to the jurisdiction of such court.
6.4. FUNDING
(a) All amounts payable in accordance with the Plan shall
constitute a general unsecured obligation of the Company. Such amounts, as well
as any administrative costs relating to the Plan, shall be paid out of the
general assets of the Company, unless the provisions of paragraph (b) below are
applicable.
(b) The Board of Directors may establish a grantor trust to
fund benefits payable under the Plan and/or administrative costs relating to the
Plan. The assets of said trust will be held separate and apart from other
Company funds and shall be used exclusively for the purposes set forth in the
Plan and the applicable trust agreement, subject to the following conditions:
(i) the creation of said trust shall not cause the
Plan to be other than "unfunded" for purposes of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA");
10
<PAGE>
(ii) the Company shall be treated as the "grantor"
of said trust for purposes of Sections 671 and 677 of the Code; and
(iii) said trust agreement shall provide that the
trust fund assets may be used to satisfy claims of the Company's general
creditors, provided that the rights of such general creditors are enforceable
under federal law.
6.5. CONDITIONS OF EMPLOYMENT NOT AFFECTED BY THE PLAN. Nothing
contained in this Plan shall be construed as a contract of employment; nor shall
the Plan or its establishment confer any legal rights upon any director or
employee or other person for a continuation of employment with the Company, nor
interfere with the rights of the Company to discharge any director or employee
and to treat him without regard to the effect which that treatment might have
upon him as a Participant or potential Participant of the Plan. The terms of
the Plan shall govern all benefits payable under the Plan and shall supersede
any contractual obligations the Company may have with respect to the payment of
benefits under this Plan.
6.6. FACILITY OF PAYMENT. If the Committee shall find that any
person to whom any amount is payable under the Plan is found by a court of
competent jurisdiction unable to care for his affairs because of illness or
accident, or is a minor, or has died, then any payment due him or his estate
(unless a prior claim therefor has been made by a duly appointed legal
representative) may, if the Committee so elects, be paid to his spouse, a child,
a relative, an institution maintaining or having custody of such person, or any
other person deemed by the Committee to be a proper recipient on behalf of such
person otherwise entitled to payment. Any such payment shall be a complete
discharge of the liability of the Plan therefor.
6.7. WITHHOLDING TAXES. The Company shall have the right to deduct
from each payment to be made under the Plan any required withholding taxes.
6.8. NONALIENATION. Subject to applicable law, no benefit under
the Plan shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge, and any attempt to do so
shall be void, nor shall any such benefit be in any manner liable for or subject
to garnishment, attachment, execution or levy, or liable for or subject to the
debts, contracts, liabilities, engagements or torts of the Participants.
6.9. CONSTRUCTION
(a) The Plan is intended to be an unfunded deferred
compensation arrangement for a select group of "management or highly compensated
employees" and therefore exempt from the requirements or Sections 201, 301 and
401 of ERISA.
(b) All rights hereunder shall be governed by and construed
in accordance with the laws of the State of California.
(c) The masculine pronoun shall mean the feminine wherever
appropriate.
11
<PAGE>
6.10. AMENDMENT OR TERMINATION. The Board (or the Committee if
empowered by the Board) may amend, modify or terminate the Plan at any time.
Notice of such amendment or termination shall be given in writing to each
Participant and beneficiary of a deceased Participant having an interest in the
Plan. No such amendment shall diminish the rights of any Participant with
respect to benefits due him under the terms of the Plan at the time of its
modification amendment or termination. Notwithstanding the foregoing, upon the
occurrence of a Change of Control (as defined in Article 5) no amendment of the
Plan or action of the Board or Committee or its delegate which affects an
Participant is valid and enforceable without the prior written consent of such
Participant.
12
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-37556, No. 33-93896 and No. 333-31813 of The Wet Seal, Inc. on Form S-8 of
our report dated March 13, 1998, appearing in the Annual Report on Form 10-K of
The Wet Seal, Inc. for the year ended January 31, 1998.
Deloitte & Touche LLP
April 24, 1998
Costa Mesa, California
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET
SEAL, INC. BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 76,056,000
<SECURITIES> 20,316,000
<RECEIVABLES> 3,209,000
<ALLOWANCES> 0
<INVENTORY> 26,884,000
<CURRENT-ASSETS> 127,433,000
<PP&E> 94,124,000
<DEPRECIATION> 49,171,000
<TOTAL-ASSETS> 184,223,000
<CURRENT-LIABILITIES> 60,981,000
<BONDS> 0
0
0
<COMMON> 1,357,000
<OTHER-SE> 111,637,000
<TOTAL-LIABILITY-AND-EQUITY> 184,223,000
<SALES> 412,463,000
<TOTAL-REVENUES> 412,463,000
<CGS> 292,644,000
<TOTAL-COSTS> 86,999,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,505,000)
<INCOME-PRETAX> 36,325,000
<INCOME-TAX> 15,075,000
<INCOME-CONTINUING> 21,250,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,250,000
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.53
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET
SEAL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
3-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999 JAN-30-1999 JAN-30-1999
JAN-30-1999
<PERIOD-START> JAN-29-1995 FEB-04-1996 FEB-04-1996 MAY-05-1996
AUG-04-1996
<PERIOD-END> FEB-03-1996 FEB-01-1997 MAY-04-1996 AUG-03-1996
NOV-02-1996
<CASH> 57,153,000 71,483,000 56,370,000 77,889,000
78,544,000
<SECURITIES> 0 17,700,000 0 0
0
<RECEIVABLES> 523,000 1,577,000 81,000 868,000
519,000
<ALLOWANCES> 0 0 0 0
0
<INVENTORY> 16,241,000 22,589,000 24,672,000 29,202,000
25,283,000
<CURRENT-ASSETS> 75,445,000 114,042,000 87,696,000 114,461,000
110,452,000
<PP&E> 79,062,000 80,515,000 81,393,000 80,964,000
83,650,000
<DEPRECIATION> 41,015,000 47,285,000 44,159,000 47,187,000
49,807,000
<TOTAL-ASSETS> 117,564,000 154,752,000 128,969,000 152,268,000
149,309,000
<CURRENT-LIABILITIES> 49,394,000 54,251,000 60,339,000 64,489,000
57,566,000
<BONDS> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 1,249,000 1,354,000 1,250,000 1,352,000
1,353,000
<OTHER-SE> 56,486,000 89,766,000 57,234,000 76,535,000
80,787,000
<TOTAL-LIABILITY-AND-EQUITY> 117,564,000 154,752,000 128,969,000 152,268,000
149,309,000
<SALES> 266,695,000 374,942,000 80,575,000 94,356,000
95,571,000
<TOTAL-REVENUES> 266,695,000 374,942,000 80,575,000 94,356,000
95,571,000
<CGS> 200,626,000 272,189,000 61,537,000 69,570,000
69,152,000
<TOTAL-COSTS> 57,531,000 79,238,000 18,264,000 19,695,000
20,046,000
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> (1,410,000) (2,702,000) (477,000) (605,000)
(834,000)
<INCOME-PRETAX> 9,948,000 26,217,000 1,251,000 5,696,000
7,207,000
<INCOME-TAX> 4,133,000 10,965,000 529,000 2,381,000
3,013,000
<INCOME-CONTINUING> 5,815,000 15,252,000 722,000 3,315,000
4,194,000
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 5,815,000 15,252,000 722,000 3,315,000
4,194,000
<EPS-PRIMARY> 0.47 1.15 0.06 0.25
0.31
<EPS-DILUTED> 0.47 1.13 0.06 0.25
0.30
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET
SEAL, INC. BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999 JAN-30-1999
<PERIOD-START> FEB-02-1997 MAY-04-1997 AUG-03-1997
<PERIOD-END> MAY-03-1997 AUG-02-1997 NOV-01-1997
<CASH> 65,631,000 53,842,000 44,616,000
<SECURITIES> 24,200,000 28,765,000 39,243,000
<RECEIVABLES> 1,812,000 2,158,000 3,508,000
<ALLOWANCES> 0 0 0
<INVENTORY> 30,271,000 32,296,000 28,066,000
<CURRENT-ASSETS> 128,807,000 124,756,000 122,553,000
<PP&E> 82,631,000 90,449,000 99,138,000
<DEPRECIATION> 50,072,000 52,922,000 55,755,000
<TOTAL-ASSETS> 168,837,000 169,744,000 173,395,000
<CURRENT-LIABILITIES> 65,261,000 63,005,000 61,545,000
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 1,354,000 1,355,000 1,355,000
<OTHER-SE> 93,281,000 96,872,000 102,351,000
<TOTAL-LIABILITY-AND-EQUITY> 168,837,000 169,744,000 173,395,000
<SALES> 95,563,000 94,254,000 104,435,000
<TOTAL-REVENUES> 95,563,000 94,254,000 104,435,000
<CGS> 70,122,000 68,917,000 74,003,000
<TOTAL-COSTS> 20,197,000 20,470,000 21,932,000
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (714,000) (990,000) (905,000)
<INCOME-PRETAX> 5,958,000 5,857,000 9,405,000
<INCOME-TAX> 2,443,000 2,440,000 3,926,000
<INCOME-CONTINUING> 3,515,000 3,417,000 5,479,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,515,000 3,417,000 5,479,000
<EPS-PRIMARY> 0.26 0.25 0.40
<EPS-DILUTED> 0.25 0.25 0.39
</TABLE>
