Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18632
------------------------
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0415940
(State of incorporation) (I.R.S. Employer Identification No.)
26972 BURBANK, FOOTHILL RANCH, CA 92610
(Address of principal executive (Zip Code)
offices)
(949) 583-9029
(Registrant's telephone number, including area code)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK PREFERRED STOCK PURCHASE RIGHTS
(Title of Class) (Title of Class)
------------------------
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 3, 1999 was $372,834,756.
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 3, 1999 was
10,729,886 and 2,912,665, respectively. There were no shares of Preferred Stock,
par value $.01 per share, outstanding at April 3, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
PART III incorporates information by reference from the Registrant's
definitive Proxy Statement for its Annual Meeting of Stockholders' to be filed
with the Commission within 120 days of January 30, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL
The Wet Seal, Inc., a Delaware corporation ("Wet Seal" or the "Company"),
founded in 1962, is a nationwide specialty retailer of fashionable and
contemporary apparel and accessory items designed for consumers with a young,
active lifestyle. As of April 3, 1999, the Company operated 522 retail stores in
42 states, Washington D.C. and Puerto Rico, including 120 in California, 57 in
Florida, and 41 in Texas. Of the 522 stores, 248 operate under the "CONTEMPO
CASUALS" trademark, 190 operate under the "WET SEAL" trademark, 66 operate under
the "ARDEN B." trademark, 17 operate under the "LIMBO LOUNGE" trademark and one
of the stores operates under the "NEXT" trademark. Arden B. is the latest retail
concept introduced by the Company in November 1998, and offers a collection of
dressy and casual apparel, accessories and footwear for the young contemporary
customer. Arden B. serves to fill the void between a "junior" and a "missy"
customer. Limbo Lounge was introduced by the Company in fiscal 1996 and offers
both junior's and young men's apparel and accessories in a unique and
entertaining store environment.
On July 1, 1995, the Company acquired the business, assets and properties of
Contempo Casuals, Inc. ("Contempo Casuals"), a 237-store junior women's retail
chain. This acquisition substantially increased the size of the Company.
Effective February 2, 1997, Contempo Casuals, Inc. was merged with and into The
Wet Seal, Inc.
The Company introduced the "Wet Seal Catalog" in late January 1998. The
catalog focuses on the junior customer and features both private label and
branded apparel, shoes and accessories. The Company had six catalog mailings
throughout fiscal 1998. In fiscal 1999, the Company plans to reposition the
catalog under the "Blue Asphalt" brand name. Blue Asphalt is the number one
denim brand in both Wet Seal and Contempo Casuals stores, and has been expanded
to a full assortment of fashion apparel and accessories. The Company also plans
to introduce a related web-site under the Blue Asphalt name by mid-1999. The new
site will include an on-line shopping "magalog," as well as links to the Wet
Seal and Contempo Casuals web-sites. The Blue Asphalt magalog and web-site will
both offer Blue Asphalt merchandise and youth-targeted editorial content to
build brand awareness and increase customer base and sales.
PRODUCTS AND MERCHANDISING
Both Wet Seal and Contempo Casuals stores target the same fashion-conscious
junior customer. The Company merchandises both stores similarly. In duplicate
locations (stores located in malls where the Company operates both a Wet Seal
and a Contempo Casuals store), the Company differentiates the locations by
displaying the merchandise differently in each of the stores, and will
occasionally differentiate the merchandise mix. The Company provides a balance
of moderately-priced, fashionable brand name and Company-developed apparel and
accessories that appeal to consumers with young, active lifestyles. The Company
believes that Company-developed apparel differentiates it from its competitors.
In the fourth quarter of fiscal 1998, the Company opened the first Arden B.
store. Arden B. caters to the fashionable young contemporary woman who falls
between a "junior" and a "missy" customer. Arden B. stores offer a collection of
dressy and casual apparel, accessories and footwear, all under the "Arden B."
brand name. The Company currently operates 66 Arden B. stores nationwide and
plans to open up to 13 additional stores in fiscal 1999.
In the fourth quarter of fiscal 1996, the Company introduced a store concept
called Limbo Lounge. The product offerings include both junior's and young men's
apparel and accessories in a unique and entertaining store environment. The
Company currently operates 17 Limbo Lounge stores and plans to open up to eight
additional stores in fiscal 1999.
2
With respect to each of the retail concepts, the Company frequently updates
its product offerings to provide a regular flow of fresh, new fashionable
merchandise. Management carefully monitors pricing and markdowns to expedite
sales of slower-moving inventory, facilitate the introduction of new merchandise
and maintain an updated fashion image.
Generally, the Company's stores display merchandise within a current fashion
trend which reflects a color statement and key items related to that trend.
Rather than always displaying garments together by type (blouses with blouses,
for example), the Company combines items of apparel and accessories which the
customer might buy as an ensemble. Store displays are designed to enable
customers to create ensembles within a current fashion statement or trend group.
Management believes that the trend grouping concept strengthens the fashion
image of the merchandise offered in the stores and enables the customer to
locate combinations of blouses, skirts, pants and accessories in a manner which
enhances the Company's opportunity to make multiple unit sales. From time to
time certain key items are merchandised together on tables or wall shelf
sections in order to emphasize those particular items. The general layout of
merchandise in the stores is planned by the Company's management. The Company
makes use of in-store image posters to help focus customers on particular
fashion themes. The Company frequently changes the visual display of the
merchandise in its stores to reflect the changing tastes of the Company's target
customer.
DESIGN, BUYING AND PRODUCT DEVELOPMENT
The Company's experienced design and buying teams are responsible for
identifying evolving fashion trends and then developing themes to guide the
Company's merchandising strategy. These teams monitor emerging fashion trends by
attending domestic and international fashion shows, engaging the services of
international fashion consultants, following industry publications and
conducting regular market research, including monitoring cutting-edge,
alternative stores, visiting Company stores to interact with customers and
employees and visiting competitors' stores. Additionally, the Company holds
"open to buy" days once a week to allow vendors to meet with buyers. Management
believes that these open sessions provide buyers with the opportunity to
purchase fresh and innovative products that help to further differentiate the
Company's merchandise mix.
The Company's commitment to Company-developed apparel is an important
element in differentiating its merchandise from that of its competitors. After
selecting a fashion theme to promote, the design and buying teams work closely
with vendors to modify colors, materials and designs and create an image
consistent with the theme for the Company's product offerings. Additionally, the
Company has increased its focus on developing exclusive designs and brands to
reinforce the fashion statements of its merchandise offerings as well as to
increase the perception of Wet Seal, Contempo Casuals, Arden B. and Limbo Lounge
as destination stores for the customer. The Company focused on the Blue Asphalt,
Evolution Not Revolution and Arden B. brands in particular in fiscal 1998 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 1998 no single vendor
accounted for more than 10% of the Company's merchandise and only two vendors
accounted for more than 5%, management believes the Company is the largest
customer of many of its smaller vendors. Management believes the Company's
importance to these vendors allows it to provide significant input into their
design, manufacturing and distribution processes, and has enabled the Company to
negotiate favorable terms with such vendors. Quality control is monitored
carefully at the distribution points of its largest vendors and manufacturers,
and all merchandise is inspected upon arrival at the Company's Foothill Ranch,
California distribution center. The Company does not have any long term or
exclusive contracts with any particular manufacturer or supplier for either
brand name or Company-developed apparel.
3
ALLOCATION AND DISTRIBUTION
The Company's merchandising effort primarily focuses on maintaining a
regular flow of fresh, fashionable merchandise into its stores. Successful
execution depends in large part on the Company's integrated planning, allocation
and distribution functions. Planning and allocation are managed by a team headed
by the Company's Vice President of Planning and Allocation. By working closely
with District and Regional Directors and merchandise buyers, this team manages
inventory levels and coordinates the allocation of merchandise to each of the
Company's stores based on sales volume, climate and other factors that may
influence individual stores' product mix.
All merchandise for retail stores is received from vendors at the Company's
Foothill Ranch, California distribution facility, where items are inspected for
quality and prepared for shipping to the Company's stores. Merchandise for the
catalog is distributed through a third party fulfillment house. 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 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 $7.9 million
for the fiscal year ended January 30, 1999. These stores operate under the Wet
Seal, Contempo Casuals and Arden B. names.
MARKETING, ADVERTISING AND PROMOTION
The Company believes that the highly-visible locations of its stores within
regional shopping malls, broad selection of fashionable merchandise and dynamic,
entertaining in-store environments have contributed significantly to the
Company's reputation as a destination store addressing the lifestyle of fashion-
conscious young consumers. Consequently, the Company has historically relied
more heavily on these factors and "word-of-mouth" advertising than more
traditional forms of advertising such as print, radio and television.
The Company utilizes a variety of advertising and promotional programs that
allow the Company to gain exposure in a cost-effective manner. By introducing
frequent shopper cards in its Wet Seal and Contempo Casuals stores, the Company
has developed a marketing database that helps to track customers. The cards,
which are sold for $20 each, entitle customers to a standard 10% discount on
purchases made within a one-year period. As part of these programs, sales
representatives call selected cardholders personally to notify customers of
special in-store promotions, such as preferred customer sales during which
cardholders receive additional incentives. Management believes these promotions
foster customer loyalty and encourage frequent visits and multiple item
purchases. The Company also sponsors special events such as snowboarding
competitions and beach festivals that focus on the interests and active
lifestyles of its target customers. Further, the Company utilizes its
Company-owned trucks as "rolling billboards" in California, painting them to
promote the Company as well as certain of its Company-developed labels such as
Blue Asphalt and Evolution Not Revolution.
STORE OPERATIONS
The Company's Wet Seal and Contempo Casuals stores are divided into seven
geographic regions. Each region is managed by a Regional Director who reports to
the Company's Senior Vice President of Store Operations. Each region is further
divided into districts consisting of between 9 to 16 stores and managed by a
District Director. The Limbo Lounge stores are located nationwide and are
currently overseen by the local Wet Seal/Contempo Casuals Regional and District
Directors. The Arden B. stores are divided into eight geographic districts
consisting of 8 to 10 stores each. Each district is managed by a
4
District Director who reports to the Arden B. Director of Store Operations, who
in turn reports to the Company's Senior Vice President of Store Operations. The
Company delegates substantial authority to regional, district and store-level
employees, while taking advantage of economies of scale by centralizing
functions such as finance, data processing, merchandise purchasing and
allocation, human resources and real estate at the corporate level.
The Company encourages communication between and among its Regional and
District Directors and senior management. Each of the Company's 53 District
Directors provides weekly reports to senior management concerning overall
business conditions and specific aspects of their stores' operations. These
reports are used to identify competitive trends and store level concerns in a
timely manner. Store performance is also evaluated by senior management through
the use of a "secret shopper" service that shops each store twice a month.
Stores are typically staffed with one full-time manager, one or two
full-time co-managers, one full-time customer service leader and 9 to 16
customer service representatives and cashiers, most of whom are part-time.
During peak seasons, stores may increase staffing levels to accommodate the
additional in-store traffic. The Company seeks to hire store-level employees who
are energetic, fashionable and friendly and who can identify with its targeted
customers. The Company's policy is to promote store managers from within while
also hiring from outside. Highly-regarded store managers are often given
opportunities to move to higher-volume stores. The Company sets weekly sales
goals for each store and devises incentives to reward stores that meet or exceed
their sales targets. In addition, from time to time the Company runs sales
contests to encourage its store level employees to maximize sales volume.
Most of the Company's stores are, and the Company expects that most of its
new stores will be, located in regional, high-traffic shopping malls which
contain at least one "anchor" department store. The Company places great
emphasis on its location within a mall and attempts to locate stores in the
higher-traffic areas of a mall and to obtain the greatest amount of frontage
possible. The Company's average store size is approximately 4,100 square feet.
Store hours are determined by the mall in which the store is located.
INFORMATION AND CONTROL SYSTEMS
While the Company believes its information systems are adequate to support
its current needs, in order to accommodate future growth the Company plans to
convert and upgrade to a state of the art client server based merchandising
system. This conversion began at the end of fiscal 1998 and is expected to be
completed by the third quarter of fiscal 1999. Prior to the purchase of the new
system and hardware the Company obtained assurance from the vendors that the
products purchased are in fact Year 2000 compliant.
All of the Company's stores have a point-of-sale system operating on
in-store computer hardware and internally developed software. The system
features bar-coded ticket scanning, dial-out check and credit authorization and
provides nightly polling transmittal of sales and inventory data between the
stores and the Company's corporate office. The Company has performed a thorough
review of its existing computer software systems and hardware to identify
processes which may be affected by Year 2000 problems. At this time, no
significant issues have been identified and the Company has developed a plan for
Year 2000 compliance should the conversion noted above fall behind schedule. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
EXPANSION STRATEGY
The Company currently plans to open up to 105 new stores in fiscal 1999 and
plans to continue to grow in the following year. The Company may, in limited
instances and to the extent it deems advisable, seek to acquire additional
businesses which complement or enhance the Company's operations. The Company
currently has no commitments or understandings with respect to such business
opportunities.
5
The following table sets forth the number of stores in each state as of
April 3, 1999:
# OF # OF # OF
STATE STORES STATE STORES STATE STORES
- ---------------------------- --------- ---------------------------- --------- ---------------------------- ---------
Alabama..................... 1 Louisiana................... 3 Oklahoma.................... 4
Arizona..................... 10 Maine....................... 2 Oregon...................... 1
Arkansas.................... 1 Maryland.................... 14 Pennsylvania................ 15
California.................. 120 Massachusetts............... 16 Rhode Island................ 1
Colorado.................... 9 Michigan.................... 13 South Carolina.............. 3
Connecticut................. 12 Minnesota................... 9 Tennessee................... 3
Delaware.................... 1 Missouri.................... 3 Texas....................... 41
Florida..................... 57 Nebraska.................... 1 Utah........................ 6
Georgia..................... 12 Nevada...................... 7 Virginia.................... 13
Hawaii...................... 6 New Hampshire............... 3 Washington.................. 6
Illinois.................... 28 New Jersey.................. 24 Wisconsin................... 6
Iowa........................ 3 New Mexico.................. 3 West Virginia............... 2
Indiana..................... 7 New York.................... 28 Washington D.C.............. 2
Kansas...................... 3 North Carolina.............. 5 Puerto Rico................. 2
Kentucky.................... 4 Ohio........................ 12
Management does not believe there are significant geographic constraints on
the locations of future stores. The Company's strategy is to enter a particular
geographic region with a base of two or three solid stores, and then continue
expansion in such geographic regions while simultaneously entering new markets
in a similar manner, thereby increasing the recognition of the Company's name.
When deciding whether to open a new store, the Company typically targets
regional malls as well as prime street locations in select markets. In making
its selection, the Company evaluates, among other factors, market area,
demographics, "anchor stores," store location, the volume of consumer traffic,
rent payments and other costs associated with opening a new store. The average
store size the Company intends to consider is between 3,000 and 4,500 square
feet depending on the chain selected for the particular location. However, in
making its decision, management reviews all leases in order to match closely the
store size to the sales potential of the store.
The Company's ability to expand in the future will depend, in part, on
general business conditions, the demand for the Company's merchandise, the
ability to find suitable malls or other locations with acceptable sites on
satisfactory terms, and the continuance of satisfactory cash flows from existing
operations.
TRADEMARKS
The Company's primary trademarks and service marks are "WET SEAL," "CONTEMPO
CASUALS," "LIMBO LOUNGE" and "NEXT," which are registered in the U.S. Trademark
Office. The Company has pending registrations in a number of classes for the
trademark, "Arden B.," which are being opposed by Elizabeth Arden. It is the
opinion of the Company's trademark counsel that the Company should be able to
register its Arden B. marks and even if the Company is unable to register the
marks (or any one of them), the absence of such registration will not cause any
interruption in the use of Arden B. as a trademark by the Company to designate
the merchandise sold under the Arden B. name and the stores in which that
merchandise is sold. The Company also uses and has registered, or has a pending
registration, on a number of marks, including "A. AUBREY," "ACCESSORIES FOR
LIFE," "ACCOMPLICE," "BLUE ASPHALT," "CEMENT," "CLUB CONTEMPO," "EVOLUTION NOT
REVOLUTION," "FORMULA X," "MEOW GENES," "UNCIVILIZED," "URBAN LIFE" and "URBAN
VIBE." In general, the registrations for these trademarks and service marks are
renewable indefinitely as long as the Company continues to use the marks as
required by applicable trademark law. The Company is the owner of an allowed and
currently pending service mark application for the mark "SEAL PUPS." Other than
6
with respect to Arden B., the Company is not aware of any adverse claim or other
infringement relating to its trademarks or service marks.
COMPETITION
The young women's retail apparel industry is highly competitive, with
fashion, quality, price, location, in-store environment and service being the
principal competitive factors. The Company competes with specialty apparel
retailers, department stores and certain other apparel retailers, including The
Limited and The GAP, and on a regional basis, with such retailers as Charlotte
Russe, Gadzooks and Pacific Sunwear. Many competitors are large national chains
which have substantially greater financial, marketing and other resources than
the Company. While the Company believes it competes effectively for favorable
site locations and lease terms, competition for prime locations within a mall is
intense.
EMPLOYEES
As of January 30, 1999, the Company had 7,404 employees, consisting of 2,033
full-time employees and 5,371 part-time employees. Full-time personnel consisted
of 1,140 salaried and 893 hourly employees. All part-time personnel are hourly
employees. Of the total employees, 7,085 were sales personnel and 319 were
administrative and distribution center personnel. Personnel at all levels of
store operations are provided with cash incentives based upon various individual
store sales targets.
All of the Company's employees are non-union and, in management's opinion,
are paid competitively with current standards in the industry. The Company
considers its relationship with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located at 26972 Burbank, Foothill
Ranch, California, consisting of 283,200 square feet of leased office and
distribution facility space (including 74,500 square feet of merchandise
handling and storage mezzanine space in the distribution facility and 20,500
square feet of second floor office space). This lease expires on December 4,
2007. The Company's former distribution facility located in Los Angeles,
California was subleased beginning in fiscal 1998 for the remainder of the lease
term. The Los Angeles lease was acquired with the acquisition of Contempo
Casuals and expires on July 31, 2002.
The Company leases all of its stores. Lease terms for the Company's stores
are typically 10 years in length and generally do not contain renewal options.
The leases generally provide for a fixed minimum rental and a rental based on a
percent of sales once a minimum sales level has been reached. As a lease
expires, the Company generally renews such lease at current market terms.
However, each renewal is based upon an analysis of the individual store's
profitability and sales potential.
The following table sets forth information with respect to store openings
and closings since fiscal 1994:
FISCAL YEARS
--------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Stores open at beginning of year............................ 389 364 364 133 129
Stores acquired during period(1)............................ 0 0 0 237 0
Stores opened during period................................. 86 34 10 3 6
Stores closed during period................................. 21 9 10 9 2
---- ---- ---- ---- ----
Stores open at end of period................................ 454 389 364 364 133
---- ---- ---- ---- ----
---- ---- ---- ---- ----
- ------------------------
(1) Contempo Casuals was acquired on July 1, 1995.
7
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
3, 1999, 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.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Class A Common Stock ("Common Stock") is listed on The Nasdaq
Stock Market ("Nasdaq") under the symbol "WTSLA". As of April 1, 1999, there
were 296 shareholders of record of the Company's Class A Common Stock.
Additionally, the number of beneficial owners of the Company's Common Stock was
estimated to be in excess of 4,500. The closing price of the Common Stock on
April 1, 1999 was $36.
The following table reflects the high and low sale prices of the Company's
Common Stock as reported by Nasdaq for the last two fiscal years.
FISCAL 1998 FISCAL 1997
--------------- ---------------
QUARTER HIGH LOW HIGH LOW
- -------------------------------------------------- --------- --------- --------- ---------
First Quarter..................................... $38 1/4 $26 7/8 $27 1/4 $18
Second Quarter.................................... 37 9/16 25 3/4 31 5/8 22 1/2
Third Quarter..................................... 31 13 5/8 27 1/4 17 3/8
Fourth Quarter.................................... 38 16 7/8 31 1/2 22 3/4
The Company has reinvested earnings in the business and has never paid any
cash dividends to holders of the Company's Common Stock. The declaration and
payment of future dividends, which are subject to the terms and covenants
contained in the Company's bank line of credit, are at the sole discretion of
the Board of Directors and will depend upon the Company's profitability,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following table of certain selected data regarding the Company should be
read in conjunction with the financial statements and notes thereto and with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The data for the fiscal years ended February 3, 1996 and January
28, 1995 are derived from the Company's financial statements for such years
which are not included herein.
9
FIVE YEAR FINANCIAL SUMMARY
FISCAL YEAR 1998 1997 1996 1995 1994
- --------------------------- ------------- ------------- ------------- ------------- -------------
JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
FISCAL YEAR ENDED 1999 1998 1997 1996(1) 1995
- --------------------------- ------------- ------------- ------------- ------------- -------------
OPERATING RESULTS
Sales...................... $ 485,389,000 $ 412,463,000 $ 374,942,000 $ 266,695,000 $ 132,997,000
Income (loss) before
provision (benefit) for
income taxes............. 42,202,000 36,325,000 26,217,000 9,948,000 (1,366,000)
Net income (loss).......... $ 25,954,000 $ 21,250,000 $ 15,252,000 $ 5,815,000 $ (1,013,000)
PER SHARE DATA
Net income (loss), basic... $ 1.98 $ 1.57 $ 1.15 $ 0.47 $ (0.08)
Net income (loss),
diluted.................. $ 1.91 $ 1.53 $ 1.13 $ 0.47 $ (0.08)
Weighted average shares
outstanding, basic....... 13,085,587 13,552,502 13,219,284 12,387,140 12,234,502
Weighted average shares
outstanding, diluted..... 13,581,233 13,899,877 13,459,810 12,500,564 12,234,502
OTHER FINANCIAL INFORMATION
Net income (loss) as a
percent of sales......... 5.3% 5.2% 4.1% 2.2% (0.8)%
Return on average
stockholders' equity..... 22.3% 20.8% 20.5% 10.7% (2.0)%
Cash and marketable
securities............... $ 91,506,000 $ 95,873,000 $ 89,183,000 $ 57,153,000 $ 25,369,000
Working capital(4)......... $ 21,856,000 $ 66,452,000 $ 59,791,000 $ 26,051,000 $ 22,473,000
Ratio of current assets to
current liabilities...... 1.3 2.1 2.1 1.5 2.8
Total assets............... $ 197,490,000 $ 184,223,000 $ 154,752,000 $ 117,564,000 $ 67,298,000
Long-term debt............. 1,264,000 1,264,000 3,264,000 5,264,000 --
Total stockholders'
equity................... $ 120,278,000 $ 112,994,000 $ 91,120,000 $ 57,735,000 $ 50,724,000
Number of stores open at
year end................. 454 389 364 364 133
Number of stores acquired
during the year.......... -- -- -- 237 --
Number of stores opened
during the year.......... 86 34 10 3 6
Number of stores closed
during the year.......... 21 9 10 9 2
Square footage of leased
store space at year
end...................... 1,848,513 1,637,347 1,539,777 1,530,891 596,685
Percent of increase in
leased square footage.... 12.9% 6.3% 0.6% 156.6% 2.3%
Avg. sales per square foot
of leased space(2)....... $ 271 $ 263 $ 244 $ 229 $ 226
Average sales per
store(2)................. $ 1,132,000 $ 1,112,000 $ 1,030,000 $ 976,000 $ 1,008,000
Comparable store sales
increase (decrease)(3)... 2.1% 5.8% 8.8% (4.1)% (9.2)%
- --------------------------
(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.
(4) The decrease in working capital in fiscal 1998 is due to the classification
of $37,973,000 of cash investments as long-term in fiscal 1998.
10
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 522 retail
stores in 42 states, Washington D.C. and Puerto Rico under the names "Wet Seal,"
"Contempo Casuals," "Arden B.," "Limbo Lounge" and "Next." In January 1998, the
Company initiated a catalog which operates under the name "Wet Seal."
On July 1, 1995, the Company acquired Contempo Casuals. The purchase price
consisted of a $100,000 cash payment and the issuance of 254,676 shares of Class
A Common Stock which had a market value of $1,178,000 as of the acquisition
date. In addition, the Company assumed approximately $27,700,000 of current
liabilities of Contempo Casuals. The transaction was accounted for under the
purchase method and resulted in negative goodwill. The acquisition substantially
increased the number of stores the Company operates. Effective February 2, 1997,
Contempo Casuals, Inc. was merged with and into The Wet Seal, Inc.
As of January 30, 1999, the Company operated 454 stores compared to 389
stores as of January 31, 1998, the end of fiscal 1997. The Company opened 86
stores during fiscal 1998 and closed 21 stores.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Financial Statements
and the Notes thereto.
RESULTS OF OPERATIONS
Fiscal 1998 consists of the 52 week period ended January 30, 1999, Fiscal
1997 consists of the 52 week period ended January 31, 1998 and Fiscal 1996
consists of the 52 week period ended February 1, 1997. Comparable store sales
are defined as sales in stores that were open throughout the full fiscal year
and throughout the full prior fiscal year.
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
-------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- -----------
Sales (including frequent buyer sales income and catalog
sales).................................................... 100.0% 100.0% 100.0%
Cost of sales (including buying, distribution and occupancy
costs).................................................... 69.3 71.0 72.6
----- ----- -----
Gross margin................................................ 30.7 29.0 27.4
Selling, general and administrative expenses................ 22.8 21.1 21.1
----- ----- -----
Operating income............................................ 7.9 7.9 6.3
Interest income, net........................................ 0.8 0.9 0.7
----- ----- -----
Income before provision for income taxes.................... 8.7 8.8 7.0
Provision for income taxes.................................. 3.4 3.6 2.9
----- ----- -----
Net income.................................................. 5.3% 5.2% 4.1%
----- ----- -----
----- ----- -----
FISCAL 1998 COMPARED TO FISCAL 1997
Sales in fiscal 1998 were $485,389,000 compared to sales in fiscal 1997 of
$412,463,000, an increase of $72,926,000 or 17.7%. The dollar increase in sales
in fiscal 1998 compared to fiscal 1997 was primarily due to the impact of the 86
new store openings in fiscal 1998 and the full year impact in 1998 of the net 25
new store openings in fiscal 1997. These increases were somewhat offset by the
closing of 21 stores in fiscal 1998. To a lesser extent, the increase in sales
was due to an increase in comparable store sales of 2.1%.
11
Cost of sales, including buying, distribution and occupancy costs, was
$336,527,000 in fiscal 1998 compared to $292,644,000 in fiscal 1997, an increase
of $43,883,000 or 15.0%. As a percentage of sales, cost of sales decreased to
69.3% in fiscal 1998, from 71.0% in fiscal 1997, a decrease of 1.7%. The dollar
increase in cost of sales in fiscal 1998 compared to fiscal 1997 was due
primarily to the increase in total sales. Of the 1.7% decrease in cost of sales
as a percentage of sales, 1.2% related to a decrease in occupancy costs, 0.6%
related to a decrease in the cost of merchandise and 0.1% related to a decrease
in buying costs, offset by a 0.2% increase in distribution costs. The decrease
in occupancy costs was associated primarily to the leverage of the catalog
operation sales on store occupancy costs. To a lesser extent the decrease in
occupancy was due to a decrease in store rental expenses as a percent of sales
as a result of the expense leverage related to the increase in comparable store
sales. The decrease of 0.6% in merchandise cost was due to an increase in the
initial markup rates related to a decrease in the cost of merchandise. The 0.1%
decrease in buying costs as a percentage of sales was due to the leverage
associated with the increase in total sales. The 0.2% increase in distribution
costs was related primarily to the catalog operation.
Selling, general and administrative expenses were $110,554,000 in fiscal
1998 compared to $86,999,000 in fiscal 1997, an increase of $23,555,000 or
27.1%. As a percentage of sales, selling, general and administrative expenses
was 22.8% in fiscal 1998 compared to 21.1% in fiscal 1997. The dollar increase
in selling, general and administrative expenses in fiscal 1998 compared to
fiscal 1997 was primarily due to the increase in total sales and to a lesser
extent the expenses related to the catalog operation. The increase as a percent
of sales was primarily due to the impact of the fixed costs associated with
catalog production. Without the impact of the catalog operation, selling,
general and administrative expenses increased 0.5%. This increase related
primarily to the increase in selling expense as a percentage of sales due to the
increases in minimum wage and to the start up costs associated with new store
openings. Also contributing to the increase as a percentage of sales was an
increase in administrative wages to support the expanded operations in fiscal
1998.
Interest income, net, was $3,894,000 in fiscal 1998 compared to $3,505,000
in fiscal 1997, an increase of $389,000. This increase was due primarily to an
increase in the average cash balance invested during the year.
Income tax provision was $16,248,000 in fiscal 1998 compared to $15,075,000
in fiscal 1997. The effective income tax rate in fiscal 1998 was 38.5% compared
to 41.5% in fiscal 1997. The decrease in the effective tax rate in fiscal 1998
compared to fiscal 1997 was due to the increase in income generated from states
with lower effective tax rates as well as the impact of changes in the corporate
cash investment strategy which resulted in higher balances invested in tax
exempt securities.
Based on the factors noted above, net income was $25,954,000 in fiscal 1998
compared to $21,250,000 in fiscal 1997, an increase of $4,704,000 or 22.1%. As a
percentage of sales, net income was 5.3% in fiscal 1998 compared to 5.2% in
fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Sales in fiscal 1997 were $412,463,000 compared to sales in fiscal 1996 of
$374,942,000, an increase of $37,521,000 or 10%. The dollar increase in sales in
fiscal 1997 compared to fiscal 1996 was primarily due to the increase in the
comparable store sales and the increase in frequent buyer sales income in fiscal
1997 compared to fiscal 1996. The Company attributes the increase in comparable
store sales of 5.8% to the continued resurgence of fashion that began in fiscal
1996. The increase in sales was also due to a slightly lesser extent to the
impact of the 34 new store openings in fiscal 1997 and the full year impact in
1997 of the 10 new store openings in fiscal 1996. These increases were somewhat
offset by the closing of nine stores in fiscal 1997.
Cost of sales, including buying, distribution and occupancy costs, was
$292,644,000 in fiscal 1997 compared to $272,189,000 in fiscal 1996, an increase
of $20,455,000 or 7.5%. As a percentage of sales, cost of sales decreased to
71.0% in fiscal 1997, from 72.6% in fiscal 1996, a decrease of 1.6%. The dollar
12
increase in cost of sales in fiscal 1997 compared to fiscal 1996 was due
primarily to the increase in total sales. Of the 1.6% decrease in cost of sales
as a percentage of sales, 1.0% related to a decrease in occupancy costs, 0.4%
related to a decrease in the cost of merchandise and 0.3% related to a decrease
in distribution costs, offset by a 0.1% increase in buying costs. The decrease
in occupancy costs was due primarily to a decrease in store rental expenses as a
percent of sales as a result of the expense leverage related to the increase in
comparable store sales. The decrease of 0.4% in merchandise cost was due to an
increase in the initial markup rates related to a decrease in the cost of
merchandise. The 0.3% decrease in distribution costs was related to a decrease
in depreciation due to the impact of fully depreciated assets in the current
year and to cost efficiencies related to processing the merchandise. These
decreases were offset by a 0.1% increase in buying costs which was associated
with payroll and personnel increases during the year to support the larger
operations.
Selling, general and administrative expenses were $86,999,000 in fiscal 1997
compared to $79,238,000 in fiscal 1996, an increase of $7,761,000 or 9.8%. As a
percentage of sales, selling, general and administrative expenses remained the
same at 21.1% in fiscal 1997 as compared to fiscal 1996. The dollar increase in
selling, general and administrative expenses in fiscal 1997 compared to fiscal
1996 was primarily due to the increase in total sales and an increase in
management expenses related to bonuses and retirement plans, offset by a
decrease in office depreciation related to the impact of fully-depreciated
assets, proceeds related to an insurance reimbursement and a decrease in
non-payroll related selling expenses as a result of the economies of scale
associated with the increase in comparable store sales.
Interest income, net, was $3,505,000 in fiscal 1997 compared to $2,702,000
in fiscal 1996, an increase of $803,000. This increase was due primarily to an
increase in the average cash balance invested.
Income tax expense was $15,075,000 in fiscal 1997 compared to $10,965,000 in
fiscal 1996. The effective income tax rate in fiscal 1997 was 41.5% compared to
a rate of 41.8% in fiscal 1996.
Based on the factors noted above, net income was $21,250,000 in fiscal 1997
compared to $15,252,000 in fiscal 1996, an increase of $5,998,000 or 39.3%. As a
percentage of sales, net income was 5.2% in fiscal 1997 compared to 4.1% in
fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at the end of fiscal 1998, 1997 and 1996 was $21,856,000,
$66,452,000 and $59,791,000, respectively. The decrease in working capital in
fiscal 1998 compared to fiscal 1997 was due to a net increase in long term
investments of $37,474,000 as current year cash was invested to a larger extent
in investments with maturities beyond one year. The decrease in working capital
was also due to the purchase of treasury stock for $19,675,000 in the third
quarter of fiscal 1998. Net cash provided by operating activities in fiscal
1998, 1997 and 1996 was $43,950,000, $31,948,000 and $28,187,000, respectively.
The increase in net cash provided by operating activities in fiscal 1998 was due
primarily to the increase in net earnings. Further contributing to the increase
was the increase in income taxes payable and accounts payable offset to some
extent by the increase in inventory and deferred tax, net. The increase in
income taxes payable is due to the timing of tax payments. The increase in
accounts payable was attributable to the increase in payables associated with
capital expenditures. The increase in inventory over the prior year was related
to the increase in the number of stores offset to some extent by the decrease in
catalog inventory as compared to prior year.
The increase in cash provided by operating activities in fiscal 1997 was due
primarily to the increase in net earnings. Further contributing to the increase
was the increase in accounts payable and accrued liabilities offset to some
extent by the increase in inventory. The increase in accounts payable was
attributable to the increase in payables associated with capital expenditures as
well as to the timing of inventory receipts. The increase in inventory over the
prior year was related to the increase in the number of stores as well as to the
inventory held for the new catalog operations at the end of fiscal 1997.
13
Additions to property and equipment are the Company's most significant
investment activities. In fiscal 1998, 1997 and 1996 the Company invested
$26,503,000, $22,973,000 and $8,620,000, respectively, in property and equipment
and leasehold improvements. These expenditures related primarily to new store
openings and remodels. In fiscal 1997, the Company constructed a new office and
distribution facility. On December 1, 1998, the Company acquired the leases and
furniture and fixtures for 19 store locations from Mothers Work, Inc. for
$1,911,000. The majority of the locations acquired were converted to Arden B.
stores. On February 1, 1999, the Company acquired the leases and furniture and
fixtures for 80 stores from Britches of Georgetowne, Inc. The Company plans to
convert the locations to Arden B., Wet Seal, Contempo Casuals and Limbo Lounge
stores by the end of the first quarter of fiscal 1999, with the majority of the
locations planned as Arden B. Primarily as a result of the Company's expanded
operations and the real estate acquisition of 80 stores, capital expenditures
for fiscal 1999 are currently estimated to be $53,000,000.
In September 1998, the Company's Board of Directors authorized the
repurchase of up to 20% of the outstanding shares of the Company's Class A
Common Stock. As of January 30, 1999, 1,327,000 shares had been repurchased at a
cost of $19,675,000. Such repurchased shares are reflected as treasury stock in
the accompanying financial statements.
On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as
part of a public offering pursuant to a registration statement on Form S-3. The
net proceeds to the Company from the sale of shares were $14,459,000.
The Company has an unsecured revolving line of credit arrangement with Bank
of America National Trust and Savings Association ("Bank of America") in an
aggregate principal amount of $30,000,000, maturing on July 1, 1999 and a five
year amortizing term loan with Bank of America in the amount of $10,000,000. As
of January 30, 1999 the term loan has an outstanding balance of $2,264,000. On
March 31, 1999, the line of credit was extended to a maturity date of July 1,
2000. At January 30, 1999, there were no outstanding borrowings under the credit
arrangement, and the Company was in compliance with all terms and covenants of
the credit arrangement and the term loan. The Company invests its excess funds
primarily in a short-term investment grade money market fund, investment grade
commercial paper and U.S. Treasury and Agency obligations. Management believes
the Company's working capital and cash flows from operating activities will be
sufficient to meet the Company's operating and capital requirements in the
foreseeable future.
SEASONALITY AND INFLATION
The Company's business is seasonal by nature with the Christmas season
(beginning the week of Thanksgiving and ending the first Saturday after
Christmas) and the back-to-school season (beginning the last week of July and
ending the first week of September) historically accounting for the largest
percentage of sales volume. In the Company's three fiscal years ended January
30, 1999, the Christmas and back-to-school seasons together accounted for an
average of approximately 33% of the Company's annual sales, after adjusting for
sales increases related to new stores. The Company does not believe that
inflation has had a material effect on the results of operations during the past
three years. However, there can be no assurance that the Company's business will
not be affected by inflation in the future.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
The preceding "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections may contain various
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended, which represent the Company's
expectations or beliefs concerning future events. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward looking
statements,
14
including, without limitation, the retention by the Company of suppliers for
both brand name and Company-developed merchandise, the ability of the Company to
expand and to continue to increase comparable store sales and the sufficiency of
the Company's working capital and cash flows from operating activities. In
addition, these statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, a decline in demand for the
merchandise offered by the Company, the ability of the Company to locate and
obtain acceptable store sites and lease terms or renew existing leases, the
ability of the Company to obtain adequate merchandise supply, the ability of the
Company to hire and train employees, the ability of the Company to gauge the
fashion tastes of its customers and provide merchandise that satisfies customer
demand, management's ability to manage the Company's expansion, the effect of
economic conditions, the effect of severe weather or natural disasters and the
effect of competitive pressures from other retailers. The Company disclaims any
obligation or undertaking to disseminate any updates or revisions to any forward
looking statement contained herein or to reflect any change in the expectations
of the Company after the date hereof or any change in events, conditions or
circumstances on which any statement is based.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"), in the first quarter of fiscal
1998. SFAS 130 establishes standards for the reporting and display of
comprehensive income. Components of comprehensive income, among other items, may
include foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale.
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132") which is effective for fiscal years
beginning after December 15, 1997. This statement standardized the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous statements.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.
During fiscal 1998 and continuing through fiscal 1999, the Company is in the
process of converting substantially all of its computer software systems and
hardware. Prior to the purchase of the new systems and hardware the Company
obtained or is in the process of obtaining assurance from the vendors that the
products purchased are in fact Year 2000 compliant. The Company will also
complete an independent review of such systems to further verify Year 2000
compliance. The Company has performed a thorough review of its existing computer
software systems and hardware to identify processes which may be affected by
Year 2000 problems. At this time, no significant issues have been identified and
the Company has developed an adequate plan for Year 2000 compliance should the
conversions fall behind schedule.
During fiscal 1998 and fiscal 1999, the Company is also in the process of
completing a Year 2000 review of its relationships with suppliers and financial
institutions to obtain assurance, where necessary, that these entities are Year
2000 compliant. The Company's total Year 2000 project costs include the
estimated costs and time associated with the impact of a third party's Year 2000
issue on the Company, and are based on presently available information. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a
15
material adverse effect on the Company's business, results of operations, cash
flows and financial condition.
If the Company is not completely successful in mitigating internal and
external Year 2000 risks, the result could be a system failure causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, distribute merchandise, or engage in similar normal
business activities at the Company or its vendors and suppliers. The Company
believes that under a worst case scenario, it could continue the majority of its
normal business activities on a manual basis. With respect to potential Year
2000 failures of its vendors and suppliers, the Company plans to mitigate this
risk by not depending on any single vendor or supplier for products or
merchandise.
Due to the fact that the majority of the Company's computer software systems
and hardware have been purchased or developed recently and were designed to be
Year 2000 compliant, the Company does not expect to incur significant additional
costs in addressing the Year 2000 issue. The total cost of the Year 2000 project
is estimated at $300,000, and will be funded through operating cash flows. Year
2000 costs as of January 30, 1999 totaled $100,000.
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
All of the information called for by Part III (Items 10 through 13) is
incorporated by reference from the Company's definitive Proxy Statement in
connection with its Annual Meeting of Stockholders to be held June 9, 1999,
filed pursuant to Regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. Financial Statements--See "Index to Financial Statements and Financial
Statement Schedules".
2. Financial Statement Schedules--See "Index to Financial Statements and
Financial Statement Schedules".
3. Exhibits--See "Exhibit Index".
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended January 30, 1999.
16
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
- ------------------------------ -------------------------- -------------------
/s/ GEORGE H. BENTER JR. Director April 23, 1999
- ------------------------------
George H. Benter Jr.
/s/ KATHY BRONSTEIN Vice Chairman and Chief April 23, 1999
- ------------------------------ Executive Officer and
Kathy Bronstein Director (Principal
Executive Officer)
/s/ STEPHEN GROSS Secretary and Director April 23, 1999
- ------------------------------
Stephen Gross
/s/ ANN CADIER KIM Vice President of Finance April 23, 1999
- ------------------------------ and Chief Financial
Ann Cadier Kim Officer (Principal
Financial and Accounting
Officer)
/s/ WALTER F. LOEB Director April 23, 1999
- ------------------------------
Walter F. Loeb
17
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ WILFRED POSLUNS Director April 23, 1999
- ------------------------------
Wilfred Posluns
/s/ GERALD RANDOLPH Director April 23, 1999
- ------------------------------
Gerald Randolph
/s/ ALAN SIEGEL Director April 23, 1999
- ------------------------------
Alan Siegel
/s/ IRVING TEITELBAUM Chairman of the Board and April 23, 1999
- ------------------------------ Director
Irving Teitelbaum
/s/ EDMOND THOMAS President and Chief April 23, 1999
- ------------------------------ Operating Officer and
Edmond Thomas Director
18
THE WET SEAL, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
---------
INDEPENDENT AUDITORS' REPORT:
Report of Deloitte & Touche LLP............................................................................ 20
FINANCIAL STATEMENTS:
Balance sheets as of January 30, 1999 and January 31, 1998................................................. 21
Statements of income for the years ended January 30, 1999, January 31, 1998 and February 1, 1997........... 22
Statements of comprehensive income for the years ended January 30, 1999, January 31, 1998 and February 1,
1997..................................................................................................... 22
Statements of stockholders' equity for the years ended January 30, 1999, January 31, 1998 and February 1,
1997..................................................................................................... 23
Statements of cash flows for the years ended January 30, 1999, January 31, 1998 and February 1, 1997....... 24
Notes to financial statements.............................................................................. 25
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.
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Wet Seal, Inc.:
We have audited the accompanying balance sheets of The Wet Seal, Inc. as of
January 30, 1999 and January 31, 1998 and the related statements of income,
comprehensive income, stockholders' equity and cash flows for each of the three
fiscal years in the period ended January 30, 1999. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Wet Seal, Inc. as of
January 30, 1999 and January 31, 1998 and the results of its operations and its
cash flows for each of the three fiscal years in the period ended January 30,
1999, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
March 12, 1999
Costa Mesa, California
20
THE WET SEAL, INC.
BALANCE SHEETS
ASSETS
JANUARY 30, JANUARY 31,
1999 1998
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents (Note 1).......................... $ 31,590,000 $ 76,056,000
Short-term investments (Note 3)............................. 21,943,000 19,817,000
Other receivables........................................... 3,665,000 3,209,000
Merchandise inventories..................................... 28,002,000 26,884,000
Prepaid expenses (Note 1)................................... -- 330,000
Deferred tax charges (Note 4)............................... 1,791,000 1,137,000
------------ ------------
Total current assets...................................... 86,991,000 127,433,000
------------ ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements...................................... 75,659,000 65,465,000
Furniture, fixtures and equipment........................... 37,758,000 24,965,000
Leasehold rights............................................ 3,577,000 3,692,000
Construction in progress.................................... 489,000 2,000
------------ ------------
117,483,000 94,124,000
Less accumulated depreciation............................... (57,110,000) (49,171,000)
------------ ------------
Net equipment and leasehold improvements.................. 60,373,000 44,953,000
------------ ------------
LONG-TERM INVESTMENTS (Note 3).............................. 37,973,000 499,000
OTHER ASSETS:
Deferred tax charges and other assets (Notes 4 and 13)...... 11,677,000 10,817,000
Goodwill, net of accumulated amortization of $656,000 and
$611,000 as of January 30, 1999 and January 31, 1998,
respectively.............................................. 476,000 521,000
------------ ------------
Total other assets........................................ 12,153,000 11,338,000
------------ ------------
$197,490,000 $184,223,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 37,515,000 $ 35,858,000
Accrued liabilities (Note 12)............................... 20,430,000 20,570,000
Income taxes payable (Note 4)............................... 6,190,000 2,553,000
Current portion of long-term debt (Note 9).................. 1,000,000 2,000,000
------------ ------------
Total current liabilities................................. 65,135,000 60,981,000
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt (Note 9)..................................... 1,264,000 1,264,000
Deferred rent............................................... 7,458,000 6,254,000
Other long-term liabilities (Note 13)....................... 3,355,000 2,730,000
------------ ------------
Total long-term liabilities............................... 12,077,000 10,248,000
------------ ------------
Total liabilities......................................... 77,212,000 71,229,000
------------ ------------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY: (Notes 5 and 6)
Preferred Stock, $.01 par value, authorized, 2,000,000
shares; none issued and outstanding....................... -- --
Common Stock, Class A, $.10 par value, authorized 20,000,000
shares; 10,704,886 and 10,656,578 shares issued and
outstanding at January 30, 1999 and January 31, 1998,
respectively.............................................. 1,071,000 1,066,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares; 2,912,665 shares issued and
outstanding at January 30, 1999 and January 31, 1998...... 291,000 291,000
Paid-in capital............................................. 58,356,000 57,217,000
Retained earnings........................................... 80,374,000 54,420,000
Other comprehensive loss (Note 13).......................... (139,000) --
Treasury stock, 1,327,000 shares at cost.................... (19,675,000) --
------------ ------------
Total Stockholders' Equity................................ 120,278,000 112,994,000
------------ ------------
$197,490,000 $184,223,000
------------ ------------
------------ ------------
See accompanying notes to financial statements.
21
THE WET SEAL, INC.
STATEMENTS OF INCOME
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
-------------- -------------- --------------
SALES........................................................... $ 485,389,000 $ 412,463,000 $ 374,942,000
COST OF SALES (including buying, distribution and occupancy
costs)........................................................ 336,527,000 292,644,000 272,189,000
-------------- -------------- --------------
GROSS MARGIN.................................................... 148,862,000 119,819,000 102,753,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 10).......... 110,554,000 86,999,000 79,238,000
-------------- -------------- --------------
OPERATING INCOME................................................ 38,308,000 32,820,000 23,515,000
INTEREST INCOME, NET (Note 9)................................... 3,894,000 3,505,000 2,702,000
-------------- -------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................ 42,202,000 36,325,000 26,217,000
PROVISION FOR INCOME TAXES (Note 4)............................. 16,248,000 15,075,000 10,965,000
-------------- -------------- --------------
NET INCOME...................................................... $ 25,954,000 $ 21,250,000 $ 15,252,000
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME PER SHARE, BASIC (Note 14)........................... $ 1.98 $ 1.57 $ 1.15
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME PER SHARE, DILUTED (Note 14)......................... $ 1.91 $ 1.53 $ 1.13
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC (Note 1)............. 13,085,587 13,552,502 13,219,284
-------------- -------------- --------------
-------------- -------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED (Note 1)........... 13,581,233 13,899,877 13,459,810
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to financial statements.
THE WET SEAL, INC.
STATEMENTS OF COMPREHENSIVE INCOME
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------- ------------- -------------
NET INCOME.......................................................... $ 25,954,000 $ 21,250,000 $ 15,252,000
------------- ------------- -------------
OTHER COMPREHENSIVE LOSS:
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ADJUSTMENT (Note 13).......... (139,000) -- --
------------- ------------- -------------
COMPREHENSIVE INCOME................................................ $ 25,815,000 $ 21,250,000 $ 15,252,000
------------- ------------- -------------
------------- ------------- -------------
See accompanying notes to financial statements.
22
THE WET SEAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------------------------------------
CLASS A CLASS B
---------------------- ---------------------
OTHER
PAID-IN RETAINED COMPREHENSIVE
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS LOSS
---------- ---------- ---------- --------- ----------- ----------- -----------
Balance at February 3, 1996................ 5,687,066 $ 568,000 6,807,665 $681,000 $38,568,000 $17,918,000 --
Issuance of Class A Common Stock pursuant
to Public Offering (Note 5).............. 765,000 76,000 -- -- 14,383,000 -- --
Stock issued pursuant to long-term
incentive plan (Note 6).................. 5,308 1,000 -- -- 106,000 -- --
Exercise of stock options (Note 6)......... 276,500 28,000 -- -- 1,712,000 -- --
Tax benefit related to exercise of stock
options (Note 6)......................... -- -- -- -- 1,827,000 -- --
Conversion of Class B Common Stock to Class
A Common Stock (Note 5).................. 3,895,000 390,000 (3,895,000) (390,000 ) -- -- --
Net income................................. -- -- -- -- -- 15,252,000 --
---------- ---------- ---------- --------- ----------- ----------- -----------
Balance at February 1, 1997................ 10,628,874 1,063,000 2,912,665 291,000 56,596,000 33,170,000 --
Stock issued pursuant to long-term
incentive plan (Note 6).................. 8,704 1,000 -- -- 265,000 -- --
Exercise of stock options (Note 6)......... 19,000 2,000 -- -- 212,000 -- --
Tax benefit related to exercise of stock
options (Note 6)......................... -- -- -- -- 144,000 -- --
Net income................................. -- -- -- -- -- 21,250,000 --
---------- ---------- ---------- --------- ----------- ----------- -----------
Balance at January 31, 1998................ 10,656,578 1,066,000 2,912,665 291,000 57,217,000 54,420,000 --
Stock issued pursuant to long-term
incentive plan (Note 6).................. 12,308 1,000 -- -- 462,000 -- --
Exercise of stock options (Note 6)......... 36,000 4,000 -- -- 269,000 -- --
Tax benefit related to exercise of stock
options (Note 6)......................... -- -- -- -- 408,000 -- --
Repurchase of common stock (Note 5)........ -- -- -- -- -- -- --
Supplemental Employee Retirement Plan
adjustment (Note 13)..................... -- -- -- -- -- -- (139,000 )
Net income................................. -- -- -- -- -- 25,954,000 --
---------- ---------- ---------- --------- ----------- ----------- -----------
Balance at January 30, 1999................ 10,704,886 $1,071,000 2,912,665 $291,000 $58,356,000 $80,374,000 $(139,000 )
---------- ---------- ---------- --------- ----------- ----------- -----------
---------- ---------- ---------- --------- ----------- ----------- -----------
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
----------- -------------
Balance at February 3, 1996................ -- $ 57,735,000
Issuance of Class A Common Stock pursuant
to Public Offering (Note 5).............. -- 14,459,000
Stock issued pursuant to long-term
incentive plan (Note 6).................. -- 107,000
Exercise of stock options (Note 6)......... -- 1,740,000
Tax benefit related to exercise of stock
options (Note 6)......................... -- 1,827,000
Conversion of Class B Common Stock to Class
A Common Stock (Note 5).................. -- --
Net income................................. -- 15,252,000
----------- -------------
Balance at February 1, 1997................ -- 91,120,000
Stock issued pursuant to long-term
incentive plan (Note 6).................. -- 266,000
Exercise of stock options (Note 6)......... -- 214,000
Tax benefit related to exercise of stock
options (Note 6)......................... -- 144,000
Net income................................. -- 21,250,000
----------- -------------
Balance at January 31, 1998................ -- 112,994,000
Stock issued pursuant to long-term
incentive plan (Note 6).................. -- 463,000
Exercise of stock options (Note 6)......... -- 273,000
Tax benefit related to exercise of stock
options (Note 6)......................... -- 408,000
Repurchase of common stock (Note 5)........ (19,675,000) (19,675,000)
Supplemental Employee Retirement Plan
adjustment (Note 13)..................... -- (139,000)
Net income................................. -- 25,954,000
----------- -------------
Balance at January 30, 1999................ $(19,675,000) $120,278,000
----------- -------------
----------- -------------
See accompanying notes to financial statements.
23
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $25,954,000 $21,250,000 $15,252,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization.......................................... 13,039,000 11,295,000 11,848,000
Loss on disposal of equipment and leasehold improvements............... -- -- 153,000
Stock issued pursuant to long-term incentive plan...................... 463,000 266,000 107,000
Deferred tax, net...................................................... (1,124,000) (2,189,000) (3,084,000)
Changes in operating assets and liabilities, net of effect of
acquisition:
Other receivables.................................................... (456,000) (1,632,000) (1,054,000)
Merchandise inventories.............................................. (1,118,000) (4,295,000) (6,348,000)
Prepaid expenses..................................................... 330,000 (330,000) 428,000
Other assets......................................................... (594,000) (118,000) 38,000
Accounts payable and accrued liabilities............................. 1,517,000 6,329,000 9,276,000
Income taxes payable................................................. 4,045,000 545,000 625,000
Deferred rent........................................................ 1,204,000 137,000 946,000
Other long-term liabilities.......................................... 690,000 690,000 --
----------- ----------- ------------
Net cash provided by operating activities.............................. 43,950,000 31,948,000 28,187,000
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements....................... (26,503,000) (22,973,000) (8,620,000)
Investment in marketable securities...................................... (83,018,000) (42,320,000) (17,700,000)
Proceeds from sale of marketable securities.............................. 43,418,000 39,704,000 --
Acquisition of store leases and related store assets..................... (1,911,000) -- --
----------- ----------- ------------
Net cash used in investing activities.................................... (68,014,000) (25,589,000) (26,320,000)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt..................................... (1,000,000) (2,000,000) (3,736,000)
Purchase of treasury stock............................................... (19,675,000) -- --
Proceeds from issuance of common stock................................... 273,000 214,000 16,199,000
----------- ----------- ------------
Net cash (used in) provided by financing activities...................... (20,402,000) (1,786,000) 12,463,000
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................... (44,466,000) 4,573,000 14,330,000
CASH AND CASH EQUIVALENTS, beginning of year............................. 76,056,000 71,483,000 57,153,000
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year................................... $31,590,000 $76,056,000 $71,483,000
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................................... $ 194,000 $ 337,000 $ 538,000
Income taxes, net...................................................... 13,326,000 16,720,000 13,424,000
SCHEDULE OF NONCASH TRANSACTIONS:
During the fifty-two weeks ended January 30, 1999, January 31, 1998 and
February 1, 1997, the Company recorded an increase to paid-in capital of
$408,000, $144,000 and $1,827,000, respectively, related to tax benefits
associated with the exercise of non-qualified stock options.
During the fifty-two weeks ended January 30, 1999, the Company recorded a
decrease to other comprehensive income of $139,000 and a corresponding decrease
to other long-term liabilities and other assets of $65,000 and $204,000,
respectively, related to the Supplemental Employee Retirement Plan. (See Note
13.)
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.
See accompanying notes to financial statements.
24
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS
The Wet Seal, Inc. (the "Company") is a nationwide specialty retailer of
fashionable and contemporary apparel and accessory items designed for consumers
with a young, active lifestyle. In January 1998, the Company initiated a catalog
which operates under the name "Wet Seal". On July 1, 1995, the Company acquired
Contempo Casuals, Inc., a 237-store junior women's retail 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 react to changes in fashion trends could adversely
affect its results of operations. Approximately 35% of the voting stock of the
Company is held by a group of companies directly or indirectly controlled by two
directors of the Company, one of which is the Chairman of the Board. Effective
February 2, 1997, Contempo Casuals, Inc. was merged with and into The Wet Seal,
Inc.
The Company's fiscal year ends on the Saturday closest to the end of
January. The reporting period includes 52 weeks in each of the fiscal years
1998, 1997 and 1996.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost (first-in,
first-out) or market. Cost is determined using the retail inventory method.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Expenditures for
betterment or improvement are capitalized, while expenditures for repairs that
do not significantly increase the life of the asset are expensed as incurred.
Depreciation is provided using primarily the straight-line method over the
estimated useful lives of the assets. Furniture, fixtures and equipment are
typically depreciated over 3 to 5 years. Leasehold improvements and the cost of
acquiring leasehold rights are depreciated over the lesser of the term of the
lease or 10 years.
LONG-LIVED ASSETS
The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). In accordance with SFAS 121, long-lived assets to
be held are reviewed for events or changes in circumstances which indicate that
their carrying value may not be recoverable. At January 30, 1999, the Company
believes there has been no impairment of the value of such assets.
INTANGIBLE ASSET
Excess of cost over net assets acquired (goodwill) is being amortized on the
straight-line method over 25 years. The Company assesses the recoverability of
goodwill at each balance sheet date by determining whether the amortization of
the balance over its remaining useful life can be recovered through projected
undiscounted future operating cash flows from the acquisition.
25
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RENTAL EXPENSE
Any defined rental escalations are averaged over the term of the related
lease in order to provide level recognition of rental expense.
STORE PRE-OPENING COSTS
Store opening and pre-opening costs are charged to expense as they are
incurred.
ADVERTISING COSTS
Costs for advertising related to retail operations consisting primarily of
in-store signage and promotions are expensed as incurred. Direct response
advertising costs consisting primarily of catalog book production and printing
costs are capitalized and amortized over the expected life of the catalog, not
to exceed 6 months. Direct response advertising costs reported as prepaid assets
are $0 and $330,000 at January 30, 1999 and January 31, 1998, respectively.
Total advertising expenses related primarily to retail operations in fiscal
1998, 1997 and 1996 were $1,993,000, $1,676,000 and $1,728,000, respectively.
INCOME TAX
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Deferred tax charges are provided on items, principally depreciation and
rent, for which there are temporary differences in recording such items for
financial reporting purposes and for income tax purposes.
NET INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") beginning with the Company's fourth quarter of
fiscal 1997. All prior period earnings per common share data have been restated
to conform to the provisions of this statement. Net income per share, basic, is
computed based on the weighted average number of common shares outstanding for
the period. Net income per share, diluted, is computed based on the weighted
average number of common and potentially dilutive common equivalent shares
outstanding for the period. (See Note 14.)
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid interest-earning deposits purchased with an initial maturity of
three months or less to be cash equivalents. At January 30, 1999 and January 31,
1998, cash equivalents totaled $29,298,000 and $72,212,000, respectively,
bearing interest at rates ranging from approximately 4.7% to 5.3% at January 30,
1999 and from approximately 5.4% to 5.6% at January 31, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"), in the first quarter of fiscal
1998. SFAS 130 establishes standards for the reporting and display of
comprehensive income. Components of comprehensive income, among other
26
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
items, may include foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on marketable securities
classified as available-for-sale.
In Fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132") which is effective for fiscal years
beginning after December 15, 1997. This statement standardized the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were under previous statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management believes the carrying amounts of cash and cash equivalents,
accounts receivable and accounts payable approximate fair value due to the short
maturity of these financial instruments. Long-term debt bears a variable rate of
interest; therefore, management believes the carrying amount for the outstanding
borrowings at January 30, 1999 and January 31, 1998 approximate fair value.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." (See Note 6.)
NOTE 2: ACQUISITION
On July 1, 1995, the Company acquired the business, assets and properties of
Contempo Casuals, Inc., a 237-store junior women's retail chain with stores in
34 states and Puerto Rico. The purchase price consisted of (a) the issuance of
254,676 shares of the Company's Class A Common Stock which had a value of
$1,178,000 on the date of the acquisition, and (b) $100,000 in cash. The
transaction was accounted for under the purchase method. In connection with the
acquisition, the Company assumed certain liabilities which were estimated by the
seller. The total amount of these assumed liabilities may not, in fact, be paid
as the actual payments will be based on the future claims and losses which are
actually submitted and which are related to pre-acquisition events. (See Note
12.)
On December 1, 1998, the Company acquired the leases and furniture and
fixtures for 19 store locations from Mothers Work, Inc. The purchase price was
recorded as leasehold improvements and furniture, fixtures and equipment in the
accompanying financial statements. The majority of the locations acquired were
converted to Arden B. stores.
27
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 3: INVESTMENTS
Short-term investments consist of highly liquid interest bearing deposits
purchased with an initial maturity exceeding three months with a remaining
maturity at January 30, 1999 less than twelve months. Long-term investments
consist of highly liquid interest bearing securities which mature beyond twelve
months from the balance sheet date. It is management's intent to hold short-term
and long-term investments to maturity. Short-term and long-term investments are
carried at amortized cost plus accrued income, which approximates market at
January 30, 1999.
Investments are comprised of the following:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
DESCRIPTION MATURITY DATES COST GAINS LOSSES FAIR VALUE
- ------------------------------------- ------------------- ------------- ----------- ----------- -------------
JANUARY 30, 1999
Commercial paper..................... Within one year $ 1,000,000 $ -- $ -- $ 1,000,000
Corporate bonds...................... Within one year 1,514,000 -- 4,000 1,510,000
Municipal bonds...................... Within one year 7,679,000 3,000 -- 7,682,000
Government obligations............... Within one year 11,750,000 -- 11,000 11,739,000
Corporate bonds...................... One to two years 3,087,000 -- 27,000 3,060,000
Municipal bonds...................... One to two years 34,886,000 31,000 -- 34,917,000
------------- ----------- ----------- -------------
$ 59,916,000 $ 34,000 $ 42,000 $ 59,908,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
JANUARY 31, 1998
Commercial paper..................... Within one year $ 14,905,000 $ -- $ -- $ 14,905,000
Corporate bonds...................... Within one year 1,372,000 1,000 -- 1,373,000
Municipal bonds...................... Within one year 3,540,000 -- 7,000 3,533,000
Corporate bonds...................... One to two years 499,000 1,000 -- 500,000
------------- ----------- ----------- -------------
$ 20,316,000 $ 2,000 $ 7,000 $ 20,311,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
NOTE 4: PROVISION FOR INCOME TAXES
SFAS 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 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.
28
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 4: PROVISION FOR INCOME TAXES (CONTINUED)
The components of the income tax provision are as follows:
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------- ------------- -------------
CURRENT:
Federal............................................................. $ 13,442,000 $ 12,886,000 $ 10,674,000
State............................................................... 3,930,000 4,378,000 3,375,000
------------- ------------- -------------
17,372,000 17,264,000 14,049,000
------------- ------------- -------------
DEFERRED:
Federal............................................................. (1,126,000) (1,535,000) (2,569,000)
State............................................................... 2,000 (654,000) (515,000)
------------- ------------- -------------
(1,124,000) (2,189,000) (3,084,000)
------------- ------------- -------------
$ 16,248,000 $ 15,075,000 $ 10,965,000
------------- ------------- -------------
------------- ------------- -------------
A reconciliation of the income tax provision to the amount of the provision
that would result from applying the federal statutory rate (35%) to income
before taxes is as follows:
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------- ------------- -------------
Provision for income taxes at federal statutory rate....................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit...................... 5.6 7.2 7.1
Tax exempt interest........................................................ (1.5) (2.0) (0.5)
Other...................................................................... (0.6) 1.3 0.2
--- --- ---
Effective tax rate......................................................... 38.5% 41.5% 41.8%
--- --- ---
--- --- ---
As of January 30, 1999 and January 31, 1998, the Company's net deferred tax
asset was $10,709,000 and $9,585,000 respectively. The major components of the
Company's net deferred taxes at January 30, 1999 and January 31, 1998 are as
follows:
JANUARY 30, JANUARY 31,
1999 1998
------------- ------------
Deferred rent........................................................................ $ 2,987,000 $ 2,782,000
Acquisition related reserves......................................................... 630,000 650,000
Inventory cost capitalization........................................................ 1,080,000 808,000
Difference between book and tax basis of fixed assets................................ 4,632,000 4,643,000
State income taxes................................................................... (179,000) (136,000)
Supplemental Employee Retirement Plan................................................ 594,000 307,000
Other................................................................................ 965,000 531,000
------------- ------------
$ 10,709,000 $ 9,585,000
------------- ------------
------------- ------------
29
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 5: STOCKHOLDERS' EQUITY
The 2,912,665 shares of the Company's Class B Common Stock outstanding as of
January 30, 1999 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.
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 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.
During the year ended January 30, 1999, the Company's Board of Directors
authorized the repurchase of up to 20% of the outstanding shares of the
Company's Class A Common Stock. As of January 30, 1999, 1,327,000 shares had
been repurchased at a cost of $19,675,000. Such repurchased shares are reflected
as treasury stock in the accompanying financial statements.
NOTE 6: LONG-TERM INCENTIVE PLAN
Under the Company's long-term incentive plans (the "Plans"), the Company may
grant stock options which are either incentive stock options within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options. The Plans provide that the per share exercise price
of an incentive stock option may not be less than the fair market value of the
Company's Class A Common Stock on the date the option is granted. Options become
exercisable over periods of up to five years and generally expire ten years from
the date of grant or 90 days after employment or services are terminated. The
Plans also provide that the Company may grant restricted stock and other
stock-based awards. An aggregate of 1,475,000 shares of the Company's Class A
Common Stock may be issued pursuant to the Plans. As of January 30, 1999, 19,756
shares were available for future grants.
30
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 6: LONG-TERM INCENTIVE PLAN (CONTINUED)
Stock option activity for each of the three years in the period ended
January 30, 1999 was as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
Outstanding at February 3, 1996................................ 635,000 $ 5.12
Granted...................................................... 60,000 20.86
Canceled..................................................... (6,000) 4.13
Exercised.................................................... (276,500) 6.29
----------
Outstanding at February 1, 1997................................ 412,500 6.64
Granted...................................................... 595,000 20.00
Canceled..................................................... (21,000) 17.70
Exercised.................................................... (19,000) 11.24
----------
Outstanding at January 31, 1998................................ 967,500 14.53
Granted...................................................... 130,000 16.93
Canceled..................................................... (12,000) 13.57
Exercised.................................................... (36,000) 7.58
----------
Outstanding at January 30, 1999................................ 1,049,500 $ 14.42
----------
----------
At January 30, 1999, January 31, 1998 and February 1, 1997 there were
283,500, 119,500 and 19,500 outstanding options exercisable at a weighted
average exercise price of $8.42, $4.65 and $4.40, respectively.
Additional information regarding options outstanding as of January 30, 1999
is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE
EXERCISE PRICES JAN. 30, 1999 CONTRACTUAL LIFE PRICE JAN. 30, 1999 PRICE
- --------------- ------------- ------------------- -------- ------------- --------
$ 3.00 - $ 3.63 30,000 5.33 $ 3.56 19,000 $ 3.63
4.13 - 5.13 269,500 5.20 4.18 174,500 4.17
8.00 - 16.50 290,000 8.65 16.27 50,000 15.82
19.31 - 20.00 460,000 8.60 19.97 40,000 20.00
------------- -------------
$ 3.00 - $20.00 1,049,500 7.65 $14.42 283,500 $ 8.42
During the years ended January 30, 1999, January 31, 1998 and February 1,
1997, the Company recognized tax benefits of $408,000, $144,000 and $1,827,000,
respectively, resulting from the exercise of certain non-qualified stock
options.
ADDITIONAL LONG-TERM INCENTIVE PLAN INFORMATION
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee incentive stock options or non-qualified stock options.
31
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 6: LONG-TERM INCENTIVE PLAN (CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 48 months following
vesting; stock volatility, 49.93% in fiscal 1998, 72.23% in fiscal 1997 and
65.95% in fiscal 1996; risk free interest rates, 4.74% in fiscal 1998, 6.10% in
fiscal 1997 and 6.38% in fiscal 1996; and no dividends during the expected term.
The Company's calculations are based on a valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the fiscal 1998, fiscal
1997 and fiscal 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 FISCAL
1998 1997 1996
------------- ------------- -------------
Net Income.......................................... As reported $ 25,954,000 $ 21,250,000 $ 15,252,000
Pro forma $ 24,804,000 $ 20,745,000 $ 15,192,000
Net Income Per Share, Basic......................... As reported $ 1.98 $ 1.57 $ 1.15
Pro forma $ 1.90 $ 1.53 $ 1.15
Net Income Per Share, Diluted....................... As reported $ 1.91 $ 1.53 $ 1.13
Pro forma $ 1.83 $ 1.49 $ 1.13
The impact of outstanding non-vested stock options granted prior to 1995 has
been excluded from the pro forma calculation; accordingly, the above pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
As of January 30, 1999, the Company has granted an aggregate of 72,244
shares of Class A Common Stock, net of forfeitures, to a group of its key
employees under the performance grant award plan which was instituted pursuant
to the Company's Plans. Under the performance grant award plan, key employees of
the Company receive Class A Common Stock in proportion to their salary. These
bonus shares vest at the rate of 33.33% per year and non-vested shares are
subject to forfeiture if the participant terminates employment. Compensation
expense, equal to the market value of the shares as of the issue date, is being
charged to earnings over the period that the employees provide service. In each
of the years ended January 30, 1999, January 31, 1998 and February 1, 1997,
12,308, 8,704 and 5,308 shares, respectively, were fully vested and issued. In
connection with the issuance of these shares, the Company recorded compensation
expense of $463,000, $267,000 and $107,000 for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997, respectively.
32
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 7: COMMITMENTS
LEASES
The Company leases retail stores, automobiles, computers and corporate
office and warehouse facilities under operating lease agreements expiring at
various times through 2010. Substantially all of the leases require the Company
to pay maintenance, insurance, property taxes and percentage rent ranging from
3% to 12%, based on sales volume over certain minimum sales levels. Effective
February 1998, the Company entered into a sublease agreement for its former
warehouse facility which expires in August 2002.
Minimum annual rental commitments under non-cancelable leases, including the
corporate office and warehouse facility lease, are as follows:
MINIMUM LEASE SUBLEASE NET LEASE
COMMITMENTS INCOME COMMITMENTS
--------------- ------------ --------------
FISCAL YEAR ENDING: 2000....................................... $ 51,196,000 $ 647,000 $ 50,549,000
2001....................................... 47,962,000 647,000 47,315,000
2002....................................... 43,352,000 647,000 42,705,000
2003....................................... 36,511,000 377,000 36,134,000
2004....................................... 30,793,000 -- 30,793,000
Thereafter................................. 95,957,000 -- 95,957,000
--------------- ------------ --------------
$ 305,771,000 $ 2,318,000 $ 303,453,000
--------------- ------------ --------------
--------------- ------------ --------------
Rental expense, including common area maintenance, was $72,533,000,
$64,384,000 and $62,391,000, of which $295,000, $377,000 and $345,000 was paid
as percentage rent based on sales volume, for the years ended January 30, 1999,
January 31, 1998 and February 1, 1997, respectively.
EMPLOYMENT CONTRACTS
The Company has employment contracts with two officers, which provide for
minimum annual salaries, customary benefits and allowances, and incentive
bonuses if specified Company earnings levels are achieved. The agreements
provide these same officers with severance benefits which approximate three
years' salary if the agreements are terminated without cause before expiration
of their terms or if the individual's duties materially change following a
change in control of the Company.
LITIGATION
The Company is a defendant in various lawsuits arising in the ordinary
course of its business. While the ultimate liability, if any, arising from these
claims cannot be predicted with certainty, the Company is of the opinion that
their resolution will not likely have a material adverse effect on the Company's
financial statements.
LETTERS OF CREDIT
At January 30, 1999, the Company had outstanding letters of credit amounting
to approximately $15,994,000.
33
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 8: REVOLVING CREDIT ARRANGEMENT
Under an unsecured revolving line of credit arrangement with a bank, the
Company may borrow up to a maximum of $30 million on a revolving basis through
July 1, 1999. The cash borrowings under the arrangement bear interest at the
bank's prime rate or, at the Company's option, LIBOR plus 1.75%. On March 31,
1999, the line of credit was extended to a maturity date of July 1, 2000.
The credit arrangement imposes quarterly and annual financial covenants
requiring the Company to maintain certain financial ratios and achieve certain
levels of annual income. In addition, the credit arrangement requires that the
bank approve the payment of dividends and restrict the level of capital
expenditures. At January 30, 1999 and January 31, 1998, the Company was in
compliance with these covenants. The Company had no borrowings outstanding under
the credit arrangement at January 30, 1999 or January 31, 1998.
NOTE 9: 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% (6.75% at fiscal year end) payable monthly.
Under the terms of the debt agreement, the outstanding balance of $2,264,000
will be repaid in quarterly installments of $500,000, commencing October 31,
1999, until paid. Aggregate principal payments during fiscal 1999 and fiscal
2000 are $1,000,000 and $1,264,000, respectively.
The term loan imposes quarterly and annual financial covenants requiring the
Company to maintain certain financial ratios and achieve certain levels of
annual income. In addition, the term loan requires that the bank approve the
payment of dividends and restricts the level of capital expenditures. At January
30, 1999 and January 31, 1998, the Company was in compliance with these
covenants.
NOTE 10: RELATED PARTY TRANSACTIONS
Certain officers of Suzy Shier, Inc., a shareholder, provide management
services to the Company. For these services, the officers earned in the
aggregate a management fee of $375,000 in the year ended January 31, 1999 and
$250,000 during each of the years ended January 31, 1998 and February 1, 1997.
NOTE 11: RETIREMENT PLAN
Effective June 1, 1993, the Company established a qualified defined
contribution retirement plan under the Internal Revenue Code, Section 401(k).
The Wet Seal Retirement Plan (the "Plan") is available to all employees who meet
the Plan's eligibility requirements. The Plan is funded by employee
contributions, and additional contributions may be made by the Company at its
discretion. As of January 30, 1999 the Company had accrued $112,000 as its
fiscal 1998 contribution to the Plan.
34
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 12: ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JANUARY 30, JANUARY 31,
1999 1998
--------------- ---------------
Reserve for self insurance................................. $ 2,857,000 $ 3,219,000
Accrued wages, bonuses and benefits........................ 7,272,000 5,972,000
Combination costs.......................................... -- 1,645,000
Gift certificate and credit memo liability................. 3,464,000 2,911,000
Sales tax payable.......................................... 1,651,000 1,204,000
Other...................................................... 5,186,000 5,619,000
--------------- ---------------
$ 20,430,000 $ 20,570,000
--------------- ---------------
--------------- ---------------
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 accrual for combination costs consisted of management's estimates
for the costs of closing and/or combining certain Contempo Casuals facilities
and operations into Wet Seal's, as well as the costs of integrating management
information and security systems. As of January 31, 1998, the Company had
substantially completed the combination of facilities and the acquisition of
necessary management information systems to fully integrate Contempo Casuals'
operations into Wet Seal's. The accrued combination costs remaining at January
31, 1998 totaling $1,645,000 were fully utilized with the integration of the
Company's in-store security systems in fiscal 1998.
NOTE 13: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
The Company maintains a defined benefit supplemental employee retirement
plan (the "SERP") for certain of its key employees and a director. The SERP
provides for preretirement death benefits through life insurance and for
retirement benefits. The Company funded the SERP in 1998 and 1997 through
contributions to a trust fund known as a "Rabbi" trust. Assets held in the Rabbi
trust ($861,000 and $261,000 at January 30, 1999 and January 31, 1998,
respectively) are subject to claims of the Company's creditors but otherwise
must be used only for purposes of providing benefits under the SERP.
In accordance with SFAS 132, the following presents a reconciliation of the
SERP's funded status:
CHANGE IN BENEFIT OBLIGATION
JANUARY 30, JANUARY 31,
1999 1998
--------------- ---------------
Benefit obligation at beginning of year.................... $ 2,730,000 $ 2,295,000
Service cost............................................. 293,000 274,000
Interest cost............................................ 191,000 161,000
Actuarial loss........................................... 141,000 --
Benefits paid............................................ -- --
--------------- ---------------
Benefit obligation at end of year.......................... $ 3,355,000 $ 2,730,000
--------------- ---------------
--------------- ---------------
35
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 13: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (CONTINUED)
CHANGE IN PLAN ASSETS
JANUARY 30, JANUARY 31,
1999 1998
--------------- ---------------
Fair value of plan assets at beginning of year............. $ -- $ --
Actual return on assets.................................. -- --
Employer contribution.................................... -- --
Benefits paid............................................ -- --
--------------- ---------------
Fair value of plan assets at end of year................... $ -- $ --
--------------- ---------------
--------------- ---------------
Funded status.............................................. $ (3,355,000) $ (2,730,000)
Unrecognized transition (asset)/obligation............... -- --
Unrecognized prior service cost.......................... 1,968,000 2,132,000
Unrecognized net loss/(gain)............................. 139,000 (2,000)
--------------- ---------------
Net amount recognized...................................... $ (1,248,000) $ (600,000)
--------------- ---------------
--------------- ---------------
Weighted average assumptions:
Discount rate............................................ 6.75% 7.00%
Expected return on plan assets........................... 0.00% 0.00%
Rate of compensation increase............................ n/a n/a
AMOUNTS RECOGNIZED IN BALANCE SHEET
JANUARY 30, JANUARY 31,
1999 1998
--------------- ---------------
Prepaid pension cost....................................... $ -- $ --
Accrued benefit liability................................ (3,355,000) (2,730,000)
Intangible asset (unrecognized prior service cost)....... 1,968,000 2,130,000
Accumulated other comprehensive income................... 139,000 --
--------------- ---------------
Net amount recognized...................................... $ (1,248,000) $ (600,000)
--------------- ---------------
--------------- ---------------
COMPONENTS OF NET PERIODIC PENSION COST
JANUARY 30, JANUARY 31,
1999 1998
--------------- ---------------
Service cost--benefits earned during the period............ $ 293,000 $ 274,000
Interest cost on projected benefit obligation............ 191,000 160,000
Expected return on plan assets........................... -- --
Amortization of unrecognized prior service cost.......... 164,000 164,000
--------------- ---------------
Net periodic pension cost.................................. $ 648,000 $ 598,000
--------------- ---------------
--------------- ---------------
36
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 14: NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and
diluted net income per share is as follows:
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
------------- ------------- -------------
Net income: Basic and diluted....................................... $ 25,954,000 $ 21,250,000 $ 15,252,000
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares:
Basic............................................................... 13,085,587 13,552,502 13,219,284
Effect of dilutive securities--stock options........................ 495,646 347,375 240,526
------------- ------------- -------------
Diluted............................................................. 13,581,233 13,899,877 13,459,810
------------- ------------- -------------
------------- ------------- -------------
Net income per share:
Basic............................................................... $ 1.98 $ 1.57 $ 1.15
Effect of dilutive securities--stock options........................ 0.07 0.04 0.02
------------- ------------- -------------
Diluted............................................................. $ 1.91 $ 1.53 $ 1.13
------------- ------------- -------------
------------- ------------- -------------
NOTE 15: SHAREHOLDER RIGHTS PLAN
On August 19, 1997, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan") designed to protect company stockholders in the
event of takeover action that would deny them the full value of their
investment. Terms of the Rights Plan provide for a dividend distribution of one
right for each share of common stock to holders of record at the close of
business on August 29, 1997. The rights become exercisable only in the event,
with certain exceptions, an acquiring party accumulates 12 percent or more of
the Company's voting stock, or if a party announces an offer to acquire 20
percent or more of the Company's voting stock. Unless earlier redeemed, the
rights will expire on August 29, 2007. Each right will entitle the holder to buy
one one-hundredth of a share of a new series of preferred stock at a price of
$73.00, subject to adjustment upon the occurrence of certain events. The Company
will be entitled to redeem the rights at $0.01 per right at any time until the
tenth day following the acquisition of a 12 percent position in its voting
stock.
NOTE 16: UNAUDITED QUARTERLY FINANCIAL DATA
FISCAL YEAR ENDED JANUARY 30, 1999
NET INCOME NET INCOME
PER SHARE, PER SHARE,
QUARTER SALES GROSS MARGIN NET INCOME BASIC DILUTED
- --------------------------------------- -------------- -------------- ------------- ------------- -------------
First Quarter.......................... $ 104,845,000 $ 29,973,000 $ 3,488,000 $ 0.26 $ 0.25
Second Quarter......................... 113,036,000 32,888,000 4,879,000 0.36 0.35
Third Quarter.......................... 121,622,000 36,501,000 5,418,000 0.42 0.41
Fourth Quarter......................... 145,886,000 49,500,000 12,169,000 0.99 0.95
-------------- -------------- -------------
For the Year........................... $ 485,389,000 $ 148,862,000 $ 25,954,000 $ 1.98 $ 1.91
-------------- -------------- -------------
-------------- -------------- -------------
37
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997
NOTE 16: UNAUDITED QUARTERLY FINANCIAL DATA (CONTINUED)
FISCAL YEAR ENDED JANUARY 31, 1998
NET INCOME NET INCOME
PER SHARE, PER SHARE,
QUARTER SALES GROSS MARGIN NET INCOME BASIC DILUTED
- --------------------------------------- -------------- -------------- ------------- ------------- -------------
First Quarter.......................... $ 95,563,000 $ 25,441,000 $ 3,515,000 $ 0.26 $ 0.25
Second Quarter......................... 94,254,000 25,337,000 3,417,000 0.25 0.25
Third Quarter.......................... 104,435,000 30,432,000 5,479,000 0.40 0.39
Fourth Quarter......................... 118,211,000 38,609,000 8,839,000 0.65 0.63
-------------- -------------- -------------
For the year........................... $ 412,463,000 $ 119,819,000 $ 21,250,000 $ 1.57 $ 1.53
-------------- -------------- -------------
-------------- -------------- -------------
Net Income per share is computed independently for each of the quarters
presented and therefore may not sum to the totals for the year.
NOTE 17: SUBSEQUENT EVENT
On February 1, 1999, the Company acquired the leases and furniture and
fixtures for 80 stores from Britches of Georgetowne, Inc. The Company plans to
convert the locations to Arden B., Wet Seal, Contempo Casuals and Limbo Lounge
stores by the end of the first quarter of fiscal 1999, with the majority of the
locations planned as Arden B.
38
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.
*******4.3 -- Shareholder Rights Plan.
********10.1 -- Lease between the Company and Foothill-Parkstone I, LLC, dated November 21, 1996.
*10.3 -- Services Agreement, dated December 30, 1988, and First amendment to Services Agreement, dated
June 1, 1990, between the Company and Kathy Bronstein.
**10.3.1 -- Second amendment to Services Agreement between the Company and Kathy Bronstein, dated March 23,
1992.
***10.3.2 -- Services Agreement between the Company and Edmond Thomas, dated June 22, 1992.
****10.3.3 -- Third amendment to Services Agreement between the Company and Kathy Bronstein, dated November
17, 1994.
****10.3.4 -- First amendment to Services Agreement between the Company and Edmond Thomas, dated November 17,
1994.
****10.3.5 -- Fourth amendment to Services Agreement between the Company and Kathy Bronstein, dated January
13, 1995.
****10.3.6 -- Second amendment to Services Agreement between the Company and Edmond Thomas, dated January 13,
1995.
*****10.3.7 -- Fifth amendment to Services Agreement between the Company and Kathy Bronstein, dated January
30, 1995.
*****10.3.8 -- Sixth amendment to Services Agreement between the Company and Kathy Bronstein, dated February
2, 1996.
*****10.3.9 -- Third amendment to Services Agreement between the Company and Edmond Thomas, dated February 2,
1996.
10.3.9.1 -- Fourth amendment to Services Agreement between the Company and Edmond Thomas, dated January 1,
1995.
*10.4 -- 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.
10.5.5 -- Amendment No. 1 to Business Loan Agreement between the Company and Bank of America, containing
Term Loan and Revolving Line of Credit, dated May 7, 1998.
10.5.6 -- Amendment No. 2 to Business Loan Agreement between the Company and Bank of America, containing
Term Loan and Revolving Line of Credit, dated June 12, 1998.
10.5.7 -- Amendment No. 3 to Business Loan Agreement between the Company and Bank of America, containing
Term Loan and Revolving Line of Credit, dated November 6, 1998.
10.5.8 -- Amendment No. 4 to Business Loan Agreement between the Company and Bank of America, containing
Term Loan and Revolving Line of Credit, dated March 31, 1999.
******10.6.1 -- Key Man life insurance policy for Edmond Thomas.
10.6.2 -- Key Man life insurance policy for Kathy Bronstein.
***10.7 -- 1994 Long-Term Incentive Plan.
*10.8 -- Stock Purchase and Stock Transfer Restriction Agreement among Kathy Bronstein, Suzy Shier, Inc.
and the Company dated December 30, 1988.
****10.9 -- Indemnification Agreement between the Company and various Executives and Directors, dated
January 3, 1995, and schedule listing all parties thereto.
******10.10 -- 1996 Long-Term Incentive Plan.
********10.11 -- Supplemental Employee Retirement Plan.
*****21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Deloitte & Touche LLP, independent auditors.
27.1 -- Financial Data Schedule--Fiscal year end 1998
- ------------------------------
* Denotes exhibits incorporated by reference to the Company's Registration Statement File No. 33-34895.
** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended January 30, 1993.
*** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended January 29, 1994.
**** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended January 28, 1995.
***** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended February 3, 1996.
****** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended February 1, 1997.
******* Denotes exhibits incorporated by reference to the Company's Current Report on Form 8-K filed on August
25, 1997.
******** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1998.