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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED JANUARY 29, 2000
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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COMMISSION FILE NUMBER 0-18632
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THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 33-0415940
(State of incorporation) (IRS Employer Identification No.)
26972 BURBANK, FOOTHILL RANCH, CA 92610
(Address of principal executive (zip code)
offices)
</TABLE>
(949) 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:
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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 / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section229.405 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. /X/
The aggregate market value of voting stock held by non-affiliates as of
March 20, 2000 was $149,940,039.
The number of shares outstanding of the registrant's Class A Common Stock
and Class B Common Stock, par value $.10 per share, at March 20, 2000 was
10,900,023 and 2,912,665, respectively. There were no shares of Preferred Stock,
par value $.01 per share, outstanding at March 20, 2000.
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 29, 2000.
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PART I
ITEM 1. BUSINESS
GENERAL
The Wet Seal, Inc., a Delaware corporation ("Wet Seal" or the "Company"),
founded in 1962, is a nationwide specialty retailer of fashionable and
contemporary apparel and accessory items designed for consumers with a young,
active lifestyle. As of March 20, 2000, the Company operated 542 retail stores
in 42 states, Washington D.C. and Puerto Rico, including 111 in California, 55
in Florida, and 40 in Texas. Of the 542 stores, 241 operate under the "CONTEMPO
CASUALS" trademark, 198 operate under the "WET SEAL" trademark, 80 operate under
the "ARDEN B." trademark and 23 operate under the "LIMBO LOUNGE" trademark.
Arden B. is the latest retail concept introduced by the Company in November
1998, and offers a collection of dressy and casual apparel, accessories and
footwear for the young contemporary customer. Arden B. serves to fill the void
between a "junior" and a "missy" customer. Limbo Lounge was introduced by the
Company in fiscal 1996 and offers both young men's and women's apparel and
accessories in a unique and entertaining store environment. The Company
introduced the "Wet Seal Catalog" in late January 1998. In fiscal 1999, the
Company repositioned the catalog under the "Blue Asphalt" brand name. Blue
Asphalt is the number one denim brand in both Wet Seal and Contempo Casuals
stores, and has been expanded to a full assortment of fashion apparel and
accessories. The Company introduced an e-commerce web-site in August 1999 under
the Blue Asphalt domain name. The site includes on-line shopping as well as
links from the Wet Seal and Contempo Casuals web-sites. In fiscal 2000, the
Company does not plan to mail any catalogs but will continue its e-commerce
initiatives.
On July 1, 1995, the Company acquired the business, assets and properties of
Contempo Casuals, Inc. ("Contempo Casuals"), a 237-store junior women's retail
chain. This acquisition substantially increased the size of the Company.
Effective February 2, 1997, Contempo Casuals, Inc. was merged with and into The
Wet Seal, Inc.
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 (stores located in malls where the Company operates both a Wet Seal
and a Contempo Casuals store), the Company differentiates the locations by
displaying the merchandise differently in each of the stores, and will
occasionally differentiate some of 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.
In the fourth quarter of fiscal 1998, the Company opened the first Arden B.
store. Arden B. caters to the fashionable young contemporary woman who falls
between a "junior" and a "missy" customer. Arden B. stores offer a collection of
dressy and casual apparel, accessories and footwear, all under the "Arden B."
brand name. The Company currently operates 80 Arden B. stores nationwide and
plans to open up to five additional stores in fiscal 2000.
In the fourth quarter of fiscal 1996, the Company introduced a store concept
called Limbo Lounge. The product offerings include both young men's and women's
apparel and accessories in a unique and entertaining store environment. The
Company currently operates 23 Limbo Lounge stores and plans to open up to three
additional stores in fiscal 2000.
With respect to each of the retail concepts, the Company frequently updates
its product offerings to provide a regular flow of fresh, new fashionable
merchandise. 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.
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Generally, the Company's stores display merchandise within a current fashion
trend which reflects a color statement and key items related to that trend.
Rather than always 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. From time to
time, certain key items are merchandised together on tables or wall shelf
sections in order to emphasize those particular items. The general layout of
merchandise in the stores is planned by the Company's management. The Company
makes use of in-store image posters and signage to help focus customers on
particular fashion themes. The Company frequently changes the visual display of
the merchandise in its stores to reflect the changing tastes of the Company's
target customer.
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. Each concept, Arden B., Limbo Lounge and the
combined Wet Seal / Contempo Casuals, has a separate buying team. 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 at selected times throughout the year 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, Arden B. and Limbo Lounge
as destination stores for the customer.
SOURCING AND VENDOR RELATIONSHIPS
The Company purchases its merchandise from numerous domestic vendors and a
number of foreign vendors. Although in fiscal 1999 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
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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.
All merchandise for retail stores is received from vendors at the Company's
Foothill Ranch, California distribution facility, where items are inspected for
quality and prepared for shipping to the Company's stores. Merchandise for the
e-commerce web-site is distributed through a third party fulfillment house. The
Company ships all of its 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 $8.0 million
for the fiscal year ended January 29, 2000. These stores operate under the Wet
Seal, Contempo Casuals and Arden B. 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 Wet Seal and Contempo Casuals 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 that focus on the interests
and active lifestyles of its target customers.
STORE OPERATIONS
The Company's Wet Seal and Contempo Casuals stores are divided into seven
geographic regions. Each region is managed by a Regional Director who reports to
the Company's Senior Vice President of Store Operations. Each region is further
divided into districts consisting of approximately 10 stores that are managed by
a District Director. The Limbo Lounge stores are located nationwide and are
currently overseen by the local Wet Seal / Contempo Casuals Regional and
District Directors. The Arden B. stores are divided into seven geographic
districts consisting of approximately 12 stores each. Each district is managed
by a District Director who reports to the Arden B. Director of Store Operations,
who in turn reports to the Company's Senior Vice President of Store Operations.
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 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
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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 12 customer
service representatives and cashiers, most of who 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 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 3,981 square feet.
Store hours are determined by the mall in which the store is located.
INFORMATION AND CONTROL SYSTEMS
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 to a state of the art client server based merchandising
system. This conversion is expected to be completed within fiscal 2000. Prior to
the purchase of the new system and hardware the Company obtained assurance from
the vendors that the products purchased are in fact Year 2000 compliant.
All of the Company's stores have a point-of-sale system operating on
in-store computer hardware and internally developed software. The system
features bar-coded ticket scanning, dial-out check and credit authorization and
provides nightly polling transmittal of sales and inventory data between the
stores and the Company's corporate office.
EXPANSION STRATEGY
The Company currently plans to open up to 45 new stores in fiscal 2000 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.
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The following table sets forth the number of stores in each state as of
March 20, 2000:
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STATE # OF STORES
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Alabama.............. 1
Arizona.............. 11
Arkansas............. 1
California........... 111
Colorado............. 8
Connecticut.......... 13
Delaware............. 1
Florida.............. 55
Georgia.............. 15
Hawaii............... 7
Illinois............. 34
Iowa................. 3
Indiana.............. 7
Kansas............... 3
Kentucky............. 4
</TABLE>
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STATE # OF STORES
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Louisiana............ 3
Maine................ 2
Maryland............. 14
Massachusetts........ 18
Michigan............. 14
Minnesota............ 11
Missouri............. 3
Nebraska............. 1
Nevada............... 7
New Hampshire........ 3
New Jersey........... 31
New Mexico........... 3
New York............. 27
North Carolina....... 4
Ohio................. 15
</TABLE>
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STATE # OF STORES
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Oklahoma............. 4
Oregon............... 1
Pennsylvania......... 19
Rhode Island......... 1
South Carolina....... 4
Tennessee............ 3
Texas................ 40
Utah................. 6
Virginia............. 16
Washington........... 6
Wisconsin............ 6
West Virginia........ 2
Washington D.C....... 2
Puerto Rico.......... 2
</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 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 3,000 and 4,500 square
feet depending on the chain selected for the particular location and concept.
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 has pending registrations in a number of classes for the
trademark, "Arden B.", which are being opposed by Agnes Trouble and Elizabeth
Arden. It is the opinion of the Company's trademark counsel that the Company
should be able to register its Arden B. marks and even if the Company is unable
to register the marks (or any one of them), the absence of such registration
will not cause any interruption in the use of Arden B. as a trademark by the
Company to designate the merchandise sold under the Arden B. name and the stores
in which that merchandise is sold. The Company also uses and has registered, or
has a pending registration, on a number of marks, including "A. AUBREY,"
"ACCESSORIES FOR LIFE," "ACCOMPLICE," "BLUE ASPHALT," "CEMENT," "CLUB CONTEMPO,"
"EVOLUTION NOT REVOLUTION," "FORMULA X," "MEOW GENES," "UNCIVILIZED," "URBAN
LIFE" and "URBAN VIBE." 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
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"SEAL PUPS." The Company is not aware of any adverse claim or other infringement
other than those noted above 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 29, 2000, the Company had 8,647 employees, consisting of 2,265
full-time employees and 6,382 part-time employees. Full-time personnel consisted
of 1,156 salaried and 1,109 hourly employees. All part-time personnel are hourly
employees. Of the total employees, 8,328 were sales personnel and 319 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.
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 1995:
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FISCAL YEARS
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1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Stores open at beginning of year................ 454 389 364 364 133
Stores acquired during period(1)................ 78 19 0 0 237
Stores opened during period..................... 31 67 34 10 3
Stores closed during period..................... 15 21 9 10 9
--- --- --- --- ---
Stores open at end of period.................... 548 454 389 364 364
=== === === === ===
</TABLE>
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(1) Contempo Casuals was acquired on July 1, 1995. The Company acquired 19
stores on December 1, 1998 from Mothers Work, Inc. and 78 stores on
February 1, 1999 from Britches of Georgetowne, Inc.
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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
March 20, 2000, 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.
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
Stock Market ("NASDAQ") under the symbol "WTSLA". As of March 20, 2000, there
were 312 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
March 20, 2000 was $14 1/4.
The following table reflects the high and low sale prices of the Company's
Common Stock as reported by Nasdaq for the last two fiscal years.
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<CAPTION>
FISCAL 1999 FISCAL 1998
---------------------- ----------------------
QUARTER HIGH LOW HIGH LOW
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<S> <C> <C> <C> <C>
First Quarter...................................... $44 5/8 $32 1/2 $38 1/4 $26 7/8
Second Quarter..................................... 46 3/8 24 37 9/16 25 3/4
Third Quarter...................................... 23 3/8 13 3/16 31 13 5/8
Fourth Quarter..................................... 14 3/4 11 38 16 7/8
</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.
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ITEM 6. SELECTED FINANCIAL DATA
The following table of certain selected data regarding the Company should be
read in conjunction with the consolidated 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 February 1, 1997 and
February 3, 1996 are derived from the Company's consolidated financial
statements for such years that are not included herein.
FIVE YEAR FINANCIAL SUMMARY
(Thousands except per share and per square foot amounts, ratios, share data
and square footage data)
<TABLE>
<CAPTION>
FISCAL YEAR 1999 1998 1997 1996 1995
- ----------- ------------ ------------ ------------ ------------ ------------
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
FISCAL YEAR ENDED 2000 1999 1998 1997 1996 (1)
- ----------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales................................. $ 524,407 $ 485,389 $ 412,463 $ 374,942 $ 266,695
Income before provision for income
taxes............................... $ 23,842 $ 42,202 $ 36,325 $ 26,217 $ 9,948
Net income............................ $ 14,183 $ 25,954 $ 21,250 $ 15,252 $ 5,815
PER SHARE DATA
Net income, basic..................... $ 1.14 $ 1.98 $ 1.57 $ 1.15 $ 0.47
Net income, diluted................... $ 1.11 $ 1.91 $ 1.53 $ 1.13 $ 0.47
Weighted average shares outstanding,
basic............................... 12,425,704 13,085,587 13,552,502 13,219,284 12,387,140
Weighted average shares outstanding,
diluted............................. 12,813,338 13,581,233 13,899,877 13,459,810 12,500,564
OTHER FINANCIAL INFORMATION
Net income as a percentage of sales... 2.7% 5.3% 5.2% 4.1% 2.2%
Return on average stockholders'
equity.............................. 10.97% 22.3% 20.8% 20.5% 10.7%
Cash and marketable securities........ $ 78,603 $ 91,506 $ 95,873 $ 89,183 $ 57,153
Working capital (2)................... $ 47,707 $ 21,856 $ 66,452 $ 59,791 $ 26,051
Ratio of current assets to current
liabilities......................... 1.8 1.3 2.1 2.1 1.5
Total assets.......................... $ 213,009 $ 197,490 $ 184,223 $ 154,752 $ 117,564
Long-term debt........................ $ -- $ 1,264 $ 1,264 $ 3,264 $ 5,264
Total stockholders' equity............ $ 138,233 $ 120,278 $ 112,994 $ 91,120 $ 57,735
Number of stores open at year end..... 548 454 389 364 364
Number of stores acquired during the
year................................ 78 19 -- -- 237
Number of stores opened during the
year................................ 31 67 34 10 3
Number of stores closed during the
year................................ 15 21 9 10 9
Square footage of leased store space
at year end......................... 2,182,606 1,848,513 1,637,347 1,539,777 1,530,891
Percentage of increase in leased
square footage...................... 18.1% 12.9% 6.3% 0.6% 156.6%
Average sales per square foot of
leased space (3).................... $ 247 $ 271 $ 263 $ 244 $ 229
Average sales per store (3)........... $ 988 $ 1,132 $ 1,112 $ 1,030 $ 976
Comparable store sales (decrease)
increase (4)........................ (9.8)% 2.1% 5.8% 8.8% (4.1)%
</TABLE>
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(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) The decrease in working capital in fiscal 1998 is due to the classification
of $37,973,000 of cash investments as long-term in fiscal 1998.
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(3) 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.
(4) 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. Through fiscal 1998, "Comparable
store sales" were defined as sales in stores that were open throughout the
full fiscal year and throughout the full prior fiscal year. "Comparable
store sales" for fiscal 1999 are defined as sales in stores that were open
at least 14 months.
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 542 retail
stores in 42 states, Washington D.C. and Puerto Rico. The Company operates the
stores under the names "Wet Seal," "Contempo Casuals," "Arden B." and "Limbo
Lounge." The Company initiated a catalog in fiscal 1998 and an e-commerce
web-site in August 1999. In fiscal 2000, the Company does not plan to mail any
catalogs, but will continue its e-commerce initiatives.
On July 1, 1995, the Company acquired Contempo Casuals. The purchase price
consisted of a $100,000 cash payment and the issuance of 254,676 shares of
Class A Common Stock which had a market value of $1,178,000 as of the
acquisition date. In addition, the Company assumed approximately $27,700,000 of
current liabilities of Contempo Casuals. The transaction was accounted for under
the purchase method and resulted in negative goodwill. The acquisition
substantially increased the number of stores the Company operates. Effective
February 2, 1997, Contempo Casuals, Inc. was merged with and into The Wet
Seal, Inc.
On December 1, 1998, the Company acquired the leases and furniture and
fixtures for 19 store locations from Mothers Work, Inc. The purchase price of
$1,911,000 was allocated to leasehold improvements and furniture, fixtures and
equipment. The majority of the locations acquired were converted to Arden B.
stores.
On February 1, 1999, the Company acquired the leases and furniture and
fixtures for 78 store locations from Britches of Georgetowne, Inc. for
$15,704,000. Based upon a third-party appraisal, the purchase price was
allocated to leasehold improvements, lease rights, and furniture, fixtures and
equipment. Excess of cost over net assets acquired (goodwill) totaling
$6,972,000 is being amortized on the straight-line method over 20 years. The
majority of the locations acquired were converted to Arden B. stores.
As of January 29, 2000, the Company operated 548 stores compared to 454
stores as of January 30, 1999, the end of fiscal 1998. The Company opened 109
stores during fiscal 1999 and closed 15 stores.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's consolidated
financial statements and the notes thereto.
RESULTS OF OPERATIONS
Fiscal 1999 consists of the 52 week period ended January 29, 2000, fiscal
1998 consists of the 52 week period ended January 30, 1999 and fiscal 1997
consists of the 52 week period ended January 31, 1998. Comparable store sales
for fiscal 1999 are defined as sales in stores that were open at least
14 months. Comparable store sales for fiscal 1998 and prior are defined as sales
in stores that were open throughout the full fiscal year and throughout the full
prior fiscal year. The change in the method of calculating
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comparable store sales in fiscal 1999 would not have resulted in any material
change to the results of fiscal 1998 and fiscal 1997 if applied retroactively to
these fiscal years.
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
------------------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Sales (including frequent buyer sales income, catalog and
web-site sales)........................................... 100.0% 100.0% 100.0%
Cost of sales (including buying, distribution and occupancy
costs).................................................... 72.5 69.3 71.0
----- ----- -----
Gross margin................................................ 27.5 30.7 29.0
Selling, general and administrative expenses................ 23.8 22.8 21.1
----- ----- -----
Operating income............................................ 3.7 7.9 7.9
Other income................................................ 0.2 -- --
Interest income, net........................................ 0.6 0.8 0.9
----- ----- -----
Income before provision for income taxes.................... 4.5 8.7 8.8
Provision for income taxes.................................. 1.8 3.4 3.6
----- ----- -----
Net income.................................................. 2.7% 5.3% 5.2%
===== ===== =====
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Sales in fiscal 1999 were $524,407,000 compared to sales in fiscal 1998 of
$485,389,000, an increase of $39,018,000, or 8.0%. The dollar increase in sales
in fiscal 1999 compared to fiscal 1998 was due to the impact of the 109 new
store openings in fiscal 1999 and the full year impact in 1999 of the net 65 new
store openings in fiscal 1998. These increases were somewhat offset by the
closing of 15 stores in fiscal 1999 and by the decrease in comparable store
sales of 9.8%.
Cost of sales, including buying, distribution and occupancy costs, was
$380,012,000 in fiscal 1999 compared to $336,527,000 in fiscal 1998, an increase
of $43,485,000 or 12.9%. As a percentage of sales, cost of sales increased to
72.5% in fiscal 1999, from 69.3% in fiscal 1998, an increase of 3.2%. The dollar
increase in cost of sales in fiscal 1999 compared to fiscal 1998 was due
primarily to the increase in the number of stores. The increase in cost of sales
as a percentage of sales related primarily to an increase in occupancy costs as
a percent of sales due to the decrease in comparable store sales. To a lesser
extent, the increase was due to an increase in buying costs as a percentage of
sales due to additional headcount added in fiscal 1999 to support the increase
in the number of stores. Offsetting these increases was a decrease in
distribution costs related primarily to the decrease in the unit cost of
processing in the current year and to leveraging of fixed costs such as rent and
depreciation due to the increase in total sales. The cost of merchandise as a
percent of sales was the same as the prior year. There was an improvement in the
initial mark up and the shrink rate in fiscal 1999 compared to fiscal 1998,
which was offset by an increase in markdowns. The increase in markdowns was
related primarily with the need to clear merchandise due to the decrease in
comparable store sales, particularly in the fourth quarter.
Selling, general and administrative expenses were $124,712,000 in fiscal
1999 compared to $110,554,000 in fiscal 1998, an increase of $14,158,000, or
12.8%. As a percentage of sales, selling, general and administrative expenses
was 23.8% in fiscal 1999 compared to 22.8% in fiscal 1998, an increase of 1%.
The dollar increase in selling, general and administrative expenses in fiscal
1999 compared to fiscal 1998 was primarily due to the increase in total sales.
The increase as a percentage of sales was primarily related to the increases in
selling wages and advertising expenses in the current year as a percentage of
sales offset somewhat by a decrease in the fixed costs associated with catalog
production as a percentage of sales.
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Without the impact of the catalog operation, selling, general and administrative
expenses increased 1.8%. This increase related primarily to the increase in
selling expense as a percentage of sales due to the impact of the decrease in
the comparable store sales on the fixed portion of store wages. Also
contributing to the increase as a percentage of sales was an increase in
advertising expense related to a national advertising campaign in fiscal 1999
for both the Blue Asphalt and Arden B. brands.
Other income, net, was $1,154,000 or 0.2% of sales in fiscal 1999. Other
income, net, was related to the sale of one store lease.
Interest income, net, was $3,005,000 in fiscal 1999 compared to $3,894,000
in fiscal 1998, a decrease of $889,000. This decrease was due primarily to a
decrease in the average cash balance invested during the year.
Income tax provision was $9,659,000 in fiscal 1999 compared to $16,248,000
in fiscal 1998. The effective income tax rate in fiscal 1999 was 40.5% compared
to 38.5% in fiscal 1998. The increase in the effective tax rate in fiscal 1999
compared to fiscal 1998 was due to the impact of the lower pretax income in
fiscal 1999 and the permanent timing differences between book and tax, as well
as to the decrease in tax exempt securities.
Based on the factors noted above, net income was $14,183,000 in fiscal 1999
compared to $25,954,000 in fiscal 1998, a decrease of $11,771,000 or 45.4%. As a
percentage of sales, net income was 2.7% in fiscal 1999 compared to 5.3% in
fiscal 1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Sales in fiscal 1998 were $485,389,000 compared to sales in fiscal 1997 of
$412,463,000, an increase of $72,926,000 or 17.7%. The dollar increase in sales
in fiscal 1998 compared to fiscal 1997 was primarily due to the impact of the 86
new store openings in fiscal 1998 and the full year impact in 1998 of the net 25
new store openings in fiscal 1997. These increases were somewhat offset by the
closing of 21 stores in fiscal 1998. To a lesser extent, the increase in sales
was due to an increase in comparable store sales of 2.1%.
Cost of sales, including buying, distribution and occupancy costs, was
$336,527,000 in fiscal 1998 compared to $292,644,000 in fiscal 1997, an increase
of $43,883,000 or 15.0%. As a percentage of sales, cost of sales decreased to
69.3% in fiscal 1998, from 71.0% in fiscal 1997, a decrease of 1.7%. The dollar
increase in cost of sales in fiscal 1998 compared to fiscal 1997 was due
primarily to the increase in total sales. Of the 1.7% decrease in cost of sales
as a percentage of sales, 1.2% related to a decrease in occupancy costs, 0.6%
related to a decrease in the cost of merchandise and 0.1% related to a decrease
in buying costs, offset by a 0.2% increase in distribution costs. The decrease
in occupancy costs was associated primarily to the leverage of the catalog
operation sales on store occupancy costs. To a lesser extent, the decrease in
occupancy was due to a decrease in store rental expenses, as a percentage of
sales, as a result of the expense leverage related to the increase in comparable
store sales. The decrease of 0.6% in merchandise cost was due to an increase in
the initial markup rates related to a decrease in the cost of merchandise. The
0.1% decrease in buying costs as a percentage of sales was due to the leverage
associated with the increase in total sales. The 0.2% increase in distribution
costs was related primarily to the catalog operation.
Selling, general and administrative expenses were $110,554,000 in fiscal
1998 compared to $86,999,000 in fiscal 1997, an increase of $23,555,000 or
27.1%. As a percentage of sales, selling, general and administrative expenses
was 22.8% in fiscal 1998 compared to 21.1% in fiscal 1997. The dollar increase
in selling, general and administrative expenses in fiscal 1998 compared to
fiscal 1997 was primarily due to the increase in total sales and, to a lesser
extent, the expenses related to the catalog operation. The increase as a
percentage of sales was primarily due to the impact of the fixed costs
associated with catalog production. Without the impact of the catalog operation,
selling, general and administrative expenses increased 0.5%. This increase
related primarily to the increase in selling expense as a percentage of sales
due to the
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increases in minimum wage and to the start-up costs associated with new store
openings. Also contributing to the increase as a percentage of sales was an
increase in administrative wages to support the expanded operations in fiscal
1998.
Interest income, net, was $3,894,000 in fiscal 1998 compared to $3,505,000
in fiscal 1997, an increase of $389,000. This increase was due primarily to an
increase in the average cash balance invested during the year.
Income tax provision was $16,248,000 in fiscal 1998 compared to $15,075,000
in fiscal 1997. The effective income tax rate in fiscal 1998 was 38.5% compared
to 41.5% in fiscal 1997. The decrease in the effective tax rate in fiscal 1998
compared to fiscal 1997 was due to the increase in income generated from states
with lower effective tax rates, as well as the impact of changes in the
corporate cash investment strategy, which resulted in higher balances invested
in tax exempt securities.
Based on the factors noted above, net income was $25,954,000 in fiscal 1998
compared to $21,250,000 in fiscal 1997, an increase of $4,704,000 or 22.1%. As a
percentage of sales, net income was 5.3% in fiscal 1998 compared to 5.2% in
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at the end of fiscal 1999, 1998 and 1997 was $47,707,000,
$21,856,000 and $66,452,000, respectively. The increase in working capital in
fiscal 1999 compared to fiscal 1998 was due to a net decrease in long-term
investments of $30,686,000, as current year cash was invested to a larger extent
in investments with maturities less than one year. Net cash provided by
operating activities in fiscal 1999, 1998 and 1997 was $28,795,000, $43,950,000
and $31,948,000, respectively. The decrease in net cash provided by operating
activities in fiscal 1999 compared to fiscal 1998 was due primarily to the
decrease in net earnings. Further contributing to the decrease was the decrease
in income taxes payable and the increase in inventory. This was offset to some
extent by the increase in accounts payable. The decrease in income taxes payable
was due to the decrease in taxable income, particularly in the fourth quarter.
The increase in inventory over the prior year was related to the increase in the
number of stores. The increase in accounts payable over the prior year related
to the increase in inventory.
The increase in net cash provided by operating activities in fiscal 1998
compared to fiscal 1997 was due primarily to the increase in net earnings.
Further contributing to the increase was the increase in income taxes payable
and accounts payable offset to some extent by the increase in inventory and
deferred tax, net. The increase in income taxes payable was due to the timing of
tax payments. The increase in accounts payable was attributable to the increase
in payables associated with capital expenditures. The increase in inventory over
the prior year was related to the increase in the number of stores offset, to
some extent, by the decrease in catalog inventory as compared to the prior year.
Additions to equipment and leasehold improvements are the Company's most
significant investment activities. In fiscal 1999, 1998 and 1997 the Company
invested $26,819,000, $26,503,000 and $22,973,000, respectively, in property and
equipment and leasehold improvements. These expenditures relate primarily to new
store openings and remodels. On February 1, 1999, the Company acquired the
leases and equipment and leasehold improvements for 78 store locations from
Britches of Georgetowne, Inc. for $15,704,000, of which $6,972,000 was
classified as goodwill. On December 1, 1998, the Company acquired the leases and
equipment and leasehold improvements for 19 store locations from Mothers
Work, Inc. for $1,911,000. The majority of the locations acquired were converted
to Arden B. stores.
In September 1998, the Company's Board of Directors authorized the
repurchase of up to 20% of the outstanding shares of the Company's Class A
Common Stock. As of January 29, 2000, 1,347,600 shares had been repurchased at a
cost of $20,059,000. Such repurchased shares are reflected as treasury stock in
the accompanying consolidated financial statements.
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The Company has a secured revolving line of credit arrangement with Bank of
America National Trust and Savings Association ("Bank of America") in an
aggregate principal amount of $50,000,000, maturing on July 1, 2001 and a five
year amortizing unsecured term loan with Bank of America in an amount up to
$10,000,000. As of January 29, 2000, the term loan had an outstanding balance of
$1,764,000. On October 29, 1999, the line of credit was extended to a maturity
date of July 1, 2001. At January 29, 2000, there were no outstanding borrowings
under the credit arrangement and there were $4,836,000 open letters of credit
related to imported inventory order. The Company was in compliance with all
terms and covenants of the credit arrangement and the term loan. The Company
invests its excess funds primarily in 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 30, 1999, the Christmas and back-to-school seasons together accounted
for an average of approximately 32% of the Company's annual sales, after
adjusting for sales increases related to new stores. The Company does not
believe that inflation has had a material effect on the results of operations
during the past three years. However, there can be no assurance that the
Company's business will not be affected by inflation in the future.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
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 of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward looking
statements, including, without limitation, the retention by the Company of
suppliers for both brand name and Company-developed merchandise, the ability of
the Company to expand and to continue to increase comparable store sales, and
the sufficiency of the Company's working capital and cash flows from operating
activities. In addition, these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, without limitation, a decline in demand
for the merchandise offered by the Company, the ability of the Company to locate
and obtain acceptable store sites and lease terms or renew existing leases, the
ability of the Company to obtain adequate merchandise supply, the ability of the
Company to hire and train employees, the ability of the Company to gauge the
fashion tastes of its customers and provide merchandise that satisfies customer
demand, management's ability to manage the Company's expansion, the effect of
economic conditions, the effect of severe weather or natural disasters and the
effect of competitive pressures from other retailers. The Company disclaims any
obligation or undertaking to disseminate any updates or revisions to any forward
looking statement contained herein or to reflect any change in the expectations
of the Company after the date hereof or any change in events, conditions or
circumstances on which any statement is based.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FSAB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes
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accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 was initially effective for fiscal years beginning
after June 15, 1999. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which delays the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. The Company does not believe the
adoption of SFAS No. 133 will have a material effect on the Company's
consolidated results of operations or financial condition.
YEAR 2000 COMPLIANCE
On January 1, 2000, many companies faced a potentially serious information
systems (computer) problem because many software applications and operational
programs written in the past did not properly recognize calendar dates beginning
in the Year 2000. This problem could have forced computers or machines which
utilize date dependent software to either shut down or provide incorrect data or
information. We examined our computer and information systems and were assured
by our software and hardware providers that our computer systems were fully
compliant with the Year 2000. We also performed our own internal tests of our
software and hardware to confirm that they were Year 2000 compliant.
At this time, we have not experienced any material Year 2000 related
problems with our information systems and computer software, and we have not
experienced any material problems with our key suppliers or customers related to
Year 2000.
It is not possible to quantify the aggregate cost of upgrading our computer
operating system and software since they were part of the software and hardware
providers' normal upgrades to our systems. The costs for upgrading our
information systems were funded through our operating cash flows, and we have
spent approximately $170,000 since 1998 for upgrades of our information systems
and services associated with such upgrades.
We intend to continue to review our information systems as well as monitor
our key suppliers and customers for any undetected Year 2000 problems which may
not be apparent yet. However, we do not currently believe that there are any
undetected Year 2000 problems that could have a material impact on our business,
financial condition or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Filed under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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 May 31, 2000,
filed pursuant to Regulation 14A.
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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 Consolidated Financial Statements
and Financial Statement Schedules".
2. Financial Statement Schedules--See "Index to Consolidated 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 29, 2000.
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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>
<S> <C> <C>
THE WET SEAL, INC.
(REGISTRANT)
By: /s/ KATHY BRONSTEIN
-----------------------------------------
Kathy Bronstein
VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By: /s/ EDMOND THOMAS
-----------------------------------------
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 SIGNED
---------- ----- -----------
<C> <S> <C>
/s/ GEORGE H. BENTER JR.
------------------------------------------- Director March 24, 2000
George H. Benter Jr.
Vice Chairman and Chief
/s/ KATHY BRONSTEIN Executive Officer and
------------------------------------------- Director (Principal March 24, 2000
Kathy Bronstein Executive Officer)
/s/ STEPHEN GROSS
------------------------------------------- Secretary and Director March 24, 2000
Stephen Gross
Senior Vice President of
/s/ ANN CADIER KIM Finance and Chief Financial
------------------------------------------- Officer (Principal Financial March 24, 2000
Ann Cadier Kim and Accounting Officer)
/s/ WALTER F. LOEB
------------------------------------------- Director March 24, 2000
Walter F. Loeb
</TABLE>
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<TABLE>
<CAPTION>
SIGNATURES TITLE DATE SIGNED
---------- ----- -----------
<C> <S> <C>
/s/ WILFRED POSLUNS
------------------------------------------- Director March 24, 2000
Wilfred Posluns
/s/ GERALD RANDOLPH
------------------------------------------- Director March 24, 2000
Gerald Randolph
/s/ ALAN SIEGEL
------------------------------------------- Director March 24, 2000
Alan Siegel
/s/ IRVING TEITELBAUM
------------------------------------------- Chairman of the Board and March 24, 2000
Irving Teitelbaum Director
/s/ EDMOND THOMAS
------------------------------------------- President and Chief Operating March 24, 2000
Edmond Thomas Officer and Director
</TABLE>
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THE WET SEAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT:
Report of Deloitte & Touche LLP............................. 19
FINANCIAL STATEMENTS:
Consolidated balance sheets as of January 29, 2000 and
January 30, 1999.......................................... 20
Consolidated statements of income for the years ended
January 29, 2000, January 30, 1999 and January 31, 1998... 21
Consolidated statements of comprehensive income for the
years ended January 29, 2000, January 30, 1999 and
January 31, 1998.......................................... 22
Consolidated statements of stockholders' equity for the
years ended January 29, 2000, January 30, 1999 and
January 31, 1998.......................................... 23
Consolidated statements of cash flows for the years ended
January 29, 2000, January 30, 1999 and January 31, 1998... 24
Notes to consolidated financial statements.................. 25
FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted as they are not required, or the
required information is shown in the consolidated financial
statements or the notes thereto.
</TABLE>
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Wet Seal, Inc.:
We have audited the accompanying consolidated balance sheets of The Wet
Seal, Inc. (the Company) as of January 29, 2000 and January 30, 1999 and the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for each of the three fiscal years in the period ended
January 29, 2000. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Wet
Seal, Inc. as of January 29, 2000 and January 30, 1999 and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended January 29, 2000, in conformity with accounting principles generally
accepted in the United States of America.
Deloitte & Touche LLP
Costa Mesa, California
March 15, 2000
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THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1).......................... $ 44,921 $ 31,590
Short-term investments (Note 3)............................. 26,395 21,943
Other receivables........................................... 3,909 3,665
Merchandise inventories (Note 1)............................ 33,288 28,002
Deferred tax charges (Note 4)............................... 1,560 1,791
-------- --------
Total current assets.................................... 110,073 86,991
-------- --------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Note 1):
Leasehold improvements...................................... 99,679 75,659
Furniture, fixtures and equipment........................... 47,488 37,758
Leasehold rights............................................ 2,944 3,577
Construction in progress.................................... -- 489
150,111 117,483
Less accumulated depreciation............................... (73,167) (57,110)
-------- --------
Net equipment and leasehold improvements................ 76,944 60,373
-------- --------
LONG-TERM INVESTMENTS (Note 3).............................. 7,287 37,973
OTHER ASSETS:
Deferred tax charges and other assets (Notes 4 and 13)...... 11,594 11,677
Goodwill, net of accumulated amortization of $992,000 and
$656,000 as of January 29, 2000 and January 30, 1999,
respectively (Note 1)..................................... 7,111 476
-------- --------
Total other assets...................................... 18,705 12,153
-------- --------
$213,009 $197,490
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 39,448 $ 37,515
Accrued liabilities (Note 12)............................... 20,611 20,430
Income taxes payable (Note 4)............................... 543 6,190
Current portion of long-term debt (Note 9).................. 1,764 1,000
-------- --------
Total current liabilities............................... 62,366 65,135
-------- --------
LONG-TERM LIABILITIES:
Long-term debt (Note 9)..................................... -- 1,264
Deferred rent (Note 1)...................................... 8,501 7,458
Other long-term liabilities (Note 13)....................... 3,909 3,355
-------- --------
Total long-term liabilities............................. 12,410 12,077
-------- --------
Total liabilities....................................... 74,776 77,212
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Notes 5 and 6):
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; 10,900,023 and 10,704,886 shares issued and
outstanding at January 29, 2000 and January 30, 1999,
respectively.............................................. 1,090 1,071
Common Stock, Class B convertible, $.10 par value,
authorized 10,000,000 shares; 2,912,665 shares issued and
outstanding at January 29, 2000 and January 30, 1999...... 291 291
Paid-in capital............................................. 62,493 58,356
Retained earnings........................................... 94,557 80,374
Other comprehensive loss (Note 13).......................... (139) (139)
Treasury stock, 1,347,600 and 1,327,000 shares, at cost, at
January 29, 2000 and January 30, 1999, respectively....... (20,059) (19,675)
-------- --------
Total stockholders' equity.................................. 138,233 120,278
-------- --------
$213,009 $197,490
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
SALES............................................ $ 524,407 $ 485,389 $ 412,463
COST OF SALES (including buying, distribution and
occupancy costs)............................... 380,012 336,527 292,644
---------- ---------- ----------
GROSS MARGIN..................................... 144,395 148,862 119,819
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 124,712 110,554 86,999
---------- ---------- ----------
OPERATING INCOME................................. 19,683 38,308 32,820
OTHER INCOME..................................... 1,154 -- --
INTEREST INCOME, NET............................. 3,005 3,894 3,505
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES......... 23,842 42,202 36,325
PROVISION FOR INCOME TAXES (Note 4).............. 9,659 16,248 15,075
---------- ---------- ----------
NET INCOME....................................... $ 14,183 $ 25,954 $ 21,250
========== ========== ==========
NET INCOME PER SHARE, BASIC (Note 14)............ $ 1.14 $ 1.98 $ 1.57
========== ========== ==========
NET INCOME PER SHARE, DILUTED (Note 14).......... $ 1.11 $ 1.91 $ 1.53
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC (Note
1)............................................. 12,425,704 13,085,587 13,552,502
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED
(Note 1)....................................... 12,813,338 13,581,233 13,899,877
========== ========== ==========
</TABLE>
21
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
----------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
NET INCOME....................................... $14,183 $25,954 $21,250
------- ------- -------
OTHER COMPREHENSIVE LOSS:
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ADJUSTMENT
(Note 13)...................................... -- (139) --
------- ------- -------
COMPREHENSIVE INCOME............................. $14,183 $25,815 $21,250
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------
CLASS A CLASS B
---------------------- --------------------- PAID-IN RETAINED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS
---------- --------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1997..... 10,628,874 $1,063 2,912,665 $291 $56,596 $33,170
Stock issued pursuant to
long-term incentive plan
(Note 6)...................... 8,704 1 -- -- 265 --
Exercise of stock options
(Note 6)...................... 19,000 2 -- -- 212 --
Tax benefit related to exercise
of stock options (Note 6)..... -- -- -- -- 144 --
Net income...................... -- -- -- -- -- 21,250
---------- ------ --------- ---- ------- -------
Balance at January 31, 1998..... 10,656,578 1,066 2,912,665 291 57,217 54,420
Stock issued pursuant to
long-term incentive plan
(Note 6)...................... 12,308 1 -- -- 462 --
Exercise of stock options
(Note 6)...................... 36,000 4 -- -- 269 --
Tax benefit related to exercise
of stock options (Note 6)..... -- -- -- -- 408 --
Repurchase of common stock
(Note 5)...................... -- -- -- -- -- --
Supplemental Employee Retirement
Plan adjustment (Note 13)..... -- -- -- -- -- --
Net income...................... -- -- -- -- -- 25,954
---------- ------ --------- ---- ------- -------
Balance at January 30, 1999..... 10,704,886 1,071 2,912,665 291 58,356 80,374
Stock issued pursuant to
long-term incentive plan
(Note 6)...................... 10,137 1 -- -- 110 --
Exercise of stock options
(Note 6)...................... 185,000 18 -- -- 1,691 --
Tax benefit related to exercise
of stock options (Note 6)..... -- -- -- -- 2,336 --
Repurchase of common stock
(Note 5)...................... -- -- -- -- -- --
Net income...................... -- -- -- -- -- 14,183
---------- ------ --------- ---- ------- -------
Balance at January 29, 2000..... 10,900,023 $1,090 2,912,665 $291 $62,493 $94,557
========== ====== ========= ==== ======= =======
<CAPTION>
OTHER TOTAL
COMPREHENSIVE TREASURY STOCKHOLDERS'
LOSS STOCK EQUITY
-------------- -------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Balance at February 1, 1997..... $ $ $ 91,120
Stock issued pursuant to
long-term incentive plan
(Note 6)...................... -- -- 266
Exercise of stock options
(Note 6)...................... -- -- 214
Tax benefit related to exercise
of stock options (Note 6)..... -- -- 144
Net income...................... -- -- 21,250
----- -------- --------
Balance at January 31, 1998..... -- -- 112,994
Stock issued pursuant to
long-term incentive plan
(Note 6)...................... -- -- 463
Exercise of stock options
(Note 6)...................... -- -- 273
Tax benefit related to exercise
of stock options (Note 6)..... -- -- 408
Repurchase of common stock
(Note 5)...................... -- (19,675) (19,675)
Supplemental Employee Retirement
Plan adjustment (Note 13)..... (139) -- (139)
Net income...................... -- -- 25,954
----- -------- --------
Balance at January 30, 1999..... (139) (19,675) 120,278
Stock issued pursuant to
long-term incentive plan
(Note 6)...................... -- -- 111
Exercise of stock options
(Note 6)...................... -- -- 1,709
Tax benefit related to exercise
of stock options (Note 6)..... -- -- 2,336
Repurchase of common stock
(Note 5)...................... -- (384) (384)
Net income...................... -- -- 14,183
----- -------- --------
Balance at January 29, 2000..... $(139) $(20,059) $138,233
===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
----------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $14,183 $25,954 $21,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 18,771 13,039 11,295
Loss on disposal of equipment and leasehold
improvements................................. 546 -- --
Stock issued pursuant to long-term incentive
plan......................................... 111 463 266
Deferred tax, net.............................. 271 (1,124) (2,189)
Changes in operating assets and liabilities:
Other receivables............................ (244) (456) (1,632)
Merchandise inventories...................... (5,286) (1,118) (4,295)
Prepaid expenses............................. -- 330 (330)
Other assets................................. 43 (594) (118)
Accounts payable and accrued liabilities..... 2,114 1,517 6,329
Income taxes payable......................... (3,311) 4,045 545
Deferred rent................................ 1,043 1,204 137
Other long-term liabilities.................. 554 690 690
------- ------- -------
Net cash provided by operating activities...... 28,795 43,950 31,948
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold
improvements................................... (26,819) (26,503) (22,973)
Acquisition of store leases and store assets..... (15,704) (1,911) --
Investment in marketable securities.............. (4,452) (83,018) (42,320)
Proceeds from sale of marketable securities...... 30,686 43,418 39,704
------- ------- -------
Net cash used in investing activities.......... (16,289) (68,014) (25,589)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt............. (500) (1,000) (2,000)
Purchase of treasury stock....................... (384) (19,675) --
Proceeds from issuance of common stock........... 1,709 273 214
------- ------- -------
Net cash provided by (used in) financing
activities................................... 825 (20,402) (1,786)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 13,331 (44,466) 4,573
CASH AND CASH EQUIVALENTS, beginning of year..... 31,590 76,056 71,483
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year........... $44,921 $31,590 $76,056
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest....................................... $ 146 $ 194 $ 337
Income taxes, net.............................. $12,902 $13,326 $16,720
SCHEDULE OF NONCASH TRANSACTIONS:
During the fifty-two weeks ended January 29, 2000, January 30, 1999 and January 31, 1998, the Company
recorded an increase to paid-in capital and a decrease to income taxes payable of $2,336,000, $408,000 and
$144,000, respectively, related to tax benefits associated with the exercise of non-qualified stock
options.
During the fifty-two weeks ended January 30, 1999, the Company recorded a decrease to other
comprehensive income of $139,000 and a corresponding decrease to other long-term liabilities and other
assets of $65,000 and $204,000, respectively, related to the Supplemental Employee Retirement Plan (see
note 13).
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
The Wet Seal, Inc. (the "Company") is a nationwide specialty retailer of
fashionable and contemporary apparel and accessory items designed for consumers
with a young, active lifestyle. 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 react to changes in fashion trends could adversely affect its
results of operations.
Approximately 34% 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. On July 1, 1995, the Company acquired
Contempo Casuals, Inc., a 237-store junior women's retail chain. Effective
February 2, 1997, Contempo Casuals, Inc. was merged with and into The Wet
Seal, Inc.
The Company's fiscal year ends on the Saturday closest to the end of
January. The reporting period includes 52 weeks in each of the fiscal years
1999, 1998 and 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Wet
Seal, Inc. and its wholly owned subsidiary, The Wet Seal Retail, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
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.
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 three to five 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 29, 2000,
the Company believes there has been no impairment of the value of such assets.
25
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Excess of cost over net assets acquired (goodwill), which resulted from the
acquisition of certain store assets in 1990 and 1999 is being amortized on the
straight-line method over 20 years for the 1999 acquisition and over 25 years
for the 1990 acquisition. 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 from the acquired assets.
RENTAL EXPENSE
Any defined rental escalation is 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 consisting of magazine
ads, in-store signage and promotions 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 six months. In fiscal 1999, the Company embarked on a national
magazine advertising campaign which included print ads promoting the Blue
Asphalt name and Arden B. concept which were placed in magazines such as
Seventeen, Cosmopolitan, Glamour, In-Style, Jane, Teen People, Spin and
Entertainment Weekly. Total advertising expenses related primarily to retail
operations in fiscal 1999, 1998 and 1997 were $5,567,000, $1,993,000, and
$1,676,000, of which, approximately $2,872,000 was related to the print media
advertising campaign in fiscal 1999.
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 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
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"), 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 14).
26
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 29, 2000 and
January 30, 1999, cash equivalents totaled $40,230,000 and $29,298,000,
respectively, bearing interest at rates ranging from approximately 3.6% to 5.7%
at January 29, 2000 and from approximately 4.7% to 5.3% at January 30, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FSAB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS No. 133
was initially effective for fiscal years beginning after June 15, 1999. In July
1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133,"
which delays the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company does not believe the adoption of SFAS No. 133 will
have a material effect on the Company's consolidated results of operations or
financial condition.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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, other
receivables and accounts payable approximate fair value due to the short
maturity of these financial instruments. Long-term investments consist of highly
liquid interest bearing securities that are carried at amortized cost plus
accrued income, which management believes approximates market. Long-term debt
bears a variable rate of interest which management believes the carrying amount
for the outstanding borrowings at January 29, 2000 and January 30, 1999
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 6).
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). This statement establishes standards for the way companies
report information about operating segments in financial statements. It
27
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. In accordance with the provisions of SFAS
No. 131, the Company has determined that it does not currently have any
separately reportable operating segments.
NOTE 2: ACQUISITION
On July 1, 1995, the Company acquired the business, assets and properties of
Contempo Casuals, Inc., a 237-store junior women's retail 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 12).
On December 1, 1998, the Company acquired the leases and furniture and
fixtures for 19 store locations from Mothers Work, Inc. The purchase price of
$1,911,000 was allocated to leasehold improvements and furniture, fixtures and
equipment in the accompanying consolidated financial statements. The majority of
the locations acquired were converted to Arden B. stores.
On February 1, 1999, the Company acquired the leases and furniture and
fixtures for 78 store locations from Britches of Georgetowne, Inc. for
$15,704,000. Based upon a third-party appraisal, the purchase price was
allocated to leasehold improvements, lease rights, and furniture, fixtures and
equipment in the accompanying consolidated financial statements. Excess of cost
over net assets acquired (goodwill) totaling $6,972,000 is being amortized on
the straight-line method over 20 years. The majority of the locations acquired
were converted to Arden B. stores.
NOTE 3: 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 29, 2000 less than 12 months. Long-term investments consist
of highly liquid interest bearing securities that mature beyond 12 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 29, 2000.
28
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 3: INVESTMENTS (CONTINUED)
Investments are comprised of the following (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION MATURITY DATES COST GAINS LOSSES FAIR VALUE
- ----------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
JANUARY 29, 2000
Corporate bonds.................... Within one year $ 3,588 $ -- $ 90 $ 3,498
Municipal bonds.................... Within one year 10,507 -- 236 10,271
Government obligations............. Within one year 10,800 -- 103 10,697
Floating rate/Adjustable Notes..... Within one year 1,500 -- -- 1,500
Municipal bonds.................... One to two years 7,287 -- 108 7,179
------- ---- ---- -------
$33,682 $ -- $537 $33,145
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION MATURITY DATES COST GAINS LOSSES FAIR VALUE
- ----------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
JANUARY 30, 1999
Commercial paper................... Within one year $ 1,000 $ -- $ -- $ 1,000
Corporate bonds.................... Within one year 1,514 -- 4 1,510
Municipal bonds.................... Within one year 7,679 3 -- 7,682
Government obligations............. Within one year 11,750 -- 11 11,739
Corporate bonds.................... One to two years 3,087 -- 27 3,060
Municipal bonds.................... One to two years 34,886 31 -- 34,917
------- ---- ---- -------
$59,916 $ 34 $ 42 $59,908
======= ==== ==== =======
</TABLE>
NOTE 4: 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
consolidated 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.
29
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 4: PROVISION FOR INCOME TAXES (CONTINUED)
The components of the income tax provision are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
CURRENT:
Federal........................................ $7,067 $13,442 $12,886
State.......................................... 2,321 3,930 4,378
------ ------- -------
9,388 17,372 17,264
------ ------- -------
DEFERRED:
Federal........................................ (47) (1,126) (1,535)
State.......................................... 318 2 (654)
------ ------- -------
271 (1,124) (2,189)
------ ------- -------
$9,659 $16,248 $15,075
====== ======= =======
</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 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
----------------- ----------------- -----------------
<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 5.6 7.2
Tax exempt interest.............................. (1.7) (1.5) (2.0)
Inventory contributions.......................... (2.0) -- --
Other............................................ 2.0 (0.6) 1.3
---- ---- ----
Effective tax rate............................... 40.5% 38.5% 41.5%
==== ==== ====
</TABLE>
As of January 29, 2000 and January 30, 1999 the Company's net deferred tax
asset was $10,438,000 and $10,709,000 respectively. The major components of the
Company's net deferred taxes at January 29, 2000 and January 30, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
----------------- -----------------
<S> <C> <C>
Deferred rent............................................... $ 3,316 $ 2,987
Acquisition related reserves................................ 608 630
Inventory cost capitalization............................... 919 1,080
Difference between book and tax basis of fixed assets....... 4,022 4,632
State income taxes.......................................... (279) (179)
Supplemental Employee Retirement Plan....................... 860 594
Other....................................................... 992 965
------- -------
$10,438 $10,709
======= =======
</TABLE>
30
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 5: STOCKHOLDERS' EQUITY
The 2,912,665 shares of the Company's Class B Common Stock outstanding as of
January 29, 2000 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 January 30, 1999, the Company's Board of Directors
authorized the repurchase of up to 20% of the outstanding shares of the
Company's Class A Common Stock. As of January 29, 2000, 1,347,600 shares had
been repurchased at a cost of $20,059,000. Such repurchased shares are reflected
as treasury stock in the accompanying consolidated financial statements.
NOTE 6: 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 10 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 2,425,000 shares of the Company's Class A
Common Stock may be issued pursuant to the Plans. As of January 29, 2000,
296,007 shares were available for future grants.
Stock option activity for each of the three years in the period ended
January 29, 2000 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
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
Granted............................................ 130,000 16.93
Canceled........................................... (12,000) 13.57
Exercised.......................................... (36,000) 7.58
---------
Outstanding at January 30, 1999...................... 1,049,500 14.42
Granted............................................ 705,500 15.13
Canceled........................................... (58,000) 16.17
Exercised.......................................... (185,000) 9.24
---------
Outstanding at January 29, 2000...................... 1,512,000 $15.32
=========
</TABLE>
At January 29, 2000, January 30, 1999 and January 31, 1998 there were
380,500, 283,500 and 119,500 outstanding options exercisable at a weighted
average exercise price of $11.71, $8.42 and $4.65, respectively.
31
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 6: LONG-TERM INCENTIVE PLAN (CONTINUED)
The following table summarizes information on outstanding and exercisable
stock options as of January 29, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AS OF REMAINING EXERCISE AS OF EXERCISE
RANGE OF EXERCISE PRICES JAN. 29, 2000 CONTRACTUAL LIFE PRICE JAN. 29, 2000 PRICE
- ------------------------ -------------- ---------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 3.00 - $ 3.63...................... 17,000 4.36 $ 3.52 17,000 $ 3.52
4.13 - 5.13...................... 163,500 4.22 4.18 161,500 4.17
8.00 - 16.50...................... 911,500 9.17 15.39 78,000 15.96
19.31 - 20.00...................... 420,000 7.62 19.97 124,000 19.98
--------- -------
$ 3.00 - $20.00...................... 1,512,000 8.15 $15.32 380,500 $11.71
========= =======
</TABLE>
During the years ended January 29, 2000, January 30, 1999 and January 31,
1998, the Company recognized tax benefits of $2,336,000, $408,000 and $144,000,
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 consolidated
financial statements for employee incentive stock options or non-qualified stock
options.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 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 No. 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:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
----------- ----------- -----------
<S> <C> <C> <C>
Dividend Yield............................... 0.00% 0.00% 0.00%
Expected Volatility.......................... 62.74% 49.93% 72.23%
Risk-Free Interest Rate...................... 5.81% 4.74% 6.10%
Expected Life of Option following
Vesting (in Months)........................ 48 48 48
</TABLE>
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 1999,
fiscal 1998 and fiscal 1997 awards had been amortized
32
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 6: LONG-TERM INCENTIVE PLAN (CONTINUED)
to expense over the vesting period of the awards, net income (in thousands) and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998 FISCAL 1997
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income...................... As reported $14,183 $25,954 $21,250
Pro forma $12,759 $24,804 $20,745
Net Income Per Share, Basic..... As reported $ 1.14 $ 1.98 $ 1.57
Pro forma $ 1.03 $ 1.90 $ 1.53
Net Income Per Share, Diluted... As reported $ 1.11 $ 1.91 $ 1.53
Pro forma $ 1.00 $ 1.83 $ 1.49
</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 29, 2000, the Company has granted an aggregate of 96,493
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 29, 2000, January 30, 1999, and January 31, 1998,
10,137, 12,308, and 8,704 shares, respectively, were fully vested and issued. In
connection with the issuance of these shares, the Company recorded compensation
expense of $111,000, $463,000, and $267,000 for the years ended January 29,
2000, January 30, 1999, and January 31, 1998, respectively.
NOTE 7: COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases retail stores, automobiles, computers and corporate
office and warehouse facilities under operating lease agreements expiring at
various times through 2010. Substantially all of the leases require the Company
to pay maintenance, insurance, property taxes and percentage rent 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.
33
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum annual rental commitments under non-cancelable leases, including the
corporate office and warehouse facility lease, are as follows (in thousands):
<TABLE>
<CAPTION>
MINIMUM LEASE SUBLEASE NET LEASE
COMMITMENTS INCOME COMMITMENTS
------------- -------- -----------
<S> <C> <C> <C>
FISCAL YEAR ENDING:
2000..................................... $ 66,416 $ 647 $ 65,769
2001..................................... 60,441 647 59,794
2002..................................... 53,390 377 53,013
2003..................................... 47,421 -- 47,421
2004..................................... 41,002 -- 41,002
Thereafter............................... 127,835 -- 127,835
-------- ------- --------
$396,505 $ 1,671 $394,834
======== ======= ========
</TABLE>
Rental expense, including common area maintenance, was $90,613,000,
$72,533,000, and $64,384,000, of which $28,000, $295,000, and $377,000 was paid
as percentage rent based on sales volume, for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998, 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 29, 2000, the Company had outstanding letters of credit amounting
to $4,836,000.
NOTE 8: REVOLVING CREDIT ARRANGEMENT
Under a secured revolving line of credit arrangement with a bank, the
Company may borrow up to a maximum of $50,000,000 on a revolving basis through
July 2001. The cash borrowings under the arrangement bear interest at the bank's
prime rate or, at the Company's option, LIBOR plus 1.5%.
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
34
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 8: REVOLVING CREDIT ARRANGEMENT (CONTINUED)
expenditures. At January 29, 2000 and January 30, 1999, the Company was in
compliance with these covenants. The Company had no borrowings outstanding under
the credit arrangement at January 29, 2000 or January 30, 1999.
NOTE 9: LONG-TERM DEBT
In June 1995, the Company entered into an unsecured five-year, $10,000,000
term loan. The loan bears interest at the bank's prime rate plus .25% or, at the
Company's option, LIBOR plus 1.5% (6.1% at fiscal year-end, payable monthly. The
outstanding debt balance as of January 29, 2000 was $1,764,000, which will be
repaid in quarterly installments of $500,000, until paid in fiscal 2000.
The term loan imposes quarterly and annual financial covenants requiring the
Company to maintain certain financial ratios and achieve certain levels of
quarterly income. In addition, the term loan requires that the bank approve the
payment of dividends and restricts the level of capital expenditures. At
January 29, 2000 and January 30, 1999, the Company was in compliance with these
covenants.
NOTE 10: RELATED PARTY TRANSACTIONS
Certain officers of Suzy Shier, Inc., a shareholder, provide management
services to the Company. For these services, the officers earned in the
aggregate a management fee of $437,500 in the year ended January 29, 2000,
$375,000 in the year ended January 30, 1999 and $250,000 in the year ended
January 31, 1998. The Company has entered into an agreement with these officers,
requiring annual payments of $500,000 through 2004.
NOTE 11: 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 29, 2000, the Company had accrued $145,000 as its
fiscal 1999 contribution to the Plan.
NOTE 12: ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
----------------- -----------------
<S> <C> <C>
Reserve for self insurance..................... $ 2,672 $ 2,857
Accrued wages, bonuses and benefits............ 5,570 7,272
Gift certificate and credit memo liability..... 4,261 3,464
Sales tax payable.............................. 2,376 1,651
Other.......................................... 5,732 5,186
------- -------
$20,611 $20,430
======= =======
</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 this
35
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 12: ACCRUED LIABILITIES (CONTINUED)
assumed accrual 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.
NOTE 13: 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 1998 and 1997 through
contributions to a trust fund known as a "Rabbi" trust. Assets held in the Rabbi
trust ($1,292,000 and $861,000 at January 29, 2000 and January 30, 1999,
respectively) are subject to claims of the Company's creditors but otherwise
must be used only for purposes of providing benefits under the SERP.
In accordance with Statement of Financial Accounting Standard No. 132,
"Employers' Disclosures about Pensions and other Postretirement Benefits." the
following presents a reconciliation of the SERP's funded status (in thousands):
CHANGE IN BENEFIT OBLIGATION
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
----------------- -----------------
<S> <C> <C>
Benefit obligation at beginning of year........ $3,355 $2,730
Service cost................................. 328 293
Interest cost................................ 226 191
Actuarial loss............................... -- 141
Benefits paid................................ -- --
------ ------
Benefit obligation at end of year.............. $3,909 $3,355
====== ======
</TABLE>
36
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 13: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (CONTINUED)
(In thousands)
CHANGE IN PLAN ASSETS
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
----------------- -----------------
<S> <C> <C>
Fair value of plan assets at beginning of
year......................................... $ -- $ --
Actual return on assets...................... -- --
Employer contribution........................ -- --
Benefits paid................................ -- --
------- -------
Fair value of plan assets at end of year....... $ -- $ --
======= =======
Funded status.................................. $(3,909) $(3,355)
Unrecognized transition (asset)/obligation... -- --
Unrecognized prior service cost.............. 1,804 1,968
Unrecognized net loss........................ 139 139
------- -------
Net amount recognized.......................... $(1,966) $(1,248)
======= =======
Weighted average assumptions:
Discount rate................................ 6.75% 6.75%
Expected return on plan assets............... 0.00% 0.00%
Rate of compensation increase................ n/a n/a
</TABLE>
AMOUNTS RECOGNIZED IN BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
----------------- -----------------
<S> <C> <C>
Prepaid pension cost........................... $ -- $ --
Accrued benefit liability.................... (3,909) (3,355)
Intangible asset (unrecognized prior service
cost)...................................... 1,804 1,968
Accumulated other comprehensive loss......... 139 139
------- -------
Net amount recognized.......................... $(1,966) $(1,248)
======= =======
</TABLE>
COMPONENTS OF NET PERIODIC PENSION COST
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
----------------- -----------------
<S> <C> <C>
Service cost--benefits earned during the
period....................................... $328 $293
Interest cost on projected benefit
obligation................................. 226 191
Expected return on plan assets............... -- --
Amortization of unrecognized prior service
cost....................................... 164 164
---- ----
Net periodic pension cost...................... $718 $648
==== ====
</TABLE>
37
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 14: NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income per share is as follows (in thousands, except for share
data):
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net income....................................... $ 14,183 $ 25,954 $ 21,250
========== ========== ==========
Weighted average number of common shares:
Basic............................................ 12,425,704 13,085,587 13,552,502
Effect of dilutive securities--stock options..... 387,634 495,646 347,375
---------- ---------- ----------
Diluted.......................................... 12,813,338 13,581,233 13,899,877
========== ========== ==========
Net income per share:
Basic............................................ $ 1.14 $ 1.98 $ 1.57
Effect of dilutive securities--stock options..... 0.03 0.07 0.04
---------- ---------- ----------
Diluted.......................................... $ 1.11 $ 1.91 $ 1.53
========== ========== ==========
</TABLE>
NOTE 15: 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.
38
<PAGE>
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 29, 2000, JANUARY 30, 1999 AND JANUARY 31, 1998
NOTE 16: UNAUDITED QUARTERLY FINANCIAL DATA
(In thousands except for share data)
FISCAL YEAR ENDED JANUARY 29, 2000
<TABLE>
<CAPTION>
NET INCOME PER NET INCOME PER
QUARTER SALES GROSS MARGIN NET INCOME SHARE, BASIC SHARE, DILUTED
- ------- -------- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
First Quarter................... $122,835 $ 35,843 $ 4,399 $0.36 $0.34
Second Quarter.................. 126,904 35,965 3,686 0.30 0.29
Third Quarter................... 131,465 36,843 2,747 0.22 0.22
Fourth Quarter.................. 143,203 35,744 3,351 0.27 0.27
-------- -------- -------
For the Year.................... $524,407 $144,395 $14,183 $1.14 $1.11
======== ======== =======
</TABLE>
FISCAL YEAR ENDED JANUARY 30, 1999
<TABLE>
<CAPTION>
NET INCOME PER NET INCOME PER
QUARTER SALES GROSS MARGIN NET INCOME SHARE, BASIC SHARE, DILUTED
- ------- -------- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
First Quarter................... $104,845 $ 29,973 $ 3,488 $0.26 $0.25
Second Quarter.................. 113,036 32,888 4,879 0.36 0.35
Third Quarter................... 121,622 36,501 5,418 0.42 0.41
Fourth Quarter.................. 145,886 49,500 12,169 0.99 0.95
-------- -------- -------
For the Year.................... $485,389 $148,862 $25,954 $1.98 $1.91
======== ======== =======
</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.
39
<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 --Services Agreement, dated December 30, 1988, and First
amendment to Services Agreement, dated June 1, 1990,
between the Company and Kathy Bronstein.
**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.
*********10.3.9.1 --Fourth amendment to Services Agreement between the Company
and Edmond Thomas, dated January 1, 1995.
**********10.3.9.2 --Fifth amendment to Services Agreement between the Company
and Edmond Thomas, dated March 31, 1999.
**********10.3.9.3 --Sixth amendment to Services Agreement between the Company
and Edmond Thomas, dated April 16, 1999.
**********10.3.9.4 --Seventh amendment to Services Agreement between the
Company and Kathy Bronstein, dated April 16, 1999.
*10.4 --1990 Long-Term Incentive Plan.
**10.5 --Credit Agreement between the Company and Bank of America,
dated as of April 20, 1992.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
***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, Inc. dated June 30, 1995.
*********10.5.5 --Amendment No. 1 to Business Loan Agreement between the
Company and Bank of America, containing Term Loan and
Revolving Line of Credit, dated May 7, 1998.
*********10.5.6 --Amendment No. 2 to Business Loan Agreement between the
Company and Bank of America, containing Term Loan and
Revolving Line of Credit, dated June 12, 1998.
*********10.5.7 --Amendment No. 3 to Business Loan Agreement between the
Company and Bank of America, containing Term Loan and
Revolving Line of Credit, dated November 6, 1998.
*********10.5.8 --Amendment No. 4 to Business Loan Agreement between the
Company and Bank of America, containing Term Loan and
Revolving Line of Credit, dated March 31, 1999.
10.5.9 --Business Loan Agreement between the Company and Bank of
America, containing Loan and Revolving Line of Credit;
Term dated October 29, 1999.
******10.6.1 --"Key Man" life insurance policy for Edmond Thomas.
*********10.6.2 --"Key Man" life insurance policy for Kathy Bronstein.
***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 1999
</TABLE>
- ------------------------
*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.
41
<PAGE>
****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.
********Denotes exhibits incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1998.
*********Denotes exhibits incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended January 30, 1999.
**********Denotes exhibits incorporated by reference to the Company's Proxy
Statement dated May 4, 1999.
42
<PAGE>
EXH. 10.5.9
BUSINESS LOAN AGREEMENT
This Agreement dated as of October 29, 1999, is between Bank of America, N.A.
(the "Bank") and The Wet Seal, Inc. (the "Borrower").
1. FACILITY NO. 1 : LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a
line of credit("Facility No. 1") to the Borrower. The amount of the line
of credit (the "Facility No. 1 Commitment") is Fifty Million and 00/100
Dollars ($50,000,000.00).
(b) This is a revolving line of credit providing for cash advances, letters
of credit, acceptances, shipside bonds and air releases. During the
availability period, the Borrower may repay principal amounts and reborrow
them.
(c) Each advance must be for at least Five Hundred Thousand and 00/100
Dollars ($500,000.00), or for the amount of the remaining available line
of credit, if less.
(d) The Borrower agrees not to permit the sum of (i) the outstanding
principal balance of advances under the line of credit, (ii) the
outstanding amounts of any letters of credit, including amounts drawn on
letters of credit and not yet reimbursed and including any outstanding
deferred payment obligation of the Bank under any letter of credit that
is not yet reimbursed (collectively, "L/C Outstandings"), and (iii) the
amount of all outstanding acceptances, shipside bonds and air releases, to
exceed the Facility No. 1 Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date
of this Agreement and July 1, 2001 (the "Facility No. 1 Expiration Date")
unless the Borrower is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below,
the interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time
to time by the Bank in San Francisco, California, as its Reference Rate.
The Reference Rate is set by the Bank based on various factors, including
the Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in
the Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on September 1, 1999, and then monthly
thereafter until payment in full of any principal outstanding under this
line of credit.
(b) Subject to the provisions of Paragraph 12.12, the Borrower will repay in
full all principal and any unpaid interest or other charges outstanding
under this line of credit no later than the Facility No. 1 Expiration
Date. Any interest period for an optional interest rate (as described
below) shall expire no later than the Facility No. 1 Expiration Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates
listed below during interest periods agreed to by the Bank and the Borrower.
The optional interest rates shall be subject to the terms and conditions
described later in this Agreement. Any principal amount bearing interest at
an optional rate under this Agreement is referred to as a "Portion". The
following optional interest rates are available:
(a) the LIBOR Rate plus 1.5 percentage points.
1.6 LETTERS OF CREDIT.
(a) This line of credit may be used for financing:
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(i) commercial letters of credit in the name of the Borrower, WSCC
Buying Group, Inc. ("WSCC") or Wet Seal Catalog, Inc. ("WSCI")
with a maximum maturity of 180 days. Each commercial letter of
credit will require drafts payable at sight or up to 90 days
after sight, or which may be deferred payment letters of credit,
with payment thereunder due up to 90 days after presentation of
conforming documents; provided, however, that (A) no commercial
letter of credit may expire, and no deferred payment obligation
of the Bank under any such letter of credit may mature, later
than 120 days after the Facility No. 1 Expiration Date, and (B)
the combined tenor of each commercial letter of credit and any
payment obligation of the Bank thereunder may not exceed 270 days.
(ii) standby letters of credit with a maximum maturity of 360
days but not to extend more than 120 days beyond the Facility No. 1
Expiration Date. The standby letters of credit may include a
provision providing that the maturity date will be automatically
extended each year for an additional year unless the Bank gives
written notice to the contrary; provided, however, that each letter
of credit shall include a final maturity date which shall not be
subject to automatic extension.
(iii) The Borrower agrees not to permit the aggregate amount of all
acceptances, shipside bonds, air releases and L/C Outstandings with
respect to commercial letters of credit to exceed at any one time
the sum of Fifty Million and 00/100 Dollars ($50,000,000.00).
(iv) The Borrower agrees not permit the aggregate amount of L/C
Outstandings with respect to standby letters of credit to exceed
Twenty Million and 00/100 Dollars ($20,000,000.00).
(v) All letters of credit outstanding from the Bank for the account of
the Borrower, WSCC or WSCI as of the date of this Agreement shall
be deemed to the outstanding under this Agreement, and shall not be
subject to all the terms and conditions stated in this Agreement.
(b) THE BORROWER AGREES:
(i) any sum drawn under a letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this
Agreement. The amount will bear interest and be due as described
elsewhere in this Agreement.
(ii) if there is a default under this Agreement, to immediately prepay
and make the Bank whole for any outstanding letters of credit.
(iii) the issuance of any letter of credit and any amendment to a letter
of credit is subject to the Bank's written approval and must be in
form and content satisfactory to the Bank and in favor of a
beneficiary acceptable to the Bank. Without limiting the foregoing,
no letter of credit may be issued to support the Borrower's
obligations under workers' compensation laws or regulation.
(iv) to sign the Bank's form Application and Agreement for Commercial
Letter of Credit or Application and Agreement for Standby Letter of
Credit.
(v) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit
for the Borrower.
(vi) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges,
(vii) to pay the Bank a non-refundable fee equal to one of the following
percentages of the outstanding undrawn amount of each standby letter
of credit, as applicable: 1.5% per annum if the face amount of the
letter of credit is less than One Million and 00/100 Dollars
($1,000,000.00); 1.25% per annum if the face amount of the letter of
credit is equal to or greater than One Million and 00/100 Dollars
($1,000,000.00) but less than Ten Million and 00/100 Dollars
($10,000,000.00); and .875% per annum if the face amount of the
letter of credit is equal to or greater than Ten Million and 00/100
Dollars ($10,000,000.00). Each fee will be payable annually in
advance, calculated on the basis of the face amount outstanding on
the day the fee is calculated, provided, that in no event shall the
fee payable with respect to any standby letter of credit be less
than $400 per annum. If there is a default under this Agreement,
at the Bank's option, the amount of the fee shall be increased to
2% per annum over the fee that would otherwise be applicable,
effective starting on the day the Bank provides notice of the
increase to the Borrower.
1.7 ACCEPTANCES. This line of credit may be used for financing acceptance
transactions in the name of the Borrower, WSCC or WSCI, subject to Paragraph
1.6(a)(iii) and the following conditions:
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(i) Acceptances shall have a maximum tenor of 90 days but not to extend
more than 90 days beyond the Facility No.1 Expiration Date.
(ii) The combined tenor of each commercial letter of credit and any
acceptance created thereunder may not exceed 270 days.
The Borrower agrees:
(a) any sum owed to the Bank under an acceptance may, at the option of the
Bank, be added to the principal amount outstanding under this Agreement.
The amount will bear interest and be due as described elsewhere in this
Agreement.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding acceptances.
(c) the issuance of any acceptance is subject to the Bank's express approval
and must be in form and content satisfactory to the Bank.
(d) to sign the Bank's standard form of agreement for acceptances, and to
pay any issuance and/or other fees that the Bank notifies the Borrower
will be charged for issuing and processing acceptances for the Borrower.
(e) to allow the bank to automatically charge its checking amount for
applicable fees, discounts, and other charges.
1.8 SHIPSIDE BONDS AND AIR RELEASES. Subject to Paragraph 1.6(a)(iii) of
the Agreement, this line of credit up to a maximum face value outstanding of
Fifty Million and 00/100 Dollars ($50,000,000.00) may be used for financing
shipside bonds and air releases in the name of the Borrower, WSCC or WSCI.
The Borrower agrees:
(a) any sum owed to the Bank under a shipside bond or an air release may, at
the option of the Bank, be added to the principal amount outstanding
under this Agreement. The amount will bear interest and be due as
described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to immediately prepay and
make the Bank whole for any outstanding shipside bonds and air releases.
(c) the issuance of any shipside bond is subject to the Bank's express
approval and must be in form and content satisfactory to the Bank.
(d) to sign the Bank's application, security agreement and other standard
forms for shipside bonds and/or air releases, and to pay any issuance
and/or other fees that the Bank notifies the Borrower will be charged
for issuing and processing shipside bonds or air releases for the
Borrower.
(e) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2. FACILITY NO. 2 : TERM LOAN AMOUNT AND TERMS
2.1 OUTSTANDING TERM LOAN. There is outstanding from the Bank to the
Borrower a term loan in the original principal amount of Ten Million and
00/100 Dollars ($10,000,000.00). This term loan is currently subject to the
terms and conditions of Facility No. 2 of the Business Loan Agreement dated
March 9, 1998. As of the date of this Agreement, the term loan shall be
deemed to be outstanding as Facility No. 2 under this Agreement, and shall be
subject to all the terms and conditions stated in this Agreement.
2.2 INTEREST RATE. Unless the Borrower elects an optional interest rate as
described below, the interest rate is the Bank's Reference Rate.
2.3 REPAYMENT TERMS.
(a) The Borrower will pay all accrued but unpaid interest on the last day of
each calendar month and upon payment in full of the principal of the
loan.
(b) Subject to the provisions of Paragraph 12.12, the Borrower will
repay principal in successive quarterly installments of Five Hundred
Thousand and 00/100 Dollars ($500,000.00) on the last day of each
January, April, July, and October of each year commencing October 31,
1999. On October 31, 2000, the Borrower will repay the remaining
principal balance plus any interest then due.
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(c) Subject to the provisions of Article 3 of this Agreement, the
Borrower may repay the loan in full or in part at any time in an
amount not less than Five Hundred Thousand and 00/100 Dollars
($500,000.00). The repayment will be applied to the most remote
payment of principal due Facility No. 2.
2.4 OPTIONAL INTEREST RATES. Instead of the interest rate based on the
Bank's Reference Rate, the Borrower may elect the optional interest rates
listed below during interest periods agreed to by the Bank and the Borrower.
The optional interest rates shall be subject to the terms and conditions
described later in this Agreement. Any principal amount bearing interest at
an optional rate under this Agreement is referred to as a "Portion." The
following optional interest rates are available.
(a) the LIBOR Rate plus 1.5 percentage points.
3. OPTIONAL INTEREST RATES
3.1 OPTIONAL RATES. Each optional interest rate is a rate per year.
Interest will be paid on the last day of each interest period, and on (i) the
first day of each month for Facility No. 1; and (ii) the last day of each
month for Facility No. 2 during the interest period. At the end of any
interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrower has designated another optional interest
rate for the Portion. No Portion will be converted to a different interest
rate during the applicable interest period. Upon the occurrence of an event
of default under this Agreement, the Bank may terminate the availability of
optional interest rates for interest periods commencing after the default
occurs.
3.2 LIBOR RATE. The election of LIBOR Rates shall be subject to the
following terms and requirements:
(a) The interest period during which the LIBOR Rate will be in effect will
be one, two, three, four, five, or six months. The first day of the
interest period must be a day other than a Saturday or a Sunday on
which the Bank is open for business in California, New York and London
and dealing in offshore dollars (a "LIBOR Banking Day"). The last day
of the interest period and the actual number of days during the
interest period will be determined by the Bank using the practices of
the London inter-bank market.
(b) Each LIBOR Rate Portion will be for an amount not less than the
following:
(i) for interest periods of four months or longer, Five Hundred Thousand
Dollars ($500,000).
(ii) for interest periods of one, two or three months, One Million
Dollars ($1,000,000).
(c) The "LIBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts
in the calculation will be determined by the Bank as of the first day of
the interest period.)
LIBOR RATE = London Inter-Bank Offered Rate
------------------------------
(1.00 - Reserve Percentage)
Where:
(i) "London Inter-Bank Offered Rate" means the interest rate at which
the Bank's London Branch, London, Great Britain, would offer U.S.
dollar deposits for the applicable interest period to other major
banks in the London inter-bank market at approximately 11:00 a.m.
London time (2) London Banking Days before the commencement of the
interest period. A "London Banking Day" is a day on which the Bank's
London Branch is open for business and dealing in offshore dollars.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained
by member banks of the Federal Reserve System for Eurocurrency
Liabilities, as defined in Federal Reserve Board Regulation D,
rounded upward to the nearest 1/100 of one percent. The percentage
will be expressed as a decimal, and will include, but not be
limited to, marginal, emergency, supplemental, special, and other
reserve percentages.
(d) The Borrower shall irrevocably request a LIBOR Rate Portion no later than
12:00 noon San Francisco time on the LIBOR Banking Day preceding the day
on which the London inter-Bank Offered Rate will be set, as specified
above. For example, if there are no intervening holidays or weekend days
in any of the relevant locations, the request must be made at least three
days before the LIBOR Rate takes effect.
(e) The Borrower may not elect a LIBOR Rate with respect to any principal
amount which is scheduled to be repaid before the last day of the
application interest period.
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(f) Each prepayment of a LIBOR Rate Portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the
scheduled payment date for such amount as required by this Agreement.
The prepayment fee shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during the
interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic certificate of
deposit market, the eurodollar deposit market, or other appropriate
money market selected by the Bank, for a period starting on the date
on which it was prepaid and ending on the last day of the interest
period for such Portion (or the scheduled payment date for the
amount prepaid, if earlier).
(g) The Bank will have no obligation to accept an election for a LIBOR Rate
Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to
the interest period, of a LIBOR Rate Portion are not available in
the London inter-bank market; or
(ii) the LIBOR Rate does not accurately reflect the cost of a LIBOR Rate
Portion.
4. FEES AND EXPENSES
4.1 FEES
(a) UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on any unused
portion of Facility No. 1 Commitment less than or equal to Twenty Million
Dollars ($20,000,000), determined by the weighted average credit
outstanding during the specified period. The fee will be calculated at
.20% per year. The calculation of credit outstanding shall include the
undrawn amount of letters of credit. This fee is due on September 30, 1999
and thereafter quarterly in arrears.
(b) WAIVER FEE. If the Bank, at its discretion, agrees to waive or amend
any terms of this Agreement, the Borrower will, at the Bank's option,
pay the Bank a fee for each waiver or amendment in an amount advised by
the Bank at the time the Borrower requests the waiver or amendment.
Nothing in this paragraph shall imply that the Bank is obligated to agree
to any waiver or amendment requested by the Borrower. The Bank may impose
additional requirements as a condition to any waiver or amendment.
4.2 EXPENSES. The Borrower agrees to immediately repay the Bank for
reasonable expenses that include, but are not limited to, filing, recording
and search fees, appraisal fees, title report fees and documentation fees.
4.3 REIMBURSEMENT COSTS.
(a) The Borrower agrees to reimburse the Bank for any expenses it incurs in
the preparation of this Agreement and any agreement or instrument required
by this Agreement. Expenses include, but are not limited to, reasonable
attorney's fees, including any allocated costs of the Bank's in-house
counsel.
(b) The Borrower agrees to reimburse the Bank for the cost of periodic
audits of the collateral securing this Agreement, at such intervals as the
Bank may reasonably require. The audits may be performed by employees of
the Bank or by independent auditors.
5. COLLATERAL
5.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by personal property the Borrower now owns or will
own in the future as listed below. The collateral is further defined in
security agreement(s) executed by the Borrower. In addition, all personal
property collateral securing this Agreement shall also secure all other
present and future obligations of the Borrower to the Bank (excluding any
consumer credit covered by the federal Truth in Lending law, unless the
Borrower has otherwise agreed in writing). All personal property collateral
securing any other present or future obligations of the Borrower to the Bank
shall also secure this Agreement.
(a) Stock and other securities as follows: 50 shares of the capital stock of
WSCC.
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Regulation U of the Board of Governors of the Federal Reserve
System places certain restrictions on loans secured by margin stock
(as defined in the Regulation). The Bank and the Borrower shall comply
with Regulation U. If any of the collateral is margin stock, the
Borrower shall provide to the Bank a Form U-1 Purpose Statement,
confirming that none of the proceeds of the loan will be used by buy
or carry any margin stock. If the Borrower has any other loan made for
the purpose of buying or carrying margin stock (purpose loan), then
the collateral securing this loan shall not secure the purpose loan,
and the collateral securing the purpose loan shall not secure this
loan.
For regulatory reasons, the Bank will not accept as collateral
Ineligible Securities while they are being underwritten by Banc of
America Securities LLC, or for thirty days thereafter. Banc of America
Securities LLC is a wholly-owned subsidiary of Bank of America
Corporation, and is a registered broker-dealer which is permitted to
underwrite and deal in certain ineligible Securities. "Ineligible
Securities" means securities which may not be underwritten or dealt in
by member banks of the Federal Reserve System under Section 16 of the
Banking Act of 1933 (12 U.S.C Section 24, Seventh) as amended.
6. DISBURSEMENTS, PAYMENTS AND COSTS
6.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be
made in writing in a manner acceptable to the Bank, or by another means
acceptable to the Bank.
6.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each
payment by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from
time to time;
(b) made for the account of the Bank's branch selected by the Bank from time
to time;
(c) made in immediately available funds, or such other type of funds selected
by the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
6.3 TELEPHONE AND TELEFAX AUTHORIZATION.
(a) The Bank may honor telephone or telefax instructions for advances or
repayments or for the designation of optional interest rates and telefax
requests for the issuance of letters of credit given by any one of the
individuals authorized to sign loan agreements on behalf of the Borrower,
or any other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 14580-50086, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone or telefax instructions the Bank
reasonably believes are made by any individual authorized by the Borrower
to give such instructions. This indemnity and excuse will survive this
Agreement's termination.
6.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit
account number 14580-50086, or such other of the Borrower's accounts with
the Bank as designated in writing by the Borrower (the "Designated
Account") on the date each payment of interest and any fees from the
Borrower becomes due (the "Due Date"). If the Due Date is not a banking
day, the Designated Account will be debited on the next banking day.
(b) Approximately 3 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in
the applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount,
regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed
Amount for the following Due Date will be increased by the amount of
the discrepancy. The Borrower will not be in default by reason of
any such discrepancy.
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(ii) If the Billed Amount is more than the Accrued Amount, the Billed
Amount for the following Due Date will be decreased by the amount
of the discrepancy.
Regardless of any such discrepancy, interest will continue to
accrue based on the actual amount of principal outstanding without
compounding. The Bank will not pay the Borrower interest on any
overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this
Agreement, the debit will be reversed.
6.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day
is a day other than a Saturday or a Sunday on which the Bank is open for
business in California. For amounts bearing interest at an offshore rate (if
any), a banking day is a day other than a Saturday or a Sunday on which the
Bank is open for business in California and dealing in offshore dollars. All
payments and disbursements which would be due on a day which is not a banking
day will be due on the next banking day. All payments received on a day which
is not a banking day will be applied to the credit on the next banking day.
6.6 TAXES. If any payments to the Bank under this Agreement are made from
outside the United States, the Borrower will not deduct any foreign taxes
from any payments it makes to the Bank. If any such taxes are imposed on any
payments made by the Borrower (including payments under this paragraph), the
Borrower will pay the taxes and will also pay to the Bank, at the time
interest is paid, any additional amount which the Bank specifies as necessary
to preserve the after-tax yield the Bank would have received if such taxes
had not been imposed. The Borrower will confirm that it has paid the taxes by
giving the Bank official tax receipts (or notarized copies) within 30 days
after the due date.
6.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request
or requirement of a regulatory agency which is applicable to all national
banks or a class of all national banks. The costs and losses will be
allocated to the loan in a manner determined by the Bank, using any
reasonable method. The costs include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments
for credit.
6.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year
and the actual number of days elapsed. This results in more interest or a
higher fee than if a 365-day year is used. Installments of principal which
are not paid when due under this Agreement shall continue to bear interest
until paid.
6.9 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, principal amounts outstanding under this
Agreement will at the option of the Bank bear interest at a rate which is 2
percentage point(s) higher than the rate of interest otherwise provided under
this Agreement. This will not constitute a waiver of any default.
7. CONDITIONS
The Bank must receive the following items, in form and content acceptable to
the Bank, before it is required to extend any credit to the Borrower under
this Agreement:
7.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance
by the Borrower of this Agreement and any instrument or agreement required
under this Agreement have been duly authorized.
7.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of incorporation.
7.3 SECURITY AGREEMENTS. Signed original security agreements, assignments,
financing statements and fixture filings (together with collateral in which
the Bank requires a possessory security interest), which the Bank requires.
7.4 EVIDENCE OF PRIORITY. Evidence that security interests and liens in
favor of the Bank are valid, enforceable, and prior to all others' rights and
interests, except those the Bank consents to in writing.
7.5 INSURANCE. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.
7.6 PAYMENT OF FEES. Payment of all accrued and unpaid expenses incurred by
the Bank as required by Paragraph 4.3 entitled "Reimbursement Costs."
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7.7 GUARANTIES. Guaranties signed by WSCC and WSCI, each in the amount of
Fifty Five Million Dollars ($55,000,000).
7.8 OTHER ITEMS. Any other items that the Bank reasonably requires.
8. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation:
8.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
8.2 AUTHORIZATION. This Agreement, any any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and
do not conflict with any of its organizational papers.
8.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance
with its terms, and any instrument or agreement required hereunder, when
executed and delivered, will be similarly legal, valid, binding and
enforceable.
8.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
8.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement,
or obligation by which the Borrower is bound.
8.6 FINANCIAL INFORMATION. All financial and other information that has
been or will be supplied to the Bank, including the Borrower's financial
statement dated as of July 31, 1999, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition, including all
material contingent liabilities.
(b) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the business condition (financial or otherwise),
operations, properties or prospects of the Borrower (or any guarantor).
8.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been
disclosed in writing to the Bank.
8.8 COLLATERAL. All of the collateral pledged by the Borrower to the Bank
pursuant to that certain Pledge Agreement dated as of June 30, 1995 ("Pledge
Agreement") is owned by the Borrower free of any title defects or any liens
or interest of others.
8.9 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade
name rights, patent rights and fictitious name rights necessary to enable it
to conduct the business in which it is now engaged.
8.10 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
8.11 INCOME TAX MATTERS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
8.12 NO TAX AVOIDANCE PLAN. The Borrower's obtaining of credit from the
Bank under this Agreement does not have as a principal purpose the avoidance
of U.S. withholding taxes.
8.13 NO EVENT OF DEFAULT. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.
8.14 INSURANCE. The Borrower has obtained, and maintained in effect, the
insurance coverage required in the "Covenants" section of this Agreement.
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8.15 ERISA PLANS.
(a) Each Plan (other than a multiemployer plan) is in compliance in all
material respects with the applicable provisions of ERISA, the Code and
other federal or state law. Each Plan has received a favorable
determination letter from the IRS and to the best knowledge of the
Borrower, nothing has occurred which would cause the loss of such
qualification. The Borrower has fulfilled its obligations, if any, under
the minimum funding standards of ERISA and the Code with respect to each
Plan, and has not incurred any liability with respect to any Plan under
Title IV of ERISA.
(b) There are no claims, lawsuits or actions (including by any governmental
authority), and there has been no prohibited transaction or violation of
the fiduciary responsibility rules, with respect to any Plan which has
resulted or could reasonable be expected to result in a material adverse
effect.
(c) Wish respect to any Plan subject to Title IV of ERISA:
(i) No reportable event has occurred under Section 4043(c) of ERISA
for which the PBGC requires 30 day notice.
(ii) No action by the Borrower or any ERISA Affiliate to terminate or
withdraw from any Plan has been taken and no notice of intent to
terminate a Plan has been filed under Section 4041 of ERISA.
(iii) No termination proceeding has been commenced with respect to a
Plan under Section 4042 of ERISA, and no event has occurred or
condition exists which might constitute grounds for the commencement
of such a proceeding.
(d) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(ii) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
(iii) "ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Borrower within the
meaning of Section 414(b) or (c) of the Code.
(iv) "PBGC" means the Pension Benefit Guaranty Corporation.
(v) "Plan" means a pension, profit-sharing, or stock bonus plan
intended to qualify under Section 401(a) of the Code, maintained
or contributed to by the Borrower or any ERISA Affiliate, including
any multiemployer plan within the meaning of Section 4001(a)(3) of
ERISA.
8.16 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under Borrower's signature on this Agreement.
8.17 YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive
review and assessment of the Borrower's systems and equipment applications
with respect to the "year 2000 problem" (that is, the inability of computers,
as well as embedded microchips in non-computing devices, to properly perform
date-sensitive functions with respect to certain dates prior to and after
December 31, 1999). Based on that review, the Borrower does not believe the
year 2000 problem, including costs of remediation, will result in a material
adverse change in the Borrower's business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the credit. The
Borrower has developed adequate contingency plans to ensure uninterrupted and
unimpaired business operation in the event of a failure of its own or a third
party's systems or equipment due to the year 2000 problem, including those of
vendors, customers, and suppliers, as well as a general failure of or
interruption in its communications and delivery infrastructure.
9. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
9.1 USE OF PROCEEDS. To use the proceeds of Facility No. 1 only for working
capital, general corporate purposes (excluding acquisition funding), issuance
of letters of credit and other trade finance products including but not
limited to deferred payment letters of credit, air releases and/or shipside
bonds, and funded or unfunded bankers acceptance.
9.2 FINANCIAL INFORMATION. To provide the following financial information
and statements in form and content acceptable to the Bank, and such
additional information as requested by the Bank from time to time:
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(a) Within 100 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with an
opinion not qualified in any manner, including not qualified due to
possible errors generated by financial reporting and related systems due
to the year 2000 problem) by a Certified Public Accountant ("CPA")
acceptable to the Bank. The statements shall be prepared on a
consolidated basis.
(b) Within 45 days of the last day of the first three fiscal quarters, the
Borrower's quarterly financial statements. These financial statements may
be Borrower prepared. The statements shall be prepared on a consolidated
basis (may be contained in 10-Q).
(c) Copies of the Borrower's Form 10-K Annual Report and annual proxy
statement, Form 10-Q Quarterly Report and Form 8-K Current Report, and
each other report the Borrower files with the Securities and Exchange
Commission ("SEC"), within 10 days after the date of filing thereof.
(d) Within the period(s) provided in (a) and (b) above, a compliance
certificate of the Borrower signed by an authorized financial officer of
the Borrower setting forth (i) the information and computations (in
sufficient detail) to establish that the Borrower is in compliance with
all financial covenants at the end of the period covered by the financial
statements then being furnished and (ii) whether there existed as of the
date of such financial statements and whether there exists as of the date
of the certificate, any default under this Agreement and, if any such
default exists, specifying the nature thereof and the action the Borrower
is taking and proposes to take with respect thereto.
(e) Within 80 days of the Borrower's fiscal year end, updated annual
consolidation projections in at least quarterly detail for that fiscal
year and updated annual projections for the then remaining term of
Facility No. 2, in SEC format and in any event in form and detail
acceptable to the Bank.
9.3 LIMITATION ON LOSSES. Not to incur on a consolidated basis a net loss
before taxes and extraordinary items in excess of Three Million Dollars
($3,000,000) for each first and second fiscal quarters of the Borrower.
9.4 MINIMUM NET INCOME. To earn on a consolidated basis net income before
taxes and extraordinary items of at least Three Million Dollars ($3,000,000)
for each third and fourth fiscal quarters of the Borrower.
9.5 OTHER DEBTS. Not to have outstanding or incur or permit WSCC to have
outstanding or incur, any direct or contingent liabilities (other than those
to the Bank), or become liable for the liabilities of others, without the
Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Operating leases related to retail store locations, whether now existing
or hereafter entered into.
(e) Operating lease obligations not described in subparagraph (9d) that do
not exceed a total amount of Five Million Dollars ($5,000,000) in any
fiscal year for the Borrower and its subsidiaries.
(f) Purchase money indebtedness in an aggregate amount not in excess of
Three Million Dollars ($3,000,000) in each fiscal year for the Borrower
and its subsidiaries.
(g) Guaranties of obligations of WSCC to vendors for merchandise purchased
for the accounts of Borrower and WSCI, so long as such guaranties are
unsupported by a lien, security interest or negative pledge in or on any
asset of Borrower of WSCC.
9.6 OTHER LIENS. Not to create, assume, or allow any security interest or
lien (including judicial liens) on all assets and trademarks the Borrower or
WSCC now or later owns except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
the Bank.
(d) Purchase money security interest in equipment securing indebtedness
permitted under Paragraph 9.5.
(e) Mechanics liens and other inchoate statutory liens incurred in connection
with the construction of tenant improvements for new retail stores
locations, which are released within 90 days following the completion of
such
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tenant improvements (but in no event later than 120 days following the
attachment thereof), provided that the consolidated obligations of the
Borrower and all of its subsidiaries secured thereby do not exceed Two
Million Dollars ($2,000,000) in the aggregate at any one time, and that no
property of the Borrower or any of its subsidiaries is at any material
risk of loss or forfeiture.
9.7 CAPITAL EXPENDITURES. Not to make capital expenditures to acquire fixed
or capital assets (on a consolidated basis) in an aggregate amount in excess
of Fifty Five Dollars ($55,000,000) for the fiscal year ending on or about
January 31, 2000, and Forty Million Dollars ($40,000,000) for the fiscal year
ending on or about January 31, 2001 and for any of fiscal year thereafter.
9.8 DIVIDENDS. Not to declare or pay any dividends on any of its shares
except dividends payable in capital stock of the Borrower, and not to
purchase, redeem or otherwise acquire for value any of its shares, or create
any sinking fund in relation thereto.
9.9 LOANS TO OFFICERS OR AFFILIATES. Not to make any loans, advances or
other extensions of credit to any of the Borrower's executives, officers,
directors, shareholders, employees or Affiliates (or any relatives of any of
the foregoing), provided that Borrower may enter into transactions (other
than loans) with its Affiliates on any arm's length basis, and may make loans
and advances to executives and officers in the ordinary course of its
business provided that the aggregate outstanding amount thereof is not in
excess of Two Hundred Fifty Thousand Dollars ($250,000) at any time.
"Affiliate" means, as to any person or entity, any other person or entity
which directly or indirectly controls, or is under common control with, or is
controlled by, such person or entity. As used in this definition, "control"
shall mean possession, directly or indirectly, of power to direct or cause
the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any person or entity that owns,
directly or indirectly, 5% or more of the securities having ordinary voting
power for the election of directors or other governing body of a corporation
or partnership or other entity, will be deemed to control such corporation,
partnership or other entity.
9.10 OUT OF DEBT PERIOD. To repay any advances in full, and not to draw any
additional advances on Facility No. 1 revolving line of credit, for a period
of at least 60 consecutive days in each fiscal year. For the purposes of this
paragraph "advances" does not include undrawn amounts of outstanding letters
of credit.
9.11 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over One Million Dollars ($1,000,000) against the Borrower
(or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's )
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
(e) any change in the Borrower's or WSCC's name, legal structure, place of
business, or chief executive office if the Borrower or WSCC has more than
one place of business.
9.12 BOOKS AND RECORDS. To maintain adequate books and records.
9.13 AUDITS. To allow the Bank and its agents to examine, audit, and make
copies of any physical certificates and books and records concerning the
collateral securing this Agreement at any reasonable time. If any of the
collateral, books or records are in the possession of a third party, the
Borrower authorizes that third party to permit the Bank or its agents to have
access to perform examinations or audits.
9.14 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
9.15 PRESERVATION OF RIGHTS. To maintain and preserve all rights,
privileges, and franchises the Borrower now has.
9.16 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or
replacements to keep the Borrower's properties in good working condition.
9.17 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect
its security interests and liens.
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9.18 COOPERATION. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.
9.19 GENERAL BUSINESS INSURANCE. To maintain insurance satisfactory to the
Bank as to amount, nature and carrier covering property damage (including
loss of use and occupancy) to any of the Borrower's properties, public
liability insurance including coverage for contractual liability, product
liability and workers' compensation, and any other insurance which is usual
for the Borrower's business.
9.20 ADDITIONAL NEGATIVE COVENANTS. Not to. without the Bank's written
consent:
(a) engage in, or permit WSCC to engage in, any business activities
substantially different from the Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter, or permit WSCC to enter, into any consolidation, merger, or other
combination, or become or permit WSCC to become a partner in a
partnership, a member of a joint venture, or a member of a limited
liability company.
(d) lease, sell, or otherwise dispose of all or a substantial part of the
Borrower's business, or in any event, lease, sell, or otherwise dispose of
any of the Borrower's assets with a fair market value of more than Two
Million Dollars ($2,000,000) outside of the ordinary course of business at
any one time, provided that this clause (d) shall not prohibit the sale of
merchandise at retail on a "discount" or "sale" basis in a manner
consistent with industry practices.
(e) acquire or purchase a business or its assets for an aggregate
consideration (including assumption of debt), on a consolidated basis,
which exceeds Ten Million Dollars ($10,000,000) in any of the Borrower's
fiscal years.
(f) sell or otherwise dispose of or permit WSCC to sell or otherwise dispose
of any assets for less than fair market value or enter or permit WSCC to
enter into any sale or leaseback agreement covering any of its fixed or
capital assets.
(g) voluntarily suspend or permit WSCC to suspend its business for more than
10 days in any 365 day period.
9.21 ADDITIONAL SUBSIDIARIES
(a) To cause each Subsidiary of the Borrower, concurrently with the
formation or acquisition thereof, to enter into a continuing guaranty of
the obligations and indebtedness of the Borrower under this Agreement in
form and substance acceptable to the Bank.
(b) Concurrently with the formation or acquisition of any Subsidiary, the
Borrower shall cause the delivery of certificates representing 100% of the
equity securities thereof to be delivered to the Bank in pledge to secure
the obligations of the Borrower to the Bank.
(c) Nothing in this Section shall be construed as a consent to the formation
or acquisition of any Subsidiary. As used in this Agreement, the term
"Subsidiary" means any corporation, partnership or business entity, the
majority of the equity securities of which are owned, directly or
indirectly, by the Borrower.
9.22 ASSETS AND LIABILITIES OF SUBSIDIARIES. Not to permit WSCC or any other
present or future Subsidiary of Borrower to have assets in excess of Ten
Thousand Dollars ($10,000), in the aggregate, or liabilities in excess of Ten
Thousand Dollars ($10,000), in the aggregate, at any time, provided that WSCC
may:
(a) incur obligations to the Bank pursuant to continuing guaranties of the
obligations of the Borrower; and
(b) purchase inventory for the account of the Borrower, provided that each
such purchase transaction is immediately liquidated by means of a
corresponding sale to the Borrower for the same price paid for such inventory
by WSCC.
9.23 BANK AS PRINCIPAL DEPOSITORY. To maintain the Bank as its principal
depository bank, including for the maintenance of business, cash management,
operating and administrative deposit accounts.
9.24 ERISA PLANS. With respect to a Plan subject to Title IV of ERISA, to
give prompt written notice to the Bank of:
(a) the occurrence of any reportable event under Section 4043(c) of ERISA
for which the PBGC requires 30 day notice.
(b) Any action by the Borrower or any ERISA Affiliate to terminate or
withdraw from a Plan or the filing of any notice of intent to terminate
under Section 4041 of ERISA.
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(c) The commencement of any proceeding with respect to a Plan under Section
4042 of ERISA.
10. HAZARDOUS WASTE INDEMNIFICATION
The Borrower will indemnify and hold harmless the Bank from any loss or
liability directly or indirectly arising out of the use, generation,
manufacture, production, storage, release, threatened release, discharge,
disposal or presence of a hazardous substance. This indemnity will apply
whether the hazardous substance is on, under or about the Borrower's property
or operations or property leased to the Borrower. The indemnity includes but
is not limited to attorneys' fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). The indemnity extends to the
Bank, its parent, subsidiaries and all of their directors, officers,
employees, agents, successors, attorneys and assigns. "Hazardous substances"
means any substance, material or waste that is or becomes designated or
regulated as "toxic," "hazardous," "pollutant," or "contaminant" or a similar
designation or regulation under any federal, state or local law (whether
under common law, statute, regulation or otherwise) or judicial or
administrative interpretation of such, including without limitation petroleum
or natural gas. This indemnity will survive repayment of the Borrower's
obligations to the Bank.
11. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional
credit available to the Borrower, and require the Borrower to repay its
entire debt immediately and without prior notice. If an event of default
occurs under the paragraph entitled "Bankruptcy," below, with respect to the
Borrower, then the entire debt outstanding under this Agreement will
automatically be due immediately.
11.1 FAILURE TO PAY. The Borrower fails to make a payment under this
Agreement within 5 days after the date when due.
11.2 LIEN PRIORITY. The Bank fails to have an enforceable first lien
(except for any prior liens to which the Bank has consented in writing) on or
security interest in any property given as security for this Agreement (or
any guaranty).
11.3 FALSE INFORMATION. The Borrower (or any guarantor) has given the Bank
information or representations that are false or misleading in any material
respect.
11.4 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy
petition, a bankruptcy petition is filed against the Borrower (or any
guarantor) or the Borrower (or any guarantor) makes a general assignment for
the benefit of creditors. The default will be deemed cured if any bankruptcy
petition filed against the Borrower (or any guarantor) is dismissed within a
period of 30 days after the filing; provided, however, that the Bank will not
be obligated to extend any additional credit to the Borrower during that
period.
11.5 RECEIVERS. A receiver or similar official is appointed for the
Borrower's (or any guarantor's) business, or the business is terminated.
11.6 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more
trade creditors against the Borrower (or any guarantor) in an aggregate
amount of Two Million Dollars ($2,000,000) or more in excess of any insurance
coverage.
11.7 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into
any settlement agreements with respect to any litigation or arbitration, in
an aggregate amount of Two Million Dollars ($2,000,000) or more in excess of
any insurance coverage.
11.8 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
11.9 MATERIAL ADVERSE CHANGE. A material adverse change occurs, or is
reasonably likely to occur, in the Borrower's (or any guarantor's) business
condition (financial or otherwise), operations, properties or prospects, or
ability to repay the credit.
11.10 CROSS-DEFAULT. Any default occurs (subject to any appliable grace or
cure period) under any agreement in connection with any credit the Borrower
(or any guarantor) has obtained from anyone else or which the Borrower (or
any guarantor) has guaranteed such agreement or guarantee relates to
indebtedness in the amount of Five Hundred Thousand Dollars ($500,000), and
the default consists of ailing to make a payment when due or gives the other
lender the right to accelerate the obligation.
11.11 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination
agreement, deed of trust, or other document required by this Agreement is
violated or no longer in effect.
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11.12 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet
the conditions of, or fails to perform any obligation under any other
agreement the Borrower (or any guarantor) has with the Bank or any affiliate
of the Bank.
11.13 ERISA PLANS. Any one or more of the following events occurs with
respect to a Plan of the Borrower subject to Title IV of ERISA, provided such
event or events could reasonably be expected, in the judgment of the Bank, to
subject the Borrower to any tax, penalty or liability (or any combination of
the foregoing) which, in the aggregate, could have a material adverse effect
on the financial condition of the Borrower:
(a) A reportable event shall occur under Section 4043(c) of ERISA with
respect to a Plan.
(b) Any Plan termination (or commencement of proceedings to terminate a
Plan) or the full or partial withdrawal from a Plan by the Borrower or
any ERISA Affiliate.
11.14 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the
conditions of, or fails to perform any obligation under, any term of this
Agreement not specifically referred to in this Article. This includes any
failure or anticipated failure by the Borrower to comply with any financial
covenants set forth in this Agreement, whether such failure is evidenced by
financial statements delivered to the Bank or is otherwise known to the
Borrower or the Bank. If, in the Bank's opinion, the breach is capable of
being remedied, the breach will not be considered an event of default under
this Agreement for a period of thirty (30) days after the date on which the
Bank gives written notice of the breach to the Borrower; provided, however,
that the Bank will not be obligated to extend any additional credit to the
Borrower during that period.
12. ENFORCING THIS AGREEMENT; MISCELLANEOUS
12.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made
under generally accepted accounting principles, consistently applied.
12.2 CALIFORNIA LAW. This Agreement is governed by California law.
12.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's
and the Bank's successors and assignees. The Borrower agrees that it may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the
right of set-off against the Borrower.
12.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those
that arise from:
(i) This Agreement (including any renewals, extensions or
modifications of this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted
between the Borrower and the Bank, including claims for injury
to persons, property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or
claims will be settled by arbitration in accordance with the United
States Arbitration Act. The United States Arbitration Act will apply
even though this Agreement provides that it is governed by California
law.
(c) Arbitration proceedings will be administered by the American
Arbitration Association and will be subject to its commercial rules of
arbitration.
(d) For purposes of the application of the statute of limitations, the
filing of an arbitration pursuant to this paragraph is the equivalent
of the filing of a lawsuit, and any claim or controversy which may be
arbitrated under this paragraph is subject to any applicable statute
of limitations. The arbitrators will have the authority to decide
whether any such claim or controversy is barred by the statute of
limitations and, if so, to dismiss the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the
arbitrators will have the authority to resolve any such dispute.
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(f) The decision that results from an arbitration proceeding may be
submitted to any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or
claim, at the time of the proposed submission to arbitration, arises
from or relates to an obligation to the Bank secured by real property
located in California. In this case, both the Borrower and the Bank
must consent to submission of the claim or controversy to arbitration.
If both parties do not consent to arbitration, the controversy or
claim will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel
of referees) selected under the auspices of the American
Arbitration Association in the same manner as arbitrators are
selected in Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be
appointed by a court as provided in California Code of Civil
Procedure Section 638 and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an
active attorney or retired judge; and
(iv) The award that results from the decision of the referee (or the
panel) will be entered as a judgment in the court that appointed
the referee, in accordance with the provisions of California
Code of Civil Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property
collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not
constitute a waiver of the right of the Borrower or the Bank,
including the suing party, to submit the controversy or claim to
arbitration if the other party contests the lawsuit. However, if the
controversy or claim arises from or relates to an obligation to the
Bank which is secured by real property located in California at the
time of the proposed submission to arbitration, this right is limited
according to the provision above requiring the consent of both the
Borrower and the Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this
Agreement, the Bank has the option to exercise the power of sale under
the deed of trust or mortgage, or to proceed by judicial foreclosure.
12.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default,
it may enforce a later default. Any consent or waiver under this Agreement
must be in writing.
12.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement.
12.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with
the enforcement or preservation of any rights or remedies under this
Agreement and any other documents executed in connection with this Agreement,
and in connection with any amendment, waiver, "workout" or restructuring
under this Agreement. In the event of a lawsuit or arbitration proceeding,
the prevailing party is entitled to recover costs and reasonable attorneys'
fees incurred in connection with the lawsuit or arbitration proceeding, as
determined by the court or arbitrator. In the event that any case is
commenced by or against the Borrower under the Bankruptcy Code (Title 11,
United States Code) or any similar or successor statute, the Bank is entitled
to recover costs and reasonable attorneys' fees incurred by the Bank related
to the presentation, protection, or enforcement of any rights of the Bank in
such a case. As used in this paragraph, "attorneys' fees" includes the
allocated costs of the Bank's in-house counsel.
12.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement collectively:
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(a) represent the sum of the understandings and agreements between the
Bank and the Borrower concerning this credit;
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
12.9 INDEMNIFICATION. The Borrower will indemnify and hold the Bank
harmless from any loss, liability, damages, judgments, and costs of any kind
relating to or arising directly or indirectly out of (a) this Agreement or
any document required hereunder, (b) any credit extended or committed by the
Bank to the Borrower hereunder, and (c) any litigation or proceeding related
to or arising out of this Agreement, any such document, or any such credit.
This indemnity includes but is not limited to attorneys' fees (including the
allocated cost of in-house counsel). This indemnity extends to the Bank,
its parent, subsidiaries and all of their directors, officers, employees,
agents, successors, attorneys, and assigns. This indemnity will survive
repayment of the Borrower's obligations to the Bank. All sums due to the
Bank hereunder shall be obligations of the Borrower, due and payable
immediately without demand.
12.10 NOTICES. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other addresses
as the Bank and the Borrower may specify from time to time in writing.
12.11 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
12.12 MANDATORY PREPAYMENT. Notwithstanding anything to the contrary
contained in this Agreement, if either of the credit facilities under this
Agreement are terminated for any reason (other than the prepayment of
Facility No. 2 using internally generated cash flow and repayment of loans
under Facility No. 1 (but not using the proceeds of any loans received from
other lenders)), then the entire principal balance of both of the Facilities
provided under this Agreement, together with all accrued interest thereon,
shall be due and payable on the effective date of such termination, provided
that if Facility No. 1 is terminated by reason of the Bank's failure to renew
it, and the Borrower is not then in default under this Agreement, Facility
No. 2 shall be due and payable on the earlier of its maturity date or within
ninety (90) days after the termination of Facility No. 1.
Except for prepayment of Facility No. 2 using internally generated cash flow,
the Borrower's obligations under this Paragraph 12.12 shall arise under every
circumstance in which either of the Facilities is terminated, including
without limitation:
(a) termination resulting from the failure by the Bank to renew Facility
No. 1 beyond any availability period applicable thereto:
(b) prepayment of the principal balance of Facility No. 2; and
(c) termination as otherwise provided or permitted under this Agreement.
12.13 COUNTERPARTS. This Agreement may be executed in as many counterparts
as necessary or convenient, and by the different parties on separate
counterparts each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same agreement.
12.14 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business
Loan Agreement entered into as of March 9, 1998 between the Bank and the
Borrower, and any credit outstanding thereunder shall be deemed to be
outstanding under this Agreement.
12.15 PLEDGE AGREEMENT AND OTHER DOCUMENTS. The Pledge Agreement shall
remain effective in accordance with its terms, except that the Collateral (as
defined therein) shall consist only of the WSCC stock described in Paragraph
2(II) of the Pledge Agreement.
-16-
<PAGE>
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA, N.A. The Wet Seal, Inc.
X /s/ Jan Y. Okinishi X /s/ Ann Cadice Kim
--------------------- --------------------
By: Jan Y. Okinishi By: Ann Cadice Kim
Address where notices to the Bank are to be sent:
So. Orange County Regional Commercial Banking X /s/ Ed Thomas
Office #01458 -----------------
675 Anton Boulevard, 2nd Floor By: Ed Thomas
Costa Mesa, CA 92626
Addresses for Notices:
26972 Burbank
Foothill Ranch, CA 92610
-17-
<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 15, 2000, appearing in the Annual Report on Form 10-K
of The Wet Seal, Inc. for the year ended January 29, 2000.
Deloitte & Touche LLP
Costa Mesa, California
March 24, 2000
================================================================================
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET
SEAL, INC. CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-03-2001
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 44,921,000
<SECURITIES> 33,682,000
<RECEIVABLES> 3,909,000
<ALLOWANCES> 0
<INVENTORY> 33,288,000
<CURRENT-ASSETS> 110,073,000
<PP&E> 150,111,000
<DEPRECIATION> 73,167,000
<TOTAL-ASSETS> 213,009,000
<CURRENT-LIABILITIES> 62,366,000
<BONDS> 0
0
0
<COMMON> 1,381,000
<OTHER-SE> 136,852,000
<TOTAL-LIABILITY-AND-EQUITY> 213,009,000
<SALES> 524,407,000
<TOTAL-REVENUES> 524,407,000
<CGS> 380,012,000
<TOTAL-COSTS> 124,712,000
<OTHER-EXPENSES> (1,154,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,005,000)
<INCOME-PRETAX> 23,842,000
<INCOME-TAX> 9,659,000
<INCOME-CONTINUING> 14,183,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,183,000
<EPS-BASIC> 1.14
<EPS-DILUTED> 1.14
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