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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18632
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0415940
(State of Incorporation) (I.R.S. Employer Identification
No.)
64 FAIRBANKS, IRVINE, CA 92718
(Address of principal executive (Zip Code)
offices)
(714) 583-9029
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS A COMMON STOCK
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (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. / /
The aggregate market value of voting stock held by non-affiliates as of
April 16, 1997 was $238,637,408.
The number of shares outstanding of the registrant's Class A Common Stock
and Class B Common Stock, par value $.10 per share, at April 16, 1997 was
10,628,874 and 2,912,665, respectively. There were no shares of Preferred Stock,
par value $.01 per share, outstanding at April 16, 1997.
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 February 1, 1997.
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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 specialty retailer of moderately priced, fashionable,
casual apparel and accessory items designed for consumers with a young, active
lifestyle. On July 1, 1995, the Company acquired the business, assets and
properties of Contempo Casuals, Inc. ("Contempo Casuals"), a 237-store retail
junior women's chain. This acquisition substantially increased the size of the
Company. As of April 16, 1997, the Company operated 363 retail stores in 34
states and Puerto Rico, including 123 in California, 49 in Florida, and 25 in
Texas. Of the 363 stores, 231 operate under the "CONTEMPO CASUALS" trademark,
128 operate under the "WET SEAL" trademark, three stores operate under the
"LIMBO LOUNGE" trademark and one of the stores operates under the "NEXT"
trademark. All of the stores, with the exception of the stores located in malls
where the Company operates both a Wet Seal and a Contempo Casuals store
("duplicate locations"), offer substantially the same merchandise and utilize
the same visual merchandising strategies. At the duplicate locations, the
Company employs different visual merchandising displays as well as in-store
image posters and will on occasion differentiate a portion of the merchandise
mix. The Limbo Lounge is a new concept which the Company began testing in three
stores in fiscal 1996 and intends to test in three additional stores in fiscal
1997. The Limbo Lounge offers both junior's and young men's clothing and
accessories in a unique store environment.
PRODUCTS AND MERCHANDISING
Both Wet Seal and Contempo Casuals stores target the same fashion-conscious
junior customer. The Company merchandises both stores similarly. In duplicate
locations, the Company differentiates the locations by displaying the
merchandise differently in each of the stores, and will occasionally
differentiate the merchandise mix. The Company provides a balance of
moderately-priced, fashionable brand name and Company-developed apparel and
accessories that appeal to consumers with young, active lifestyles. The Company
believes that Company-developed apparel differentiates it from its competitors.
The Company frequently updates its product offerings, which include sportswear,
dresses, lingerie, outerwear, shoes, cosmetics and accessories, to provide a
regular flow of fresh, new fashionable merchandise. Additionally, management
carefully monitors pricing and markdowns to expedite sales of slower-moving
inventory, facilitate the introduction of new merchandise and maintain an
updated fashion image.
Generally, the Company's stores display merchandise within a current fashion
statement by color and trend groupings. Rather than displaying garments together
by type (blouses with blouses, for example), the Company combines items of
apparel and accessories which the customer might buy as an ensemble. Store
displays are designed to enable customers to create ensembles within a current
fashion statement or trend group. Management believes that the trend grouping
concept strengthens the fashion image of the merchandise offered in the stores
and enables the customer to locate combinations of blouses, skirts, pants and
accessories in a manner which enhances the Company's opportunity to make
multiple unit sales. The general layout of merchandise in the stores is planned
by the Company's management, but may be varied and adapted by each store's
management. The Company makes use of in-store image posters to help focus
customers on particular fashion themes. The Company changes the visual display
of the merchandise in its stores approximately every six weeks to reflect the
changing tastes of the Company's target customer.
In the last quarter of fiscal 1996, the Company introduced a stand alone
store concept called Limbo Lounge. The product offerings include both junior's
and young men's apparel and accessories. The Company currently operates three
Limbo Lounges and plans on opening three additional stores in fiscal 1997. Based
on the success of these initial stores, the Company may open additional stores.
2
DESIGN, BUYING AND PRODUCT DEVELOPMENT
The Company's experienced design and buying teams are responsible for
identifying evolving fashion trends and then developing themes to guide the
Company's merchandising strategy. These teams monitor emerging fashion trends by
attending domestic and international fashion shows, engaging the services of
international fashion consultants, following industry publications and
conducting regular market research, including monitoring cutting-edge,
alternative stores, visiting Company stores to interact with customers and
employees and visiting competitors' stores. Additionally, the Company holds
"open to buy" days once a week to allow small vendors to meet with buyers
without appointments. 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 and Contempo as destination stores for the
customer. The Company focused on the Blue Asphalt brand and Evolution brand in
particular in fiscal 1996 and given the success of these brands, plans to
continue this focus.
SOURCING AND VENDOR RELATIONSHIPS
The Company purchases its merchandise from numerous domestic vendors and an
increasing number of foreign vendors. Although in fiscal 1996 no single vendor
accounted for more than 10% of the Company's merchandise and only one vendor
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 Los Angeles,
California distribution center. The Company does not have any long term or
exclusive contracts with any particular manufacturer or supplier for either
brand name or Company-developed apparel.
ALLOCATION AND DISTRIBUTION
The Company's merchandising effort primarily focuses on maintaining a
regular flow of fresh, fashionable merchandise into its stores. Successful
execution depends in large part on the Company's integrated planning, allocation
and distribution functions. Planning and allocation are managed by a team headed
by the Company's Director of Planning and Allocation. By working closely with
District and Regional Directors and merchandise buyers, this team manages
inventory levels and coordinates the allocation of merchandise to each of the
Company's stores based on sales volume, climate and other factors that may
influence individual stores' product mix.
In July 1995, the Company consolidated its distribution function into
Contempo Casuals' Los Angeles, California distribution facility. All merchandise
is received from vendors at this facility, where items are inspected for quality
and prepared for shipping to the Company's stores. The Company ships merchandise
to stores within a 100-mile radius of the distribution center by its fleet of
Company-owned trucks. The remainder of the Company's stores are shipped
merchandise by common carrier. Consistent with the Company's goal of maintaining
the freshness of its product offerings, the Company ships new merchandise to
each store daily.
In keeping with the Company's policy of introducing new merchandise,
markdowns are taken regularly to effect a rapid sale of slow-moving inventory.
Merchandise which remains unsold is periodically
3
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 $4.5 million for the fiscal year ended February 1, 1997. These stores
operate under both the Wet Seal and the Contempo Casuals names.
MARKETING, ADVERTISING AND PROMOTION
The Company believes that the highly-visible locations of its stores within
regional shopping malls, broad selection of fashionable merchandise and dynamic,
entertaining in-store environments have contributed significantly to the
Company's reputation as a destination store addressing the lifestyle of fashion-
conscious young women. Consequently, the Company has historically relied more
heavily on these factors and "word-of-mouth" advertising than more traditional
forms of advertising such as print, radio and television.
The Company utilizes a variety of advertising and promotional programs that
allow the Company to gain exposure in a cost-effective manner. By introducing
frequent shopper cards in its stores, the Company has developed a marketing
database that helps to track customers. The cards, which are sold for $20 each,
entitle customers to a standard 10% discount on purchases made within a one year
period. As part of these programs, sales representatives call cardholders
personally to notify customers of special in-store promotions, such as preferred
customer sales during which cardholders receive additional incentives.
Management believes these promotions foster customer loyalty and encourage
frequent visits and multiple item purchases. The Company also sponsors special
events such as snowboarding competitions and beach festivals that focus on the
interests and active lifestyles of its target customers. Further, the Company
utilizes its Company-owned trucks as "rolling billboards" in California,
painting them to promote the Company as well as certain of its Company-developed
labels such as Blue Asphalt.
STORE OPERATIONS
The Company's stores are divided into six geographic regions. Each region is
managed by a Regional Director who reports to the Company's Vice President of
Store Operations. Each region is further divided into districts consisting of
between 10 and 16 stores and managed by a District Director. The Company
delegates substantial authority to the 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 30 District
Directors provides weekly reports to senior management concerning overall
business conditions and specific aspects of their stores' operations. These
reports are used to identify competitive trends and store level concerns in a
timely manner. Store performance is also evaluated by senior management through
the use of a "secret shopper" service that shops each store twice a month.
Stores are typically staffed with one full-time manager, one or two
full-time co-managers, one full-time customer service leader and nine to sixteen
sales associates and cashiers, most of whom are part-time. During peak seasons,
stores may increase staffing levels to accommodate the additional in-store
traffic. The Company seeks to hire store-level employees who are energetic,
fashionable and friendly and who can identify with its targeted customers. The
Company's policy is to promote store managers from within while also hiring from
outside. Highly-regarded store managers are own 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-
4
traffic areas of a mall and to obtain the greatest amount of frontage possible.
The Company's average store size is approximately 4,200 square feet. Store hours
are determined by the mall in which the store is located.
INFORMATION AND CONTROL SYSTEMS
In fiscal 1996, the register hardware at both the Wet Seal and Contempo
Casuals stores was upgraded to a common system in order to increase efficiency.
Additionally, the Company plans to upgrade the register software in mid-fiscal
1997. As a result of these two upgrades, the Company expects to decrease
communication and maintenance costs, further improve customer service and become
more innovative in the area of in-store marketing.
While the Company believes its information systems are adequate to support
its current needs, in order to accommodate future growth the Company plans to
convert and upgrade its merchandising and other support systems in fiscal 1997
and fiscal 1998.
EXPANSION STRATEGY
The Company currently plans to open up to 30 new stores in fiscal 1997 and
plans to accelerate its growth in the following year to up to 75 stores. The
Company may, in limited instances and to the extent it deems advisable, seek to
acquire additional businesses which complement or enhance the Company's
operations. The Company currently has no commitments or understandings with
respect to such business opportunities.
The following table sets forth the number of stores in each state as of
April 16, 1997:
STATE # OF STORES STATE # OF STORES
- ------------------------------------------- --------------- ------------------------------------------- ---------------
Arizona.................................... 9 Nevada..................................... 6
California................................. 123 New Hampshire.............................. 1
Colorado................................... 7 New Jersey................................. 16
Connecticut................................ 7 New Mexico................................. 2
Delaware................................... 1 New York................................... 17
Florida.................................... 49 North Carolina............................. 2
Georgia.................................... 5 Ohio....................................... 5
Hawaii..................................... 8 Oklahoma................................... 1
Illinois................................... 16 Pennsylvania............................... 8
Indiana.................................... 1 Rhode Island............................... 1
Kentucky................................... 1 Tennessee.................................. 1
Louisiana.................................. 5 Texas...................................... 25
Maine...................................... 1 Utah....................................... 3
Maryland................................... 4 Virginia................................... 3
Massachusetts.............................. 10 Washington................................. 3
Michigan................................... 10 Wisconsin.................................. 3
Minnesota.................................. 6 Puerto Rico................................ 2
Missouri................................... 1
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, "anchor
stores," store location, the volume of consumer traffic, rent payments and other
costs associated with
5
opening a new store. The average store size the Company intends to consider is
between 3,600 and 4,500 square feet. However, in making its decision, management
reviews all leases in order to match closely the store size to the sales
potential of the store.
The Company's ability to expand in the future will depend, in part, on
general business conditions, the demand for the Company's merchandise, the
ability to find suitable malls with acceptable sites on satisfactory terms, and
the continuance of satisfactory cash flows from existing operations.
TRADEMARKS
The Company's primary trademarks and service marks are "WET SEAL," "CONTEMPO
CASUALS", "LIMBO LOUNGE" and "NEXT," which are registered in the U.S. Trademark
Office. The Company also uses and has registered, or has a pending registration,
on a number of marks, including "ACCOMPLICE," "BLUE ASPHALT," "CEMENT," "URBAN
VIBE" and "EVOLUTION NOT REVOLUTION." In general, the registrations for these
trademarks and service marks are renewable indefinitely as long as the Company
continues to use the marks as required by applicable trademark law. The Company
is the owner of an allowed and currently pending service mark application for
the mark "SEAL PUPS." The Company is not aware of any adverse claim or other
infringement relating to its trademarks or service marks.
COMPETITION
The young women's retail apparel industry is highly competitive, with
fashion, quality, price, location, in-store environment and service being the
principal competitive factors. The Company competes with specialty apparel
retailers, department stores and certain other apparel retailers, including The
GAP, and on a regional basis, with such retailers as Charlotte Russe, Miller's
Outpost and Gadzooks. 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 February 1, 1997, the Company had 5,302 employees, consisting of 1,560
full-time employees and 3,742 part-time employees. Full-time personnel consisted
of 842 salaried and 718 hourly employees. All part-time personnel are hourly
employees. Of the total employees, 5,011 are sales personnel and 291 are
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 are located at 64 Fairbanks, Irvine,
California, consisting of 85,740 square feet of leased office and storage space
(including 37,800 square feet of storage mezzanine space). This lease expires on
June 30, 1997. The Company has negotiated a six month extension on the lease.
The Company's distribution facility is located in Los Angeles, California and
consists of 99,847 square feet (including distribution mezzanine space). This
lease expires on July 31, 2002. This lease was acquired with the acquisition of
Contempo Casuals. The Company plans to sublease this facility beginning in
fiscal 1998 and has entered into a 10- year lease commencing in October 1997 for
a new distribution and office space in close proximity to its existing office
space.
6
The Company leases all of its stores. Lease terms for the Company's stores
are typically 10 years 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, such
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 1992:
FISCAL YEARS
--------------------------------------------------
1996 1995 1994 1993
----- ----- ----- -----
Stores open at beginning of year..................................... 364 133 129 125
Stores acquired during period(1)..................................... 0 237 0 0
Stores opened during period.......................................... 10 3 6 10
Stores closed during period.......................................... 10 9 2 6
--- --- --- ---
Stores open at end of period......................................... 364 364 133 129
--- --- --- ---
--- --- --- ---
1992
-----
Stores open at beginning of year..................................... 112
Stores acquired during period(1)..................................... 0
Stores opened during period.......................................... 15
Stores closed during period.......................................... 2
---
Stores open at end of period......................................... 125
---
---
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(1) Contempo Casuals was acquired on July 1, 1995.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Management
believes that, in the event of a settlement or an adverse judgment of any
pending litigation, the Company is adequately covered by insurance. As of April
16, 1997, 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
National Market ("Nasdaq") under the symbol "WTSLA." As of April 16, 1997, there
were 314 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 4,000. The closing price of the Common Stock on
April 16, 1997 was $22 1/2.
The following table reflects the high and low sales prices of the Company's
Common Stock as reported by Nasdaq for the last two fiscal years.
FISCAL 1996 FISCAL 1995
-------------------- --------------------
QUARTER HIGH LOW HIGH LOW
- ------------------------------------------------------------------------- --------- --------- --------- ---------
First Quarter............................................................ $ 16 $ 7 1/16 $ 4 1/2 $ 3 1/4
Second Quarter........................................................... 27 1/4 11 1/2 6 3 5/8
Third Quarter............................................................ 41 7/8 23 7/8 6 5/8 4 3/4
Fourth Quarter........................................................... 31 13 1/4 8 5/8 5 5/8
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
7
subject to the terms and covenants contained in the Company's bank lines of
credit, are at the sole discretion of the Board of Directors and will depend
upon the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following table of certain selected data regarding the Company should be
read in conjunction with the 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 January 29, 1994 and
January 30, 1993 are derived from the Company's financial statements for such
years which are not included herein.
FIVE YEAR FINANCIAL SUMMARY
1996 1995(1) 1994 1993 1992
----------- ----------- ----------- ----------- -----------
FISCAL YEAR FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30,
FISCAL YEAR ENDED 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
OPERATING RESULTS
Sales....................................... $374,942,000 $266,695,000 $132,997,000 $140,129,000 $149,744,000
Income (loss) before provision (benefit) for
income taxes.............................. 26,217,000 9,948,000 (1,366,000) (3,966,000) 5,924,000
Net income (loss)........................... $15,252,000 $ 5,815,000 $(1,013,000) $(2,378,000) $ 3,564,000
PER SHARE DATA
Net income (loss)........................... $ 1.13 $ 0.47 $ (0.08) $ (0.19) $ 0.29
Cash dividends per common share............. -- -- -- -- --
Weighted average number of common and common
equivalent shares outstanding............. 13,459,810 12,387,140 12,234,502 12,227,781 12,221,170
OTHER FINANCIAL INFORMATION
Net income (loss) as a percent of sales..... 4.1% 2.2% (0.8)% (1.7)% 2.4%
Return on average stockholders' equity...... 20.5% 10.7% (2.0)% (4.5)% 6.8%
Cash and marketable securities.............. $89,183,000 $57,153,000 $25,369,000 $18,331,000 $18,287,000
Working capital............................. $59,791,000 $26,051,000 $22,473,000 $18,874,000 $17,035,000
Ratio of current assets to current
liabilities............................... 2.1 1.5 2.8 2.7 2.5
Total assets................................ $154,752,000 $117,564,000 $67,298,000 $66,434,000 $68,665,000
Long-term debt.............................. 3,264,000 5,264,000 -- -- --
Total stockholders' equity.................. $91,120,000 $57,735,000 $50,724,000 $51,729,000 $54,085,000
Number of stores open at year end........... 364 364 133 129 125
Number of stores acquired during the year... -- 237 -- -- --
Number of stores opened during the year..... 10 3 6 10 15
Number of stores closed during the year..... 10 9 2 6 2
Square footage of leased store space at year
end....................................... 1,539,777 1,530,891 596,685 583,462 544,820
Percent of increase in leased square
footage................................... 0.6% 156.6% 2.3% 7.1% 16.9%
Avg. sales per square foot of leased
space(2).................................. $ 244 $ 229 $ 226 $ 247 $ 297
Average sales per store(2).................. $ 1,030,000 $ 976,000 $ 1,008,000 $ 1,092,000 $ 1,270,000
Comparable store sales increase
(decrease)(3)............................. 8.8% (4.1)% (9.2)% (14.2)% 2.0%
- ------------------------
(1) The Company's fiscal 1995 data include the results of operations of Contempo
Casuals since July 1, 1995. Fiscal 1995 consisted of 53 weeks.
(2) In fiscal 1995, the 53rd week of sales was excluded from "Sales" for
purposes of calculating "Average sales per square foot" and "Average sales
per store" in order to make fiscal 1995 comparable to prior years.
(3) In fiscal 1996, "Comparable store sales" were calculated by excluding sales
during the first week of fiscal 1995 in order to make fiscal 1995 comparable
to fiscal 1996. In fiscal 1995, "Comparable store sales" were calculated by
adding the first week of fiscal 1995 to fiscal 1994 sales in order to make
fiscal 1994 comparable to fiscal 1995. Comparable store sales are defined as
sales in stores that were open throughout the full fiscal year and
throughout the full prior fiscal year.
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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 363 retail
stores in 34 states and Puerto Rico under the names "Wet Seal", "Contempo
Casuals", "Limbo Lounge" and "Next". The Company sells moderately priced,
fashionable, casual apparel and accessory items designed for consumers with a
young, active lifestyle.
On July 1, 1995, the Company acquired Contempo Casuals. The purchase price
consisted of a $100,000 cash payment and the issuance of 254,676 shares of Class
A Common Stock, which had a market value of $1,178,000 as of the acquisition
date. In addition, the Company assumed approximately $27,700,000 of current
liabilities of Contempo Casuals. The transaction was accounted for under the
purchase method. The acquisition substantially increased the number of stores
the Company operates and reduced the percentage of total stores the Company
operates in California from more than 50% to approximately 35%.
The Company's return to profitability in fiscal 1995 as well as its improved
profitability in fiscal 1996 was directly related to the acquisition of Contempo
Casuals. Acquiring Contempo Casuals enabled the Company to significantly reduce
fixed expenses as a percentage of sales through the consolidation and
integration of the two companies' management teams, corporate offices and
distribution centers. This process was substantially completed at the time of
the acquisition. At the same time, the acquisition allowed the Company to reduce
the average depreciation per store due to the favorable acquisition price. As a
result of the acquisition of Contempo Casuals and the Company's strong balance
sheet, the Company believes it is well-positioned to capitalize on the growth in
the teenage population and the expected continuing changes in the competitive
environment of the retailing industry.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto.
RESULTS OF OPERATIONS
The following discussion and analysis of results of operations includes a
comparison of the results of operations for fiscal 1996, which contained the
full year results for both Wet Seal stores and Contempo Casuals stores, to
fiscal 1995, which contained the full year results of the Wet Seal stores and
the seven month results of the Contempo Casuals stores which were acquired on
July 1, 1995. Therefore, the results of operations for fiscal 1995 are not
directly comparable to those of fiscal 1996.
Comparable store sales are defined as sales in stores that were open
throughout the full fiscal year and throughout the full prior fiscal year. In
the last seven months of fiscal 1995, comparable store sales included sales
results of Contempo Casuals stores as compared to sales results of Contempo
Casuals stores in the corresponding period in the prior year during which time
Contempo Casuals was under different ownership.
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The following table sets forth selected income statement data of the Company
expressed as a percent of sales for the years indicated:
AS A PERCENTAGE OF SALES
FISCAL YEAR ENDED
-------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------- ------------- -------------
Sales........................................................................... 100.0% 100.0% 100.0%
Cost of sales (including buying, distribution and occupancy costs).............. 72.6 75.2 78.6
----- ----- -----
Gross margin.................................................................... 27.4 24.8 21.4
Selling, general and administrative expenses.................................... 21.1 21.6 23.1
Interest income, net............................................................ (0.7) (0.5) (0.7)
----- ----- -----
Net operating expenses.......................................................... 20.4 21.1 22.4
----- ----- -----
Income (loss) before provision (benefit) for income taxes....................... 7.0 3.7 (1.0)
Provision (benefit) for income taxes............................................ 2.9 1.5 (0.2)
----- ----- -----
Net income (loss)............................................................... 4.1% 2.2% (0.8)%
----- ----- -----
----- ----- -----
FISCAL 1996 COMPARED TO FISCAL 1995
Sales in fiscal 1996 (52 weeks) were $374,942,000 compared to sales in
fiscal 1995 (53 weeks) of $266,695,000, an increase of $108,247,000 or 40.6%.
The dollar increase in sales in fiscal 1996 compared to fiscal 1995 was
primarily due to the acquisition of Contempo Casuals and, to a lesser extent, to
the increase in the comparable store sales in fiscal 1996 compared to fiscal
1995. The Company attributes the increase in comparable store sales of 8.8% to
the resurgence of fashion at the beginning of fiscal 1996. Further contributing
to the sales increases were the opening of 10 new stores in fiscal 1996 offset
to some extent by the closing of 10 stores as well as the fact that fiscal 1996
had one less week of sales than fiscal 1995.
Cost of sales, including buying, distribution and occupancy costs, was
$272,189,000 in fiscal 1996 compared to $200,626,000 in fiscal 1995, an increase
of $71,563,000 or 35.7%. As a percentage of sales, cost of sales decreased from
75.2% in fiscal 1995 to 72.6% in fiscal 1996, a decrease of 2.6%. The dollar
increase in cost of sales in fiscal 1996 compared to fiscal 1995 was due
primarily to the increase in the number of stores as a result of the acquisition
of Contempo Casuals. Of the 2.6% decrease in cost of sales, 1.8% related to a
decrease in occupancy and buying costs and 0.8% related to a decrease in the
cost of merchandise. The decrease in occupancy costs was associated primarily
with a decrease in depreciation resulting from the lower net book value per
store of the depreciable assets of Contempo Casuals, as compared to Wet Seal.
The decrease of 0.8% in merchandise cost was due to an increase in the initial
markup rates.
Selling, general and administrative expenses were $79,238,000 in fiscal 1996
compared to $57,531,000 in fiscal 1995, an increase of $21,707,000 or 37.7%. As
a percentage of sales, selling, general and administrative expenses decreased
from 21.6% in fiscal 1995 to 21.1% in fiscal 1996, a decrease of .5%. The dollar
increase in selling, general and administrative expenses in fiscal 1996 compared
to fiscal 1995 was primarily due to the increase in the number of stores as a
result of the acquisition of Contempo Casuals. The decrease as a percentage of
sales was related to the economies of scale the Company achieved primarily as a
result of the increase in comparable store sales in fiscal 1996.
Interest income, net, was $2,702,000 in fiscal 1996 compared to $1,410,000
in fiscal 1995, an increase of $1,292,000. This increase was due primarily to an
increase in the average cash balance invested.
Income tax expense was $10,965,000 in fiscal 1996 compared to $4,133,000 in
fiscal 1995. The effective income tax rate in fiscal 1996 was 41.8% compared to
a rate of 41.5% in fiscal 1995.
10
Based on the factors noted above, net income was $15,252,000 in fiscal 1996
compared to $5,815,000 in fiscal 1995, an increase of 162%. As a percentage of
sales, net income was 4.1% in fiscal 1996 compared to 2.2% in fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Sales in fiscal 1995 (53 weeks) were $266,695,000 compared to sales in
fiscal 1994 (52 weeks) of $132,997,000, an increase of $133,698,000 or 100.5%.
The dollar increase in sales in fiscal 1995 compared to fiscal 1994 was
primarily due to the acquisition of Contempo Casuals and, to a significantly
lesser extent, to the additional week of sales in fiscal 1995. These increases
were partially offset by a 4.1% decrease in comparable store sales as well as by
the net effect of the closure of nine stores and the opening of three new stores
during 1995. The Company attributes the decline in comparable store sales to a
lack of a significant fashion trend and to a shift in consumer discretionary
spending habits, especially in the junior segment, to other non-apparel items.
The comparable store sales declines were most notable in certain regions,
particularly Southern California and parts of Florida, while certain other
regions experienced comparable store sales increases.
Cost of sales, including buying, distribution and occupancy costs, was
$200,626,000 in fiscal 1995 compared to $104,547,000 in fiscal 1994, an increase
of $96,079,000 or 91.9%. As a percentage of sales, cost of sales decreased from
78.6% in fiscal 1994 to 75.2% in fiscal 1995, a decrease of 3.4%. The dollar
increase in cost of sales in fiscal 1995 compared to fiscal 1994 was due to the
increase in the number of stores as a result of the acquisition of Contempo
Casuals. Of the 3.4% decrease in cost of sales as a percentage of sales, 2.1%
related to a decrease in occupancy costs and 0.9% related to a decrease in the
cost of merchandise. The decrease in occupancy costs was associated primarily
with a decrease in depreciation resulting from the lower net book value per
store of the depreciable assets of Contempo Casuals, as compared to Wet Seal.
The decrease of 0.9% in merchandise cost was due to an increase in the initial
markup rates. Further contributing to the decrease in cost of sales as a
percentage of sales was the fact that the acquisition of Contempo Casuals took
place on July 1, 1995, and thus fiscal 1995 results do not include the results
of operations of Contempo Casuals for the first five months of the fiscal year.
The first five months of the fiscal year historically have higher cost of sales
percentages due to relatively reduced sales levels which limit the Company's
ability to leverage the fixed components of cost of sales.
Selling, general and administrative expenses were $57,531,000 in fiscal 1995
compared to $30,698,000 in fiscal 1994, an increase of $26,833,000 or 87.4%. As
a percentage of sales, selling, general and administrative expenses decreased
from 23.1% in fiscal 1994 to 21.6% in fiscal 1995, a decrease of 1.5%. The
dollar increase in selling, general and administrative expenses in fiscal 1995
compared to fiscal 1994 was primarily due to the acquisition of Contempo
Casuals. The decrease as a percentage of sales was related to the economies of
scale the Company achieved as a result of this acquisition. These economies of
scale resulted in a 1.2% decrease in general and administrative expenses as a
percentage of sales.
Interest income, net, was $1,410,000 in fiscal 1995 compared to $882,000 in
fiscal 1994, an increase of $528,000. This increase was due primarily to an
increase in the average cash balance invested.
Income tax expense (benefit) was $4,133,000 in fiscal 1995 compared to
$(353,000) in fiscal 1994. The effective income tax rate in fiscal 1995 was
41.5% compared to a tax benefit rate of 25.8% in fiscal 1994. The tax benefit
rate in fiscal 1994 was lower than the effective tax rate in fiscal 1995 due
primarily to a valuation allowance related to the deferred tax asset which was
recorded in fiscal 1994 and was subsequently reversed in fiscal 1995.
Net income was $5,815,000 in fiscal 1995 compared to a net loss of
$1,013,000 in fiscal 1994. As a percentage of sales, net income was 2.2% in
fiscal 1995 compared to a net loss of 0.8% in fiscal 1994. The Company's return
to profitability in fiscal 1995 was directly related to the acquisition of
Contempo Casuals. With this acquisition, the Company achieved significant
economies of scale in areas such as
11
buying, distribution and general and administrative costs. At the same time, the
acquisition enabled the Company to reduce its average depreciation cost per
store due, in part, to the favorable acquisition price.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at the end of fiscal 1996, 1995 and 1994 was $59,791,000,
$26,051,000 and $22,473,000, respectively. Net cash provided by operating
activities in fiscal 1996, 1995 and 1994 was $28,187,000, $25,308,000 and
$10,068,000, respectively. The increase in cash provided by operating activities
in fiscal 1996 was due primarily to the increase in net earnings. Further
contributing was the increase in accounts payable offset to some extent by the
related increase in inventory as well as the increase in deferred taxes. The
increase in accounts payable was related to the timing of inventory receipts.
The increase in inventory was planned in order to bring the inventories to an
appropriate level to support planned sales. The increase in deferred taxes was
related primarily to the difference between book and tax depreciation. The
increase in cash provided by operating activities in fiscal 1995 was due
primarily to the increase in net earnings and depreciation. Also contributing to
the increase in cash provided by operating activities was a decrease in
inventory and increases in accounts payable and income taxes payable, net of the
effect of the Contempo Casuals acquisition.
Additions to property and equipment are the Company's most significant
investment activities. In fiscal 1996, 1995 and 1994 the Company invested
$8,620,000, $2,585,000 and $3,299,000, respectively, in property and equipment
and leasehold improvements. These expenditures related primarily to new store
openings and remodelings. Primarily as a result of the Company's expanded
operations, capital expenditures for fiscal 1997 are currently estimated to be
$30,000,000.
On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as
part of a public offering pursuant to a registration statement on Form S-3. The
net proceeds to the Company from the sale of shares were $14,459,000.
The Company has entered into lines of credit with Bank of America National
Trust and Savings Association ("Bank of America") in an aggregate principal
amount of $30,000,000 (the "Revolving Credit Facilities"), and a five year
amortizing term loan with Bank of America in the amount of $10,000,000 (the
"Term Loan," and together with the "Revolving Credit Facilities," the "Credit
Facilities") ending July 1, 2000. At February 1, 1997, there were no outstanding
borrowings under the Revolving Credit Facilities, and the Company believes it
was in substantial compliance with all terms and covenants of such agreements.
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 February
1, 1997, 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 contain various forward
looking statements within the meaning of
12
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act, which represent the Company's
expectations or beliefs concerning future events. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward looking
statements, including, without limitation, the retention by the Company of
suppliers for both brand name and Company-developed merchandise, the ability of
the Company to expand and to continue to increase comparable store sales and the
sufficiency of the Company's working capital and cash flows from operating
activities. In addition, these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements, including, without limitation, a decline in demand
for the merchandise offered by the Company, the ability of the Company to locate
and obtain acceptable store sites and lease terms or renew existing leases, the
ability of the Company to obtain adequate merchandise supply, the ability of the
Company to hire and train employees, the ability of the Company to gauge the
fashion tastes of its customers and provide merchandise that satisfies customer
demand, management's ability to manage the Company's expansion, the effect of
economic conditions, the effect of severe weather or natural disasters and the
effect of competitive pressures from other retailers.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted
earnings per share. For the year ended February 1, 1997, the amount reported as
net income per common and common equivalent share is not materially different
than that which would have been reported for basic and diluted earnings per
share in accordance with SFAS No. 128.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" which requires adoption of the disclosure provisions no later than
years beginning after December 15, 1995 and adoption of the recognition and
measurement provisions for nonemployee transactions no later than after December
15, 1995. The new standard defines a fair value method of accounting for stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period which is usually the vesting period. The
Company will continue to apply Accounting Principles Board No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") to its stock-based compensation
awards to employees and will disclose the required pro forma effect on net
income and earnings per share in its financial statements.
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and
long-lived assets and certain identifiable intangibles to be disposed of. The
Company adopted SFAS No. 121 in the first interim period of fiscal 1996 and such
adoption did not impact its financial position 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
Inapplicable.
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the information called for by Part III (Items 10 through 13) is
incorporated by reference from the Company's definitive Proxy Statement in
connection with its Annual Meeting of Stockholders to be held June 17, 1997,
filed pursuant to Regulation 14A.
14
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.
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
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.
SIGNATURES TITLE DATE SIGNED
- ------------------------------ -------------------------- -------------------
/s/ GEORGE H. BENTER JR.
- ------------------------------ Director April 30, 1997
George H. Benter Jr.
Vice Chairman and Chief
/s/ KATHY BRONSTEIN Executive Officer and
- ------------------------------ Director (Principal April 30, 1997
Kathy Bronstein Executive Officer)
/s/ STEPHEN GROSS
- ------------------------------ Secretary and Director April 30, 1997
Stephen Gross
Vice President of Finance
/s/ ANN CADIER KIM and Chief Financial
- ------------------------------ Officer (Principal April 30, 1997
Ann Cadier Kim Financial and Accounting
Officer)
/s/ WALTER F. LOEB
- ------------------------------ Director April 30, 1997
Walter F. Loeb
15
SIGNATURES TITLE DATE SIGNED
- ------------------------------ -------------------------- -------------------
/s/ WILFRED POSLUNS
- ------------------------------ Director April 30, 1997
Wilfred Posluns
/s/ GERALD RANDOLPH
- ------------------------------ Director April 30, 1997
Gerald Randolph
/s/ ALAN SIEGEL
- ------------------------------ Director April 30, 1997
Alan Siegel
/s/ IRVING TEITELBAUM
- ------------------------------ Chairman of the Board and April 30, 1997
Irving Teitelbaum Director
/s/ EDMOND THOMAS President and Chief
- ------------------------------ Operating Officer and April 30, 1997
Edmond Thomas Director
16
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. Consolidated Financial Statements--See "Index to Consolidated Financial
Statements and Financial Statement Schedules".
2. Consolidated 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 February 1, 1997.
17
THE WET SEAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
-----
INDEPENDENT AUDITORS' REPORT:
Report of Deloitte & Touche LLP............................................................................ 19
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated balance sheets as of February 1, 1997 and February 3, 1996.................................... 20
Consolidated statements of operations for the years ended February 1, 1997, February 3, 1996 and January
28, 1995................................................................................................. 21
Consolidated statements of stockholders' equity for the years ended February 1, 1997, February 3, 1996 and
January 28, 1995......................................................................................... 22
Consolidated statements of cash flows for the years ended February 1, 1997, February 3, 1996 and January
28, 1995................................................................................................. 23
Notes to consolidated financial statements................................................................. 24
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted as they are not required, or the required information is shown in the financial
statements or the notes thereto.
18
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. and subsidiary as of February 1, 1997 and February 3, 1996 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three fiscal years in the period ended February 1, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Wet
Seal, Inc. and subsidiary as of February 1, 1997 and February 3, 1996 and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended February 1, 1997, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
March 6, 1997
Costa Mesa, California
19
THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, FEBRUARY 3,
1997 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1).................................................... $ 71,483,000 $ 57,153,000
Marketable securities (Note 1)........................................................ 17,700,000 --
Other receivables..................................................................... 1,577,000 523,000
Merchandise inventories............................................................... 22,589,000 16,241,000
Prepaid expenses...................................................................... -- 428,000
Deferred tax charges (Note 3)......................................................... 693,000 1,100,000
------------ ------------
Total current assets.............................................................. 114,042,000 75,445,000
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements................................................................ 55,429,000 55,438,000
Furniture, fixtures and equipment..................................................... 21,742,000 21,606,000
Leasehold rights...................................................................... 3,342,000 2,009,000
Construction in progress.............................................................. 2,000 9,000
------------ ------------
80,515,000 79,062,000
Less accumulated depreciation......................................................... (47,285,000) (41,015,000)
------------ ------------
Net equipment and leasehold improvements.......................................... 33,230,000 38,047,000
------------ ------------
OTHER ASSETS:
Deferred tax charges and other assets (Note 3)........................................ 6,914,000 3,461,000
Goodwill, net of accumulated amortization of $566,000 and $521,000 as of February 1,
1997 and February 3, 1996, respectively............................................. 566,000 611,000
------------ ------------
Total other assets................................................................ 7,480,000 4,072,000
------------ ------------
$154,752,000 $117,564,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 26,035,000 $ 19,491,000
Accrued liabilities (Note 11)......................................................... 24,064,000 22,813,000
Income taxes payable (Note 3)......................................................... 2,152,000 3,354,000
Current portion of long-term debt..................................................... 2,000,000 3,736,000
------------ ------------
Total current liabilities......................................................... 54,251,000 49,394,000
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (Note 8)............................................................... 3,264,000 5,264,000
Deferred rent......................................................................... 6,117,000 5,171,000
------------ ------------
Total long-term liabilities....................................................... 9,381,000 10,435,000
------------ ------------
Total liabilities................................................................. 63,632,000 59,829,000
------------ ------------
COMMITMENTS: (Note 6)
STOCKHOLDERS' EQUITY: (Notes 4 and 5)
Preferred Stock, $.01 par value, authorized, 2,000,000 shares; none issued and
outstanding......................................................................... -- --
Common Stock, Class A, $.10 par value, authorized 20,000,000 shares; 10,628,874 and
5,687,066 shares issued and outstanding at February 1, 1997 and February 3, 1996,
respectively........................................................................ 1,063,000 568,000
Common Stock, Class B Convertible, $.10 par value, authorized 10,000,000 shares;
2,912,665 and 6,807,665 shares issued and outstanding at February 1, 1997 and
February 3, 1996, respectively...................................................... 291,000 681,000
Paid-in capital....................................................................... 56,596,000 38,568,000
Retained earnings..................................................................... 33,170,000 17,918,000
------------ ------------
Total Stockholders' Equity........................................................ 91,120,000 57,735,000
------------ ------------
$154,752,000 $117,564,000
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
20
THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
-------------- -------------- --------------
SALES........................................................... $ 374,942,000 $ 266,695,000 $ 132,997,000
COST OF SALES (including buying, distribution and occupancy
costs)........................................................ 272,189,000 200,626,000 104,547,000
-------------- -------------- --------------
GROSS MARGIN.................................................... 102,753,000 66,069,000 28,450,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (Note 9)............ 79,238,000 57,531,000 30,698,000
INTEREST INCOME, NET (Note 8)................................... (2,702,000) (1,410,000) (882,000)
-------------- -------------- --------------
NET OPERATING EXPENSES.......................................... 76,536,000 56,121,000 29,816,000
-------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES....... 26,217,000 9,948,000 (1,366,000)
PROVISION (BENEFIT) FOR INCOME TAXES (Note 3)................... 10,965,000 4,133,000 (353,000)
-------------- -------------- --------------
NET INCOME (LOSS)............................................... $ 15,252,000 $ 5,815,000 $ (1,013,000)
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME (LOSS) PER COMMON SHARE.............................. $ 1.13 $ 0.47 $ (0.08)
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
(Note 1)...................................................... 13,459,810 12,387,140 12,234,502
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to consolidated financial statements.
21
THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
----------------------------------------------
CLASS A CLASS B TOTAL
--------------------- ----------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS EQUITY
---------- --------- ---------- ----------- ---------- ---------- -------------
Balance at January 30, 1994........ 4,326,831 $ 433,000 7,907,665 $ 791,000 $37,389,000 $13,116,000 $51,729,000
Stock issued pursuant to long-term
incentive plan (Note 5).......... 2,106 -- -- -- 8,000 -- 8,000
Net loss........................... -- -- -- -- -- (1,013,000) (1,013,000)
---------- --------- ---------- ----------- ---------- ---------- -------------
Balance at January 28, 1995........ 4,328,937 433,000 7,907,665 791,000 37,397,000 12,103,000 50,724,000
Stock issued pursuant to long-term
incentive plan (Note 5).......... 1,453 -- -- -- 11,000 -- 11,000
Exercise of stock options.......... 2,000 -- -- -- 7,000 -- 7,000
Conversion of Class B Common
Stock to Class A Common
Stock (Note 4)................... 1,100,000 110,000 (1,100,000) (110,000) -- -- --
Issuance of Class A Common Stock
pursuant to acquisition of
Contempo Casuals (Note 2 and Note
4)............................... 254,676 25,000 -- -- 1,153,000 -- 1,178,000
Net income......................... -- -- -- -- -- 5,815,000 5,815,000
---------- --------- ---------- ----------- ---------- ---------- -------------
Balance at February 3, 1996........ 5,687,066 568,000 6,807,665 681,000 38,568,000 17,918,000 57,735,000
Issuance of Class A Common
Stock pursuant to Public
Offering (Note 4)................ 765,000 76,000 -- -- 14,383,000 -- 14,459,000
Stock issued pursuant to long-term
incentive plan (Note 5).......... 5,308 1,000 -- -- 106,000 -- 107,000
Exercise of stock options (Note
4)............................... 276,500 28,000 -- -- 1,712,000 -- 1,740,000
Tax benefit related to exercise of
stock options (Note 5)........... -- -- -- -- 1,827,000 -- 1,827,000
Conversion of Class B Common
Stock to Class A Common
Stock (Note 4)................... 3,895,000 390,000 (3,895,000) (390,000) -- -- --
Net income......................... -- -- -- -- -- 15,252,000 15,252,000
---------- --------- ---------- ----------- ---------- ---------- -------------
Balance as of February 1, 1997..... 10,628,874 $1,063,000 2,912,665 $ 291,000 $56,596,000 $33,170,000 $91,120,000
---------- --------- ---------- ----------- ---------- ---------- -------------
---------- --------- ---------- ----------- ---------- ---------- -------------
See accompanying notes to consolidated financial statements.
22
THE WET SEAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 15,252,000 $ 5,815,000 $ (1,013,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................ 11,848,000 10,384,000 8,057,000
Loss on disposal of equipment and leasehold improvements............. 153,000 14,000 124,000
Stock issued pursuant to long-term incentive plan.................... 107,000 11,000 8,000
Deferred tax, net.................................................... (3,084,000) (2,155,000) (1,162,000)
Changes in operating assets and liabilities, net of effect of
acquisition:
Other receivables.................................................. (1,054,000) 41,000 172,000
Tax refund receivable.............................................. -- 59,000 1,766,000
Merchandise inventories............................................ (6,348,000) 2,436,000 93,000
Prepaid expenses................................................... 428,000 1,093,000 133,000
Other assets....................................................... 38,000 (69,000) 21,000
Accounts payable and accrued liabilities........................... 9,276,000 3,529,000 1,352,000
Income taxes payable............................................... 625,000 3,117,000 --
Deferred rent...................................................... 946,000 1,033,000 517,000
------------- ------------ ------------
Total adjustments.................................................. 12,935,000 19,493,000 11,081,000
------------- ------------ ------------
Net cash provided by operating activities............................ 28,187,000 25,308,000 10,068,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements....................... (8,620,000) (2,585,000) (3,299,000)
Investment in marketable securities...................................... (17,700,000) -- --
Cash paid for acquisition, less cash acquired............................ -- (20,000) --
Proceeds from sale of equipment and leasehold improvements............... -- 74,000 269,000
Proceeds from sale of marketable securities.............................. -- -- 4,520,000
------------- ------------ ------------
Net cash (used in) provided by investing activities...................... (26,320,000) (2,531,000) 1,490,000
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................................. -- 10,000,000 --
Principal payments on long-term debt..................................... (3,736,000) (1,000,000) --
Proceeds from issuance of stock.......................................... 16,199,000 7,000 --
------------- ------------ ------------
Net cash provided by financing activities................................ 12,463,000 9,007,000 --
------------- ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................ 14,330,000 31,784,000 11,558,000
CASH AND CASH EQUIVALENTS, beginning of year............................. 57,153,000 25,369,000 13,811,000
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year................................... $ 71,483,000 $57,153,000 $ 25,369,000
------------- ------------ ------------
------------- ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (refunded) during the year for:
Interest............................................................... $ 538,000 $ 498,000 $ --
Income taxes, net...................................................... 13,424,000 2,829,000 (1,187,000)
SCHEDULE OF NONCASH TRANSACTIONS:
The Company acquired the assets of Contempo Casuals during the year ended
February 3, 1996. In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired............................................ $ -- $29,592,000 $ --
Cash paid to seller and transaction costs................................ -- 750,000 --
Common stock issued...................................................... -- 1,178,000 --
------------
Liabilities assumed.................................................. -- $27,664,000 --
In connection with the acquisition, the Company recorded a net deferred tax
liability of $433,000.
During the fifty-two weeks ended February 1, 1997, the Company reduced
certain estimated liabilities assumed in connection with the acquisition of
Contempo Casuals. As a result, a reduction in accounts payable of $1,481,000 was
recorded with a corresponding reduction in fixed assets. During the fifty-three
weeks ended February 3, 1996, the Company acquired the assets of Contempo
Casuals for common stock valued at $1,178,000.
During the fifty-two weeks ended February 1, 1997, the Company recorded an
increase to paid-in capital of $1,827,000 related to tax benefits associated
with the exercise of non-qualified stock options.
See accompanying notes to consolidated financial statements.
23
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
The Wet Seal, Inc. and subsidiary (the Company) is a nationwide specialty
retailer of moderately priced, fashionable apparel for women. On July 1, 1995,
the Company acquired Contempo Casuals, Inc., a 237-store retail junior women's
chain. This acquisition substantially increased the Company's size. The
Company's success is largely dependent upon its ability to gauge the fashion
tastes of its customers and to provide merchandise that satisfies customer
demand. The Company's failure to anticipate, identify or to react to changes in
fashion trends could adversely affect the Company. Approximately 30% of the
voting stock of the Company is held by a group of companies directly or
indirectly controlled by two directors of the Company, one of which is the
chairman of the board.
The Company's fiscal year ends on the Saturday closest to the end of
January. In fiscal 1995, the reporting period included 53 weeks as compared to
52 weeks in each of fiscal years 1996 and 1994.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. Intercompany balances and
transactions have been eliminated.
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 and
vehicles are typically depreciated over 3 to 5 years. Leasehold improvements and
the cost of acquiring leasehold rights are depreciated over the lesser of the
term of the lease or 10 years.
INTANGIBLE ASSET
Excess of cost over net assets acquired (goodwill) is being amortized on the
straight-line method over 25 years. The goodwill was established in fiscal 1984.
The Company assesses the recoverability of goodwill at each balance sheet date
by determining whether the amortization of the balance over its remaining useful
life can be recovered through projected undiscounted future operating cash
flows.
RENTAL EXPENSE
Any defined rental escalations are averaged over the term of the related
lease in order to provide level recognition of rental expense.
24
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAX
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.
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 February 1, 1997 and February 3,
1996, cash equivalents totaled $69,611,000 and $52,141,000, respectively,
bearing interest at rates ranging from approximately 5.1% to 5.4% at February 1,
1997 and from approximately 5.3% to 6.1% at February 3, 1996.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed based on the weighted average
number of common and common equivalent shares outstanding for the period.
MARKETABLE SECURITIES
Marketable securities consist of highly liquid interest bearing deposits
purchased with an initial maturity exceeding three months but less than twelve
months and with the intent of being held to maturity. Marketable securities are
carried at cost plus accrued income, which approximates market at February 1,
1997.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted
earnings per share. For the year ended February 1, 1997, the amount reported as
net income per common and common equivalent share is not materially different
than that which would have been reported for basic and diluted earnings per
share in accordance with SFAS No. 128.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes the carrying amounts of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to the short
maturity of these financial instruments. Long-
25
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
term debt bears a variable rate of interest; therefore, management believes the
carrying amount for the outstanding borrowings at February 1, 1997 and February
3, 1996 approximate fair value.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees." (See Note 5.)
NOTE 2: ACQUISITION
On July 1, 1995, the Company acquired the business, assets and properties of
Contempo Casuals, Inc., a 237-store retail junior women's chain with stores in
34 states and Puerto Rico. The purchase price consisted of (a) the issuance of
254,676 shares of the Company's Class A Common Stock which had a value of
$1,178,000 on the date of the acquisition, and (b) $100,000 in cash. The
transaction was accounted for under the purchase method. In connection with the
acquisition, the Company assumed certain liabilities which were estimated by the
seller. The total amount of these assumed liabilities may not, in fact, be paid
as the actual payments will be based on the future claims and losses which are
actually submitted and which are related to pre-acquisition events. (See Note
11.)
During the fifty-two weeks ended February 1, 1997, the Company reduced
certain estimated liabilities assumed in connection with the acquisition of
Contempo Casuals. As a result, a reduction in accounts payable of $1,481,000 was
recorded with a corresponding reduction in fixed assets.
NOTE 3: PROVISION (BENEFIT) FOR INCOME TAXES
SFAS No. 109 requires the recognition of deferred tax assets and liabilities
for the future consequences of events that have been recognized in the Company's
financial statements or tax returns. The measurement of deferred items is based
on enacted tax laws. In the event that the future consequences of differences
between financial reporting bases and the tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation
of the probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized. During fiscal 1994, the Company had recorded a
$110,000 valuation allowance which was reversed in fiscal 1995.
26
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 3: PROVISION (BENEFIT) FOR INCOME TAXES (CONTINUED)
The components of the income tax provision (benefit) are as follows:
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------- ------------- -------------
CURRENT:
Federal............................................................ $ 10,674,000 $ 5,170,000 $ 573,000
State.............................................................. 3,375,000 1,127,000 236,000
------------- ------------- -------------
14,049,000 6,297,000 809,000
------------- ------------- -------------
DEFERRED:
Federal............................................................ (2,569,000) (1,926,000) (958,000)
State.............................................................. (515,000) (238,000) (204,000)
------------- ------------- -------------
(3,084,000) (2,164,000) (1,162,000)
------------- ------------- -------------
$ 10,965,000 $ 4,133,000 $ (353,000)
------------- ------------- -------------
------------- ------------- -------------
A reconciliation of income tax provision (benefit) to the amount of the
actual provision (benefit) that would result from applying the federal statutory
rate (35%) to income (loss) before taxes is as follows:
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
------------- ------------- ------------
Provision (benefit) for income taxes at federal statutory rate............. 35.0% 35.0% (35.0)%
State income taxes, net of federal income tax benefit...................... 7.1 6.5 (3.8)
Change in valuation allowance.............................................. -- (1.1) 8.1
Other...................................................................... (0.3) 1.1 4.9
--- --- -----
Effective tax rate......................................................... 41.8% 41.5% (25.8)%
--- --- -----
--- --- -----
As of February 1, 1997 and February 3, 1996, the Company's net deferred tax
asset was $7,396,000 and $4,312,000 respectively. The major components of the
Company's net deferred taxes at February 1, 1997 and February 3, 1996 are as
follows:
FEBRUARY 1, FEBRUARY 3,
1997 1996
------------ ------------
Deferred rent..................................................... $ 2,706,000 $ 2,211,000
Acquisition related reserves...................................... 2,508,000 1,542,000
Inventory cost capitalization..................................... 653,000 476,000
AMT credit carry forward.......................................... -- 73,000
Difference between book and tax basis of fixed assets............. 1,445,000 (453,000)
State income taxes................................................ (63,000) (49,000)
Other............................................................. 147,000 512,000
------------ ------------
$ 7,396,000 $ 4,312,000
------------ ------------
------------ ------------
27
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 4: STOCKHOLDERS' EQUITY
The 2,912,665 shares of the Company's Class B Common Stock outstanding as of
February 1, 1997 are convertible on a share-for-share basis into shares of the
Company's Class A Common Stock at the option of the holder. The Class B Common
Stock has two votes per share while the Class A Common Stock has one vote per
share.
During the year ended February 1, 1997, major stockholders converted
3,895,000 shares of Class B Common Stock to Class A Common Stock. These shares
were sold to the public through registration statements on Form S-3. The Company
did not receive any proceeds from these transactions.
On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as a
part of a public offering pursuant to a registration statement on Form S-3. The
net proceeds to the Company from the sale of shares were $14,459,000.
During the year ended February 3, 1996, a major stockholder converted
1,100,000 shares of Class B Common Stock to Class A Common Stock. These shares
were then sold to the public through a registration statement on Form S-3. The
Company did not receive any proceeds from this transaction.
On July 1, 1995, 254,676 shares of the Company's Class A Common Stock were
issued pursuant to the acquisition of Contempo Casuals, Inc. (See Note 2)
NOTE 5: LONG-TERM INCENTIVE PLAN
Under the Company's long-term incentive plans (the "plans"), the Company may
grant stock options which are either incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options. The plans provide that the per share exercise price
of an incentive stock option may not be less than the fair market value of the
Company's Class A Common Stock on the date the option is granted. Options become
exercisable over periods of up to five years and generally expire ten years from
the date of grant or 90 days after employment or services are terminated. The
plans also provide that the Company may grant restricted stock and other
stock-based awards. An aggregate of 775,000 shares of the Company's Class A
Common Stock may be issued pursuant to the plans. An additional 700,000 shares
of the Company's Class A Common Stock may be issued pursuant to the 1996
Long-Term Incentive Plan adopted by the Company's Board of Directors on August
22, 1996 (subject to shareholder approval). As of February 1, 1997, 734,174
shares were available for future grants and 19,500 shares were exercisable.
28
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 5: LONG-TERM INCENTIVE PLAN (CONTINUED)
Stock option activity for each of the three years in the period ended
February 1, 1997 was as follows:
NUMBER OF RANGE OF
SHARES PRICES PER SHARE
----------- -----------------
Outstanding at January 30, 1994................................ 80,000 $ 9.13 - $14.25
Granted...................................................... 575,000 $ 3.00 - $ 4.75
Canceled..................................................... (40,000) $ 4.13
Outstanding at January 28, 1995................................ 615,000 $ 3.00 - $14.25
Granted...................................................... 30,000 $ 5.13 - $ 8.00
Canceled..................................................... (8,000) $ 3.63 - $ 4.13
Exercised.................................................... (2,000) $ 3.63 - $ 4.13
Outstanding at February 3, 1996................................ 635,000 $ 3.00 - $14.25
Granted...................................................... 60,000 $ 17.44 - $22.00
Canceled..................................................... (6,000) $ 4.13
Exercised.................................................... (276,500 ) $ 3.00 - $14.25
-----------
Outstanding at February 1, 1997................................ 412,500 $ 3.00 - $22.00
-----------
-----------
The following is a summary of the weighted average exercise prices for
activity during the year ended February 1, 1997:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- -------------
Outstanding at February 4, 1996.................................... 635,000 $ 5.12
Options Granted (Price=Fair Value)............................... 60,000 $ 20.86
Options Exercised................................................ (276,500) $ 6.29
Options Canceled................................................. (6,000) $ 4.13
---------- ------
Outstanding at February 1, 1997.................................... 412,500 $ 6.64
Exercisable as of February 1, 1997................................. 19,500 $ 4.40
Additional information regarding options outstanding as of February 1, 1997
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
AS OF AVERAGE AVERAGE AS OF AVERAGE
RANGE OF FEB. 1, REMAINING EXERCISE FEB. 1, EXERCISE
EXERCISE PRICES 1997 CONTRACTUAL LIFE PRICE 1997 PRICE
- ----------------- ----------- ------------------- ----------- ----------- -----------
$ 3.00 - $ 3.63 41,000 7.36 $ 3.49 8,000 $ 3.63
4.13 - 5.13 302,500 7.24 4.21 10,500 4.65
8.00 - 17.44 24,000 9.54 13.90 1,000 8.00
22.00 - 22.00 45,000 9.30 22.00 -- --
----------- --- ----------- ----------- -----
$ 3.00 - $22.00 412,500 7.61 $ 6.64 19,500 $ 4.40
29
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 5: LONG-TERM INCENTIVE PLAN (CONTINUED)
A total of 276,500 non-qualified stock options were exercised during the
year ended February 1, 1997, resulting in net proceeds of $1,740,000 to the
Company. The Company recorded an increase to Paid-in capital of $1,827,000
related to tax benefits associated with the exercise of the non-qualified stock
options.
As of February 1, 1997, the Company has granted an aggregate of 49,826
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 February 1, 1997, February 3, 1996 and January 28, 1995,
5,308, 1,453 and 2,106 shares, respectively, were fully vested and issued.
ADDITIONAL LONG-TERM INCENTIVE PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 48 months following
vesting; stock volatility, 65.95% in fiscal 1996 and 48.34% in fiscal 1995; risk
free interest rates, 6.38% in fiscal 1996 and 5.71% in fiscal 1995; and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the fiscal 1995 and 1996 awards had been
amortized to expense over the vesting period of the awards, net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
FISCAL FISCAL
1996 1995
------------- ------------
Net Income As reported $ 15,252,000 $ 5,815,000
Pro forma $ 15,192,000 $ 5,811,000
Net Income Per Common As reported $1.13 $0.47
and Equivalent Share Pro forma $1.13 $0.47
30
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 5: LONG-TERM INCENTIVE PLAN (CONTINUED)
The impact of outstanding non-vested stock options granted prior to 1995 has
been excluded from the pro forma calculation; accordingly, the fiscal 1995 and
fiscal 1996 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
NOTE 6: COMMITMENTS
LEASES
The Company leases retail stores, automobiles, computers and corporate
office and warehouse facilities under operating lease agreements expiring at
various times through 2007. Substantially all of the leases require the Company
to pay maintenance, insurance, property taxes and percentage rent ranging from
4.0% to 12%, based on sales volume over certain minimum sales levels.
Minimum annual rental commitments under non-cancelable leases, including the
new corporate office and warehouse facility lease executed at the end of fiscal
1996, are as follows:
FISCAL YEAR
ENDING: 1998.................... $42,701,000
1999.................... 39,473,000
2000.................... 35,903,000
2001.................... 32,597,000
2002.................... 27,401,000
Thereafter.............. 58,361,000
-----------
$236,436,000
-----------
-----------
Rental expense, including common area maintenance, was $62,391,000,
$46,010,000 and $22,728,000, of which $345,000, $152,000 and $286,000 was paid
as percentage rent based on sales volume, for the years ended February 1, 1997,
February 3, 1996 and January 28, 1995, 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 February 1, 1997, the Company had outstanding letters of credit amounting
to approximately $6,589,000.
31
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 7: REVOLVING CREDIT ARRANGEMENT
Under unsecured revolving line-of-credit arrangements with a bank, the
Company may borrow up to a maximum of $30 million on a revolving basis through
July 1, 1998. The cash borrowings under the arrangements bear interest at the
bank's prime rate or, at the Company's option, LIBOR plus 1.75% for the Wet Seal
facility ($10,000,000) and for the Contempo Casuals facility ($20,000,000).
The credit arrangements impose quarterly and annual financial covenants
requiring the Company to maintain certain financial ratios and achieve certain
levels of annual income. In addition, the credit arrangements require that the
bank approve the payment of dividends and restrict the level of capital
expenditures. At February 1, 1997 and February 3, 1996, the Company was in
compliance with these covenants. The Company had no borrowings outstanding under
these credit arrangements at February 1, 1997 or February 3, 1996.
NOTE 8: LONG-TERM DEBT
In June 1995, the Company entered into an unsecured five-year, $10 million
term loan. The loan bears interest at the bank's prime rate plus .25% or, at the
Company's option, LIBOR plus 1.75% (7.1875% at fiscal year end). The estimated
annual principal payments on the loan are $2,000,000 payable in quarterly
installments of $500,000 beginning October 31, 1995.
The term loan imposes quarterly and annual financial covenants requiring the
Company to maintain certain financial ratios and achieve certain levels of
annual income. In addition, the term loan requires that the bank approve the
payment of dividends and restricts the level of capital expenditures. At
February 1, 1997 and February 3, 1996, the Company was in compliance with these
covenants.
NOTE 9: RELATED PARTY TRANSACTIONS
Certain officers of Suzy Shier, Inc. provide management services to the
Company. For these services, the officers earned in the aggregate a management
fee of $250,000 during each of the years ended February 1, 1997, February 3,
1996 and January 28, 1995, respectively.
NOTE 10: RETIREMENT PLAN
Effective June 1, 1993, the Company established a qualified defined
contribution retirement plan under the Internal Revenue Code, Section 401(k).
The Wet Seal Retirement Plan (the "Plan") is available to all employees who meet
the Plan's eligibility requirements. The Plan is funded by employee
contributions, and additional contributions may be made by the Company at its
discretion. As of February 1, 1997 the Company has not made any contributions to
the Plan.
32
THE WET SEAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED FEBRUARY 1, 1997, FEBRUARY 3, 1996 AND JANUARY 28, 1995
NOTE 11: ACCRUED LIABILITIES
Accrued liabilities consist of the following:
FEBRUARY 1, FEBRUARY 3,
1997 1996
------------- -------------
Reserve for self insurance..................................... $ 4,057,000 $ 4,638,000
Accrued wages, bonuses and benefits............................ 4,735,000 3,610,000
Combination costs.............................................. 5,569,000 7,300,000
Gift certificate and credit memo liability..................... 2,331,000 1,828,000
Sales tax payable.............................................. 2,348,000 1,102,000
Other.......................................................... 5,024,000 4,335,000
------------- -------------
$ 24,064,000 $ 22,813,000
------------- -------------
------------- -------------
In connection with the acquisition of Contempo Casuals, Inc., the Company
assumed certain accruals, including the reserve for self insurance, which were
estimated by the seller. The total amount of these assumed accruals may not, in
fact be paid as the actual payments will be based on the future claims and
losses which are actually submitted and which are related to pre-acquisition
events. The combination costs of $5,569,000 consist of the estimated costs
associated with the closing and/or combination of certain Contempo Casuals'
facilities and operations into Wet Seal's.
NOTE 12: UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL YEAR ENDED FEBRUARY 1, 1997
NET INCOME
QUARTER SALES GROSS MARGIN NET INCOME PER SHARE
- ---------------------------------------------------- -------------- -------------- ------------- -------------
First Quarter....................................... $ 80,575,000 $ 19,038,000 $ 722,000 $ 0.06
Second Quarter...................................... 94,356,000 24,786,000 3,315,000 0.25
Third Quarter....................................... 95,571,000 26,419,000 4,194,000 0.30
Fourth Quarter...................................... 104,440,000 32,510,000 7,021,000 0.51
-------------- -------------- -------------
For the year........................................ $ 374,942,000 $ 102,753,000 $ 15,252,000 $ 1.13
-------------- -------------- -------------
-------------- -------------- -------------
FISCAL YEAR ENDED FEBRUARY 3, 1996
NET INCOME
NET INCOME (LOSS) PER
QUARTER SALES GROSS MARGIN (LOSS) SHARE
- ------------------------------------------------------- -------------- ------------- ------------ -----------
First Quarter.......................................... $ 29,839,000 $ 5,642,000 $ (671,000) $ (0.05)
Second Quarter......................................... 44,883,000 8,944,000 (733,000) (0.06)
Third Quarter.......................................... 88,674,000 21,661,000 1,822,000 0.15
Fourth Quarter......................................... 103,299,000 29,822,000 5,397,000 0.43
-------------- ------------- ------------
For the Year........................................... $ 266,695,000 $ 66,069,000 $ 5,815,000 $ 0.47
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33
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------
*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.
*10.1 -- Lease between the Company and The Irvine Company, dated March 6, 1987.
*10.3 -- First amendment to Services Agreement between the Company and Kathy Bronstein, dated December 30,
1988.
**10.3.1 -- Second amendment to Services Agreement between the Company and Kathy Bronstein, dated March 23,
1992.
***10.3.2 -- Services Agreement between the Company and Edmond Thomas, dated June 22, 1992.
****10.3.3 -- Third amendment to Services Agreement between the Company and Kathy Bronstein, dated November 17,
1994.
****10.3.4 -- First amendment to Services Agreement between the Company and Edmond Thomas, dated November 17,
1994.
****10.3.5 -- Fourth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 13,
1995.
****10.3.6 -- Second amendment to Services Agreement between the Company and Edmond Thomas, dated January 13,
1995.
*****10.3.7 -- Fifth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 30,
1995.
*****10.3.8 -- Sixth amendment to Services Agreement between the Company and Kathy Bronstein, dated February 2,
1996.
*****10.3.9 -- Third amendment to Services Agreement between the Company and Edmond Thomas, dated February 2,
1996.
*10.4 -- 1990 Long-Term Incentive Plan.
**10.5 -- Credit Agreement between the Company and Bank of America, dated as of April 20, 1992.
***10.5.1 -- Credit Agreement between the Company and Bank of America, dated June 23, 1993, as amended.
****10.5.2 -- Amendments No. 1 and No. 2 to Credit Agreement between the Company and Bank of America, dated
January 25, 1994 and June 1, 1994, respectively.
*****10.5.3 -- Business Loan Agreement between the Company and Bank of America, containing Term Loan and
Revolving Line of Credit, dated June 30, 1995.
*****10.5.4 -- Business Loan Agreement between the Company and Bank of America, containing Revolving Line of
Credit for Contempo Casuals, dated June 30, 1995.
**10.6 -- "Key Man" life insurance policy for Kathy Bronstein.
34
EXHIBIT NO. DESCRIPTION
- ------------- -------------------------------------------------------------------------------------------------
10.6.1 -- "Key Man" life insurance policy for Edmond Thomas.
***10.7 -- 1994 Long-Term Incentive Plan.
*10.8 -- Stock Purchase and Stock Transfer Restriction Agreement among Kathy Bronstein, Suzy Shier, Inc.
and the Company dated December 30, 1988.
****10.9 -- Indemnification Agreement between the Company and various Executives and Directors, dated January
3, 1995, and schedule listing all parties thereto.
10.10 -- 1996 Long-Term Incentive Plan.
*****21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP, independent auditors.
27.1 -- Financial Data Schedule
- ------------------------
* Denotes exhibits incorporated by reference to the Company's Registration
Statement File No. 33-34895.
** Denotes exhibits incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended January 30, 1993.
*** Denotes exhibits incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended January 29, 1994.
**** Denotes exhibits incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended January 28, 1995.
***** Denotes exhibits incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended February 3, 1996.
35