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QuickLinks-- Click here to rapidly navigate through this documentUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549------------------------ FORMForm 10-K
(MARK ONE) /X/(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended February 2, 2002
OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER
o 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
(Exact name of registrant as specified in its charter)
DELAWARE 33-0415940 (State
(State of Incorporation)(I.R.S.33-0415940
(I.R.S. Employer Identification No.)26972 BURBANK, FOOTHILL RANCH,Burbank, Foothill Ranch, CA92610 (Address
(Address of principal executive offices)(Zip92610
(Zip Code)(949) 583-9029
(Registrant's
(Registrant's telephone number, including area code)SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:Securities registered pursuant to Section 12(b) of the Act: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:Securities registered pursuant to Section 12(g) of the Act:
CLASSClass A COMMON STOCK PREFERRED STOCK PURCHASE RIGHTS (TitleCommon Stock
(Title of Class)(TitlePreferred Stock Purchase Rights
(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_ý No___oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.
/ /Yes ý No oThe aggregate market value of voting stock held by non-affiliates as of March
15, 200114, 2002 was$309,588,267.approximately $497,987,000 based on the closing sale price of $33.70 per share as reported on the Nasdaq National Market on such date.The number of shares outstanding of the registrant's Class A Common Stock and Class B Common Stock, par value $.10 per share, at March
15, 200114, 2002 was11,496,94616,849,176 and2,912,665,3,202,833, respectively. There were no shares of Preferred Stock, par value $.01 per share, outstanding at March15, 2001.14, 2002.DOCUMENTS INCORPORATED BY REFERENCE:
PART III incorporates information by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders' to be filed with the Commission within 120 days of February
3, 2001. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------2, 2002. Item 1.
BUSINESS GENERAL The Wet Seal, Inc.,BusinessGeneral
Founded in 1962 as a Delaware corporation,
("Wet Seal" or the "Company"), founded in 1962, iswe are anationwidenational specialty retailer of fashionable and contemporary apparel and accessory items designed forconsumersfemale customers with a young, active lifestyle. As of March15, 2001, the Company14, 2002, we operated552572 retail stores in4244 states, Puerto Rico and Washington D.C. under the names Wet Seal®, Contempo Casuals®, Arden B.™ andPuerto Rico, including 101 in California, 53 in Florida, and 38 in Texas.Zutopia®. Of the552572 stores,242 operate under the "CONTEMPO CASUALS" trademark, 225 operate under the "WET SEAL" trademark, and405 were Wet Seal locations, 51 were Contempo Casuals locations, 85operate under the "ARDEN B." trademark.were Arden B.was introduced as a retail concept bylocations and 31 were Zutopia locations. Both theCompany in November 1998, and offers a collection of fashion separates and accessories for all parts of the fashionable, sophisticated, contemporary customer's lifestyle. Limbo Lounge was discontinued as a retail concept by the Company at the end of fiscal 2000. The Company introduced a catalog in fiscal 1998 and continued it through fiscal 1999. In fiscal 2000, the Company did not mail any catalogs. The Company introduced an e-commerce web-site, which includes on-line shopping in August 1999. On March 25, 2001, the Company acquired the leases, merchandise inventory and furniture and fixtures for 18 Zutopia stores from Gymboree, Inc. Zutopia is a "tween" retail concept which caters to the female customer ages 5 to 12. The Company intends to continue to operate the acquired store locations under the Zutopia name. PRODUCTS AND MERCHANDISING BothWet Seal and Contempo Casuals stores are merchandised similarly and target the same fashion-conscious juniorcustomer. The Company merchandises both stores similarly. In duplicate locations (stores located in malls where the Company operates bothcustomer by providing aWet Sealbalance of moderately priced fashionable brand name anda Contempo Casuals store), the Company differentiates the locations by displaying the merchandise differently in each of the stores, by differentiating the marketingcompany-developed apparel andwill occasionally differentiate some of the merchandise mix. Inaccessories. During fiscal 2001,the company plans to convert the majoritywe converted 152 of the Contempo Casualsstoreslocations to the Wet Seal name in order to build a stronger brand presence for the WetSeal brand. The Company provides a balance of moderately priced fashionable brand name and Company-developed apparel and accessoriesSeal. We believe thatappeal to consumers with young, active lifestyles. The Company believes that Company-developedour company-developed apparel differentiatesitus fromitsour competitors.In the fourth quarter of fiscal 1998,
the Companywe opened the first Arden B.store.location. Arden B.catersstores cater to the fashionable, sophisticated, and contemporary customer. Arden B. stores offer a collection of fashion separates and accessories for allpartsfacets ofourthe customer'slifestyle;lifestyle: everyday, wear-to-work, special occasion and casual, all under the "Arden B." brand name.The Company currently operates 85 Arden B. stores nationwide.In the
fourththird quarter of fiscal1996,1999, we launched WetSeal.com, an online store, making Wet Seal merchandise available for direct retail sales to customers over theCompany introducedInternet. The online store was designed as an extension of the in-store experience, and offers astore concept called Limbo Lounge. The Company closedwide selection of our merchandise.In the
Limbo Lounge division at the endfirst quarter of fiscal20002001, we acquired the Zutopia brand name andis in18 retail stores. Zutopia caters to theprocess"tween" customer, those between the ages ofconverting5 to 12. The Zutopia concept complements themajority of the 26 store locations toWet Sealor Contempo Casuals stores. With respect to each of the retail concepts, the Company frequently updates its product offerings to provide a regular flow of fresh, newconcept, by introducing fun and fashionablemerchandise. 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 apparelfemale clothing and accessories2whichat a prime age, creating a natural progression to thecustomer might buyWet Seal concept as the "tween" becomes a teenager.In the fall of fiscal 2002, we are planning to launch the Wet Seal Catalog and a proprietary credit card in an
ensemble. Store displays are designedeffort toenable customersfurther build the Wet Seal brand and enhance our relationship with our customers. We also believe these actions will increase the opportunity for sales tocreate 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 storesnew andenables the customer to locate combinations of blouses, skirts, pantsexisting customers.Design, Buying and
accessories in a manner which enhances the Company's opportunity to make multiple unit sales. From time to time, certain key items are merchandised together on tables or wall shelf sections in order to emphasize those particular items. The general layout of merchandise in the stores is planned by the Company's management. The Company makes use of in-store image posters and signage to help focus customers on particular fashion themes. The Company frequently changes the visual display of the merchandise in its stores to reflect the changing tastes of the Company's target customer. DESIGN, BUYING AND PRODUCT DEVELOPMENT The Company'sProduct DevelopmentOur experienced design and buying teams are responsible for identifying evolving fashion trends, and then developing themes to guide
the Company'sour merchandising strategy. Each retail concept has a separate buying team. The merchandising team for each retail concept developsafashionthemethemes andstrategystrategies through the references of fashion services and publications, shopping the European market, shopping the appropriate domestic vendor base, and through customerresponseresponses to current trends in each division. After selectingafashionthemethemes to promote, the design and buying teams work closely with vendors to modify colors, materials and designs and createan imageimages consistent with thethemethemes forthe Company'sour product offerings. Additionally,the Company haswe have increaseditsour focus on developing exclusive designs and brands to reinforce the fashion statements ofitsour merchandise offerings, as well as to increase the perception of Wet Seal, Contempo Casuals,andArden B., and Zutopia as destination stores for the customer.SOURCING AND VENDOR RELATIONSHIPS The Company purchases itsSourcing and Vendor Relationships
We purchase our merchandise from
numerousdomesticvendorsanda numberforeign vendors. Merchandise relating to approximately 18% of our retail receipts is imported from foreign vendors. Although in fiscal20002001 no single vendoraccounted forprovided more than 10% ofthe Company'sour merchandise, and only one vendoraccounted forprovided more than 5%, management believesthe Company iswe are the largest customer of many ofitsour smaller vendors.ManagementOur2
management believes
the Company'sthat our importance to these vendors allowsitus to provide significant input into their design, manufacturing and distribution processes, and has enabledthe Companyus to negotiate favorable terms with such vendors. Quality control is monitored carefully at the distribution points ofitsour largest vendors and manufacturers, and all merchandise is inspected upon arrival atthe Company'sour Foothill Ranch, California distribution center.The Company doesWe do not
havemaintain any long-term or exclusivecontractscommitments or arrangements to purchase merchandise from any single supplier. We believe we have a good relationship withany particular manufacturer or supplier for either brand name or Company developed apparel. ALLOCATION AND DISTRIBUTION The Company'sour suppliers and that, as the number of our stores increases, subject to the discussion above, there will continue to be adequate sources to produce a sufficient supply of quality goods in a timely manner and on satisfactory terms.Allocation and Distribution
Our merchandising effort primarily focuses on maintaining a regular flow of fresh, fashionable merchandise into
itsour stores. Successful execution depends in large part onthe Company'sour integrated planning, allocation and distribution functions. By working closely with District and Regional Directors and merchandise buyers,theour team of planners and allocators manage inventory levels and coordinate the allocation of merchandise to each ofthe Company'sour stores based on sales volume, climate and other factors that may influence an individualstores'store's product mix.All merchandise for retail stores is received from vendors at
the Company'sour Foothill Ranch, California distribution facility, where items are inspected for quality and fit and prepared for shipping tothe Company'sour stores. Merchandise for the e-commerce web-site is distributed through a third party fulfillment house.The Company shipsWe ship all ofitsour merchandise to our stores by common carrier. Consistent withthe Company'sour goal of maintaining the freshness ofitsour product offerings,the Company shipswe ship new merchandise to each storedaily. 3In keeping with the Company's policy of introducing new merchandise,daily and markdowns are taken regularly to effectathe rapid sale of slow-moving inventory. Merchandisewhichthat remains unsold is periodically shipped tothe Company'sour clearance stores where further markdowns are taken as needed in order to move the merchandise.SalesMarketing, Advertising and Promotion
We believe that our four brands are among our most important assets. Our ability to successfully increase brand awareness is dependent upon our ability to address the changing needs and priorities of
merchandise at these stores aggregated $6.8 million foreach brand's target customers. We continue to invest in the development of our brands through customer research, national print advertising, in-store marketing and the maintenance of an online (internet) presence.We believe we can further enhance brand awareness by communicating on a regular basis directly with our customer base. To achieve this, we are currently planning to launch a Wet Seal Catalog this fall and introduce a proprietary credit card in conjunction with a major financial institution. During fiscal
year ended February 3, 2001. These stores operate under2001, 2000 and 1999, we spent 1.0%, 0.5% and 1.0%, respectively, of our sales on marketing. As a result of the continued investment in national print advertising, the new Wet Seal catalog and the proprietary credit card implementation, we expect our marketing costs to increase to approximately 1.2% in fiscal 2002.We introduced a frequent shopper card in our Wet Seal, Contempo Casuals and
Arden B. names. MARKETING, ADVERTISING AND PROMOTION The Company believes that the highly visible locations of itsZutopia stores,within regional shopping malls, broad selection of fashionable merchandise and dynamic, entertaining in-store environments have contributed significantlyin order tothe 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 developeddevelop a marketing database that helpstotrack customers. The cards, which are sold for $20 each for Wet Seal and Contempo Casuals, and $25 each for Zutopia, entitle customers to astandard10% discount on purchases made within a one-year period. As part of these programs, sales representativescalltelephone selected cardholders personally to notifycustomersthem of special in-store promotions, such as preferred customer sales during which cardholders receive additional incentives.ManagementOur management believes these promotions foster customer loyalty and encourage frequent visits and multiple item purchases.The CompanyWe alsosponsorssponsor special events that focus on the interests and active lifestyles ofitsour target customers.STORE OPERATIONS The Company's Wet Seal3
Information and
Contempo Casuals stores are divided into seven geographic regions. Each region is managed byControl SystemsIn the fall of fiscal 2000, we implemented a
Regional Director who reportsnew comprehensive merchandising information system tothe Company's Senior Vice President of Store Operations. Each region is further divided into districts consisting of approximately 10 stores that are managed by a District Director. The Arden B. stores are divided into seven geographic districts consisting of approximately 12 stores each. Each district is managed by a District Director who reports to the Arden B. Director of Store Operations, who in turn reports to the Company's Senior Vice President of Store Operations. The Company delegates substantial authority to regional, district and store-level employees, while taking advantage of economies of scale by centralizing functions such as finance, data processing, merchandise purchasing and allocation, human resources and real estate at the corporate level. The Company encourages communication between and among its Regional and District Directors and senior management. Each of the Company's District Directors provides weekly reports to senior management concerning overall business conditions and specific aspects of their stores' operations. These reports are used to identify competitive trends and store level concerns in a timely manner. Store performance is also evaluated by senior management through the use of a "secret shopper" service that shops each store at least once a month. Stores are typically staffed with one full-time manager, one or two full-time co-managers, one full-time customer service leader and 12 customer service representatives and cashiers, most of who are part-time. During peak seasons, stores may increase staffing levels to accommodate the additional in-store traffic. The Company seeks to hire store-level employees who are energetic, fashionable and friendly and who can identify with its targeted customers. The Company's policy is to promote store managers from within while also hiring from outside. Highly regarded store managers are often given opportunities to move to higher-volume stores. The Company sets weekly sales goalsprovide improved systems support foreach store and 4devises incentives to reward stores that meet or exceed their sales targets. In addition, from time to time the Company runs sales contests to encourage its store level employees to maximize sales volume. Most of the Company's stores are, and the Company expects that most of its new stores will be, located in regional, high-traffic shopping malls which contain at least one "anchor" department store. The Company places great emphasis on its location within a mall and attempts to locate stores in the higher-traffic areas of a mall and to obtain the greatest amount of frontage possible. The Company's average store size is approximately 3,970 square feet. Store hours are determined by the mall in which the store is located. INFORMATION AND CONTROL SYSTEMS In order to accommodate future growth the Company converted and upgraded to a state of the art client server basedour merchandisingsystem in fiscal 2000. Prior to the purchase of thefunctions. This new system serves as our central source of information regarding merchandise items, inventory management, purchasing, replenishment, receiving andhardware the Company obtained assurance from the vendors that the products purchased are Year 2000 compliant.distribution.All of
the Company'sour 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 andthe Company'sour corporate office.The Company plansWe plan to convert to a new point-of-sale software program in fiscal20012002, in order to enhance customer service capabilities at the store level.EXPANSION STRATEGY The Company currently plansStores and Expansion Strategy
We also make investments to
open approximately 30enhance our customers' experience through the opening of new storesin fiscal 2001andplans to continue to grow inthefollowing 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. 5renovation of existing stores. The following table sets forth the number of our stores
in eachby state or territory as of March 14, 2002:
State # of Stores State # of Stores State # of Stores Alabama 1 Kentucky 6 Ohio 21 Arizona 11 Louisiana 4 Oklahoma 5 Arkansas 1 Maine 2 Oregon 1 California 90 Maryland 12 Pennsylvania 24 Colorado 8 Massachusetts 19 Rhode Island 2 Connecticut 10 Michigan 15 South Carolina 5 Delaware 2 Minnesota 13 Tennessee 6 Florida 54 Missouri 4 Texas 44 Georgia 18 Nebraska 3 Utah 7 Hawaii 7 Nevada 7 Virginia 18 Idaho 1 New Hampshire 3 Washington 8 Illinois 36 New Jersey 29 West Virginia 1 Indiana 9 New Mexico 3 Wisconsin 9 Iowa 3 New York 31 Washington D.C. 2 Kansas 3 North Carolina 10 Puerto Rico 3 North Dakota 1 During fiscal 2002, we expect to open approximately 50 new Wet Seal stores, between 15
2001:
STATE # OF STORES - ----- -----------Alabama.............. 1 Arizona.............. 9 Arkansas............. 1 California........... 101 Colorado............. 8 Connecticut.......... 13 Delaware............. 2 Florida.............. 53 Georgia.............. 15 Hawaii............... 7 Illinois............. 34 Indiana.............. 9 Iowa................. 3 Kansas............... 3 Kentucky............. 5
STATE # OF STORES - ----- -----------Louisiana............ 4 Maine................ 2 Maryland............. 13 Massachusetts........ 20 Michigan............. 15 Minnesota............ 11 Missouri............. 3 Nebraska............. 2 Nevada............... 6 New Hampshire........ 3 New Jersey........... 32 New Mexico........... 3 New York............. 33 North Carolina....... 6 Ohio................. 16
STATE # OF STORES - ----- -----------Oklahoma............. 5 Oregon............... 1 Pennsylvania......... 21 Rhode Island......... 2 South Carolina....... 5 Tennessee............ 5 Texas................ 38 Utah................. 6 Virginia............. 17 Washington........... 7 West Virginia........ 1 Wisconsin............ 6 Washington D.C....... 2 Puerto Rico.......... 3Management does notand 20 Arden B. stores and 10 to 15 Zutopia stores. We believethere are significantthat the new Wet Seal locations will average approximately 3,800 square feet, the new Arden B. stores will average approximately 2,800 square feet and the new Zutopia stores will average approximately 2,600 square feet. We plan to close approximately 27 stores during fiscal 2002.During fiscal 2002, we also plan to renovate approximately 20 Wet Seal locations with completly new store frontage, flooring, wall and light fixtures and video displays. The resulting image of these renovations will mirror a new store. Our strategy for geographic
constraints on the locations of future stores. The Company's strategyexpansion is toenterestablish a presence in a particular geographic region with a base of two or threesolidwell-performing stores. Once we have established two or three well-performing stores,and thenwe may continue expansion insuchthat geographicregions while simultaneously entering new markets in a similar manner, thereby increasing the recognition of the Company's name.region. When deciding whether to open a new store,the Companywe typicallytargetstarget regional malls as well as prime street locations in select markets. In makingitsour selection,the Company evaluates,we evaluate, 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 sizethe Company intendswe intend to consider isbetween 3,000 and 4,5004
approximately 3,300 square
feet depending on the chain selected for the particular location and concept.feet. However, in makingitsour decision, management reviews all leases in order to match closely the store size to the sales potential of the store.The Company'sOur ability to expand in the future will depend, in part, on general business conditions, the demand for
the Company'sour merchandise, the ability to find suitable malls or other locations with acceptable sites on satisfactory terms, andthe continuance ofcontinued satisfactory cash flows from existing operations.TRADEMARKS The Company'sOur management does not believe there are significant geographic constraints on the locations of future stores. We believe that there are approximately 600 to 800 potential Wet Seal locations, between 150 and 200 potential Arden B. locations and up to 300 potential Zutopia locations throughout the nation.We may, in limited instances and to the extent we deem advisable, seek to acquire additional businesses that complement or enhance our operations. We currently have no commitments or understandings with respect to any business opportunities of this type.
Seasonal
Our 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 a large percentage of sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of approximately 30% of our annual sales, after adjusting for sales increases related to new stores. Our profitability depends, to a significant degree, on the sales generated during these peak periods. Any decrease in sales or margins during these periods, whether as a result of economic conditions, poor weather or other factors beyond our control, could have a material adverse effect on our company.
Trademarks
Our primary trademarks and service marks are WET
SEAL,SEAL®, CONTEMPOCASUALS,CASUALS®, andLIMBO LOUNGE,ZUTOPIA®, which are registered in the U.S. Trademark Office.The Company hasWe have registrations pendingregistrationsin a number of classes for the Arden B. trademark,ARDEN B.,whichare beingwere opposed by Agnes Trouble.Agnes Trouble contends that its trademarkThe litigation, which gave rise to the opposition, was settled on March 20, 2002 andstyle agnes b. are infringed by Arden B. whichwill allow theCompany denies. Trial is likely to occur in calendar year 2001. If the Company were to lose at trial and is ordered to change the Arden B. name or logo it could have a negative impact on the businessregistration of the Arden B.division. The Companytrademark in a mutually acceptable form to proceed unopposed. We alsousesuse andhashave registered, orhashave pending applications for, a number of otherUnited States marks,U.S. trademarks, including A.AUBREY,AUBREY™, ACCESSORIES FORLIFE, ACCOMPLICE,LIFE®, ACCOMPLICE®, BLUEASPHALT, CEMENT,ASPHALT®, CEMENT®, CLUBCONTEMPO,CONTEMPO™, EVOLUTION NOTREVOLUTION,REVOLUTION®, FORMULAX,X®, MEOWGENES, UNCIVILIZED,GENES®, SEAL™, SEAL GLAMOUR™, SEAL T.V.™, SEAL MAGAZINE™, UNCIVILIZED®, URBANLIFELIFE®, URBAN VIBE®, andURBAN VIBE.a particular flower design. In general, the registrations for these trademarks and service marks are renewable indefinitely, as long asthe Company continueswe continue to use the marks as required by applicable trademark law.The Company isWe are the owner of an allowed and currently pending service mark application for the mark6SEAL PUPS. The Company isWe are not aware of any adverse claims or infringement actions relating toitsour trademarks or service marks, other than those noted above.COMPETITIONCompetition
The 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 competesWe compete with specialty apparel retailers, department stores and certain other apparel retailers, including Charlotte Russe, Gadzooks, Pacific Sunwear, Forever 21, Express, bebe, Rampage andRampage.Limited Too. Many of our competitors are large national chains, which have substantially greater financial, marketing and other resources thanthe Company.we do. Whilethe Company believes it competeswe believe we compete effectively for favorable site locations and lease terms, competition for prime locations withina mallmalls, in particular, and within other locations isintense. EMPLOYEESintense, and we cannot assure you that we will be able to obtain new locations on terms favorable to us, if at all.5
Employees
As of February
3, 2001, the Company2, 2002, we had8,9017,227 employees, consisting of2,3212,352 full-time employees and6,5804,875 part-time employees. Full-time personnel consisted of1,2131,274 salaried and1,1081,078 hourly employees. All part-time personnel are hourly employees. Of the total employees,8,5416,908 were sales personnel and360319 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'sour employees are non-union, and, in management's opinion, are paid competitively with current standards in the industry.The Company considers itsWe believe that our relationship withitsour employees is good.Statement Regarding Forward Looking Disclosure and Risk Factors
Certain sections of this Annual Report on Form 10-K, including "Item 1. Business" and "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations," may contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events.
Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as "believes," "plans," "anticipates," "estimates," "expects" or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be
satisfactory. ITEMprovided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.Actual events and results may differ materially from those expressed in any forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results, and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in Exhibit 99.1 attached to this report and elsewhere in this report.We strongly urge you to review and consider the risk factors set forth in Exhibit 99.1.
Item 2.PROPERTIES The Company'sPropertiesOur corporate headquarters
isare located at 26972 Burbank, Foothill Ranch, California,consisting ofand has 283,200 square feet of leased office and distribution facility space,(includingincluding 74,500 square feet of merchandise handling and storage mezzanine space in the distribution facility and 20,500 square feet of second floor officespace).space. This lease expires on December 4, 2007.The Company'sOur former distribution facility was located in Los Angeles, California and was subleased beginning in fiscal 1998 for the remainder of the lease term. The Los Angeles lease was acquired along withtheour acquisition of Contempo Casuals and expires on July 31, 2002.The Company leasesWe lease all of
itsour stores. Lease terms forthe Company'sour stores are typically 10 years in length and generally do not contain renewal options. The leases generally provide for a fixed minimum rental andaadditional rental based on a percent of sales once a minimum sales level has been reached.AsWhen a lease expires,the Companywe generallyrenews suchrenew that lease at current market terms. However, each renewal is based upon an analysis of the individual store's profitability and sales potential.7At the end of fiscal 2001, we had 2,212,146 square feet of leased space, not including our corporate headquarters. 6
The following table sets forth information with respect to store openings and closings since fiscal
1996:1997:
Fiscal Years 2001 2000 1999 1998 1997 Stores open at beginning of year 552 548 454 389 364 Stores acquired during period (1) 18 0 78 19 0 Stores opened during period 51 36 31 67 34 Stores closed during period 50 32 15 21 9 Stores open at end of period 571 552 548 454 389
FISCAL YEARS ---------------------------------------------------- 2000(1) 2001: We acquired 18 Zutopia stores on March 25, 2001 from Gymboree, Inc. 1999: We acquired 78 stores on February 1, 1999 1998 1997 1996 -------- -------- -------- -------- --------Stores open at beginningfrom Britches ofyear............................ 548 454 389 364 364 StoresGeorgetowne, Inc.1998: We acquired during period(1)............................ 0 78190 0 Stores opened during period................................. 36 31 67 34 10 Stores closed during period................................. 32 15 21 9 10 --- --- --- --- --- Stores open at end of period................................ 552 548 454 389 364 === === === === ===store locations from Mothers Work, Inc. on December 1, 1998.- ------------------------ (1) The Company acquired 19 stores on December 1, 1998 from Mothers Work, Inc. and 78 stores on February 1, 1999 from Britches of Georgetowne, Inc. ITEM
Item 3.LEGAL PROCEEDINGS The Company isLegal ProceedingsWe were a defendant in a lawsuit entitled Agnes Trouble
vsversus The Wet Seal, Inc.pendingin the United States District Court for the Southern District of NewYork. The plaintiff seeks money damages in an unspecified amount and an injunction againstYork contending theCompany's use of the trademark Arden B. Plaintiff contends that itstrademark and style, agnes b.are, were infringed by Arden B.whichThe litigation was settled on March 20, 2002. The settlement cost and substantially all theCompany denies. Trial is likely to occur in calendar year 2001. If the Companycosts of defense wereto lose at trial and is orderedcovered by insurance. We agreed to change theArden B. name or logo it could have a negative impact on the businessstyling of the Arden B.division andlogo to a mutually acceptable form. We do not believe that changing theCompany would incur costs to comply with the orderslogo will have a material adverse effect on our results ofthe Court.operations.In addition, from time to time,
the Company iswe are involved in litigation relating to claims arising out ofitsour operations in the normal course of business.ManagementOur management believes that, in the event of a settlement or an adverse judgment of any of the pending litigations,the Company iswe are adequately covered by insurance. As of March15, 2001, the Company was14, 2002, we were not engaged in any legal proceedingswhichthat are expected, individually or in the aggregate, to have a material adverse effect onthe Company. ITEMus.
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSSubmission of Matters to a Vote of Security HoldersNo matters were submitted to a vote of security holders through solicitations of proxies or otherwise during the fourth quarter of the fiscal year covered by this
report to a votereport.Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
We have two classes of
security holders through solicitations of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company'scommon stock: Class A and Class B. Our Class A Common Stock("Common Stock")is listed on The NASDAQ Stock Market("NASDAQ")under the symbol "WTSLA." As of March15, 2001,14, 2002, there were290 shareholders287 stockholders of record of theCompany'sClass A Common Stock. Additionally, the number of beneficial owners ofthe Company'sour Class A Common Stock was estimated to be in excess of4,500.5,000. The closing price oftheour Class A Common Stock on March15, 200114, 2002 was$27 11/16. 8$33.70. No established public trading market exists for our Class B Common Stock. As of March 14, 2002, there were three stockholders of record of our Class B Common Stock. The following table reflects the high and low sale prices of
the Company'sour Common Stock as reported byNasdaqNASDAQ for the last two fiscal years.
FISCAL 2000 FISCAL 1999 -------------------------- ------------------------ HIGH LOW HIGH LOW ------------ ----------- ---------- -----------First Quarter............................................... $19 15/16 $10 1/8 $44 5/8 $32 1/2 Second Quarter.............................................. 18 3/8 10 3/4 46 3/8 24 Third Quarter............................................... 16 7/8 11 1/16 23 3/8 13 3/16 Fourth Quarter.............................................. 31 7/8 17 1/2 14 3/4 11The Company hasFiscal 2001 and fiscal 2000 sales prices have been adjusted for the three-for-two stock split effective July 24, 2001.
Fiscal 2001 Fiscal 2000 Quarter High Low High Low First Quarter $ 25.00 $ 14.65 $ 13.29 $ 6.75 Second Quarter $ 25.40 $ 12.45 $ 12.25 $ 7.17 Third Quarter $ 21.31 $ 13.00 $ 11.25 $ 7.38 Fourth Quarter $ 27.50 $ 18.55 $ 21.25 $ 11.67 7
We have reinvested earnings in the business and
hashave never paid any cash dividends to holders ofthe Company'sour Common Stock. The declaration and payment of future dividends, which are subject to the terms and covenants contained inthe Company'sour bank line of credit, are at the sole discretion of the Board of Directors and will depend uponthe Company'sour profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.ITEM
Item 6.SELECTED FINANCIAL DATASelected Financial DataThe following table of certain selected data
regarding the Companyshould be read in conjunction with the consolidated financial statements and notes thereto and withthe"Management's Discussion and Analysis of Financial Condition and Results of Operations." The data for the fiscal years ended January 30, 1999 and January 31, 1998, andFebruary 1, 1997the balance sheet data for the fiscal year ended January 29, 2000, are derived fromthe Company'sour consolidated financial statements for such years,thatwhich are not included herein.9FIVE YEAR FINANCIAL SUMMARY
FISCAL YEAR 2000 1999 1998 1997 1996 - ----------- ----------- ----------- ----------- ----------- ----------- FEBRUARY 3, JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, FISCAL YEAR ENDED 2001 (1) 2000 1999 1998 1997 - ----------------- ----------- ----------- ----------- ----------- ----------- (THOUSANDS EXCEPT PER SHARE AND PER SQUARE FOOT AMOUNTS, RATIOS, SHARE DATA AND SQUARE FOOTAGE DATA)Operating Results Sales............................. $ 580,182 $ 524,407 $ 485,389 $ 412,463 $ 374,942 Income before provision for income taxes........................... $ 31,727 $ 23,842 $ 42,202 $ 36,325 $ 26,217 Net income........................ $ 19,512 $ 14,183 $ 25,954 $ 21,250 $ 15,252 Per Share Data Net income, basic................. $ 1.56 $ 1.14 $ 1.98 $ 1.57 $ 1.15 Net income, diluted............... $ 1.54 $ 1.11 $ 1.91 $ 1.53 $ 1.13 Weighted average shares outstanding, basic.............. 12,484,409 12,425,704 13,085,587 13,552,502 13,219,284 Weighted average shares outstanding, diluted............ 12,662,307 12,813,338 13,581,233 13,899,877 13,459,810 Other Financial Information Net income as a percentage of sales........................... 3.4% 2.7% 5.3% 5.2% 4.1% Return on average stockholders' equity.......................... 12.92% 10.97% 22.3% 20.8% 20.5% Cash and marketable securities.... $ 108,200 $ 78,603 $ 91,506 $ 95,873 $ 89,183 Working capital (2)............... $ 44,213 $ 47,707 $ 21,856 $ 66,452 $ 59,791 Ratio of current assets to current liabilities..................... 1.7 1.8 1.3 2.1 2.1 Total assets...................... $ 243,911 $ 213,009 $ 197,490 $ 184,223 $ 154,752 Long-term debt.................... $ $ $ 1,264 $ 1,264 $ 3,264 Total stockholders' equity........ $ 163,793 $ 138,233 $ 120,278 $ 112,994 $ 91,120 Number of stores open at year end............................. 552 548 454 389 364 Number of stores acquired during the year........................ 78 19 Number of stores opened during the year............................ 36 31 67 34 10 Number of stores closed during the year............................ 32 15 21 9 10 Square footage of leased store space at year end............... 2,191,522 2,182,606 1,848,513 1,637,347 1,539,777 Percentage of increase in leased square footage.................. 0.4% 18.1% 12.9% 6.3% 0.6% Average sales per square foot of leased space (3)................ $ 256 $ 247 $ 271 $ 263 $ 244 Average sales per store (3)....... $ 1,020 $ 988 $ 1,132 $ 1,112 $ 1,030 Comparable store sales increase (decrease) (4).................. 3.9% (9.8)% 2.1% 5.8% 8.8%- --------------------------(In thousands, except per share and per square foot amounts, ratios, share data and square footage data)
Fiscal Year 2001 2000 1999 1998 1997 Fiscal Year Ended February 2,
2002February 3,
2001 (1)January 29,
2000January 30,
1999January 31,
1998Operating Results Sales $ 601,895 $ 580,182 $ 524,407 $ 485,389 $ 412,463 Cost of Sales $ 405,187 $ 419,310 $ 380,012 $ 336,527 $ 292,644 Gross margin $ 196,708 $ 160,872 $ 144,395 $ 148,862 $ 119,819 Selling, general and administrative expenses $ 151,815 $ 134,002 $ 124,712 $ 110,554 $ 86,999 Operating income $ 44,893 $ 26,870 $ 19,683 $ 38,308 $ 32,820 Income before provision for income taxes $ 50,020 $ 31,727 $ 23,842 $ 42,202 $ 36,325 Net income $ 31,015 $ 19,512 $ 14,183 $ 25,954 $ 21,250 Per Share Data Net income, basic (2) $ 1.57 $ 1.04 $ 0.76 $ 1.32 $ 1.05 Net income, diluted (2) $ 1.52 $ 1.03 $ 0.74 $ 1.27 $ 1.02 Weighted average shares Outstanding, basic (2) 19,734,245 18,726,614 18,638,556 19,628,381 20,328,753 Weighted average shares Outstanding, diluted (2) 20,343,201 18,993,461 19,220,007 20,371,850 20,849,816 Other Financial Information Net income as a percentage of Sales 5.2 % 3.4 % 2.7 % 5.3 % 5.2 % Return on average stockholders' Equity 16.7 % 12.9 % 11.0 % 22.3 % 20.8 % Cash and marketable securities $ 132,301 $ 108,200 $ 78,603 $ 91,506 $ 95,873 Working capital (3) $ 77,191 $ 44,213 $ 47,707 $ 21,856 $ 66,452 Ratio of current assets to current Liabilities 2.0 1.7 1.8 1.3 2.1 Total assets $ 295,717 $ 243,911 $ 213,009 $ 197,490 $ 184,223 Long-term debt $ — $ — $ — $ 1,264 $ 1,264 Total stockholders' equity $ 207,610 $ 163,793 $ 138,233 $ 120,278 $ 112,994 Number of stores open at year end 571 552 548 454 389 Number of stores acquired during the year 18 — 78 19 — Number of stores opened during the year 51 36 31 67 34 Number of stores closed during the Year 50 32 15 21 9 Square footage of leased store space at year end 2,212,146 2,191,522 2,182,606 1,848,513 1,637,347 Percentage increase in leased Square footage 0.9 % 0.4 % 18.1 % 12.9 % 6.3 % Average sales per square foot of Leased space (4) $ 265 $ 256 $ 247 $ 271 $ 263 Average sales per store (4) $ 1,043 $ 1,020 $ 988 $ 1,132 $ 1,112 Comparable store sales increase (decrease) (5) 4.7 % 3.9 % (9.8 )% 2.1 % 5.8 %
- (1)
- Fiscal 2000 consisted of 53 weeks.
8
- (2)
- Per share data, net income per share and the weighted average shares have been adjusted to account for the three-for-two stock split effected as of July 24, 2001.
- (3)
- The decrease in working capital in fiscal 1998 was due to the classification of $37,973,000 of cash investments as long-term in fiscal 1998.
(3) In fiscal 2000,- (4)
- Sales during the 53rd week of
sales wasfiscal 2000 were excluded from "Sales" for purposes of calculating "Average sales per square foot" and "Average sales per store" in order to make fiscal 2000comparable to prior years. 10(4) In fiscal 2000, "Comparablecomparable.- (5)
- "Comparable store sales"
were calculated using 52 weeks compared to the same 52 weeks infor fiscal1999. In fiscal 1996, "Comparable store sales"2001 were calculated by excluding sales during thefirstlast week of fiscal19952000 (a53 week53-week year) in order to make fiscal19952000 comparable to fiscal1996. Up through fiscal 19982001. "Comparable store sales" are defined as sales in stores that were openthroughoutat least 14 months.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion should be read in conjunction with our consolidated financial statements and Notes thereto included elsewhere in this Form 10-K. The following discussion contains forward-looking statements which involve risks and uncertainties, and our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the
fullheading "Statements Regarding Forward-Looking Disclosures and Risk Factors," those set forth in Exhibit 99.1 of the Form 10-K, and those included elsewhere in this Form 10-K.Critical Accounting Policies and Estimates
We prepared the consolidated financial statements of The Wet Seal, Inc. in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.
We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change is warranted. Our accounting policies are more fully described in Note 1 to the Consolidated Financial statements included herein.
Current Trends and Outlook
Our current fiscal year began on February 3, 2002. Our comparable store sales as well as total sales were up significantly in February and
throughoutMarch. We have provided guidance with respect to our anticipated first quarter results in releases made public during this period.We believe that consumer acceptance of our fashion offering continues to be positive resulting in increased sales in all of our operating divisions, especially our Arden B. division. Consequently, our Board of Directors has authorized capital expenditures of $50,000,000 in the current fiscal year to cover new store openings, store renovations and other capital expenditures described in Liquidity and Capital Resources in this Management Discussion and Analysis and elsewhere in this report.
In a release dated February 28, 2002 we stated that the average new store will be approximately 3,300 square feet and each will require an investment of $308,000. We believe we can achieve sales of $300 per square foot in these stores and, if we are successful, the return on the Company's investment in the first full
prioryear of operations of the new stores is estimated to be approximately 75%.Inventory Valuation
Merchandise inventories are stated at the lower of cost (first in, first out) or market. Cost is calculated using the retail inventory method. Inventories include items that have been marked down to management's best estimate of their fair market value. Management's decision to mark down
9
merchandise is based on maintaining the freshness of our product offering. Markdowns are taken regularly to effect the rapid sale of slow moving inventory and to make room for new merchandise arriving daily to the stores. To the extent that management's estimates differ from actual results, additional markdowns may be required which could reduce our gross margin and operating income. Our success is largely dependent on our ability to anticipate the changing fashion tastes of our customers and to respond to those changing tastes in a timely manner. If we fail to anticipate, identify or react appropriately to changing styles, trends or brand preferences of our customers, we may experience lower sales, excess inventories and more frequent markdowns which would adversely affect our operating results.
Results of Operations
Fiscal 2001 consists of the 52 week period ended February 2, 2002, fiscal
year. "Comparable store sales" for2000 consists of the 53 week period ended February 3, 2001 and fiscal 1999and fiscal 2000consists of the 52 week period ended January 29, 2000. Comparable store sales are defined as sales in stores that were open at least 14 months.ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company is one of the largest national mall-based specialty retailers focusing primarily on young women's apparel, and currently operates 552 retail stores in 42 states, Washington D.C. and Puerto Rico. The Company operates the stores under the names "Wet Seal," "Contempo Casuals" and "Arden B." The Company initiated a catalog in fiscal 1998 and an e-commerce web-site in August 1999. In fiscal 2000, the Company did not mail any catalogs, but continued its e-commerce initiatives. Limbo Lounge was discontinued as a retail concept by the Company at the end of fiscal 2000. The majority of the 26 Limbo Lounge stores were converted or are in the process of converting to Wet Seal or Contempo Casuals stores. On December 1, 1998, the Company acquired the leases and furniture and fixtures for 19 store locations from Mothers Work, Inc. The purchase price of $1,911,000 was allocated to leasehold improvements and furniture, fixtures and equipment. The majority of the locations acquired were converted to Arden B. stores. On February 1, 1999, the Company acquired the leases and furniture and fixtures for 78 store locations from Britches of Georgetowne, Inc. for $15,704,000. Based upon a third-party appraisal, the purchase price was allocated to leasehold improvements, lease rights, and furniture, fixtures and equipment. Excess of cost over net assets acquired (goodwill) totaling $6,972,000 is being amortized on the straight-line method over 20 years. The majority of the locations acquired were converted to Arden B. stores. As of February 3, 2001, the Company operated 552 stores compared to 548 stores as of January 29, 2000, the end of fiscal 1999. The Company opened 36 stores during fiscal 2000 and closed 32 stores. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's consolidated financial statements and the notes thereto. RESULTS OF OPERATIONS Fiscal 2000 consists of the 53 week period ended February 3, 2001, fiscal 1999 consists of the 52 week period ended January 29, 2000 and fiscal 1998 consists of the 52 week period ended January 30, 1999. Comparable store sales for fiscal 2000 and fiscal 1999 are defined as sales in stores that were open at least 14 months. Comparable store sales for fiscal 1998 are defined as sales in stores that were open throughout the full fiscal year and throughout the full prior fiscal year. The change in the method of calculating comparable store sales in fiscal 1999 would not have resulted in any material change to the results of fiscal 1998 if applied retroactively to that fiscal year. 11The following table sets forth selected income statement data
of the Companyexpressed as a percent of sales for the years indicated:
AS A PERCENTAGE OF SALES FISCAL YEAR ENDED --------------------------------------- FEBRUARY 3, JANUARY 29, JANUARY 30, 2001 2000 1999 ----------- ----------- -----------Sales (including frequent buyer sales income, catalog and web-site sales)........................................... 100.0% 100.0% 100.0% Cost of sales (including buying, distribution and occupancy costs).................................................... 72.3 72.5 69.3 ----- ----- ----- Gross margin................................................ 27.7 27.5 30.7 Selling, general and administrative expenses................ 23.1 23.8 22.8 ----- ----- ----- Operating income............................................ 4.6 3.7 7.9 Other income................................................ -- 0.2 -- Interest income, net........................................ 0.9 0.6 0.8 ----- ----- ----- Income before provision for income taxes.................... 5.5 4.5 8.7 Provision for income taxes.................................. 2.1 1.8 3.4 ----- ----- ----- Net income.................................................. 3.4% 2.7% 5.3% ===== ===== =====FISCAL
As a Percentage of Sales
Fiscal Year EndedFiscal Year 2001 2000 1999 Fiscal Year Ended February 2,
2002February 3,
2001January 29,
2000Sales 100.0 % 100.0 % 100.0 % Cost of sales (including buying, distribution and occupancy costs) 67.3 72.3 72.5 Gross margin 32.7 27.7 27.5 Selling, general and administrative expenses 25.2 23.1 23.8 Operating income 7.5 4.6 3.7 Other income — — 0.2 Interest income, net 0.9 0.9 0.6 Income before provision for income taxes 8.3 5.5 4.5 Provision for income taxes 3.2 2.1 1.8 Net income 5.2 % 3.4 % 2.7 % Fiscal 2001 Compared to Fiscal 2000
COMPARED TO FISCALSales in fiscal 2001 were $601,895,000 for the 52 week fiscal year compared to sales in fiscal 2000 of $580,182,000 for the 53 week fiscal year, an increase of $21,713,000, or 3.7%. On a proforma basis, comparing the 52 week period ended February 2, 2002 to the 52 week period ended January 27, 2001, the increase in sales would have been $30,505,000, or 5.3%. The dollar increase in sales in fiscal 2001 compared to fiscal 2000 was due to the impact of 51 new store openings and the acquisition of 18 stores in fiscal 2001. The increase in sales was also due to the increase in comparable store sales of 4.7% for the 52 weeks ended February 2, 2002 compared to the 52 weeks ended January 27, 2001. These increases were somewhat offset by the closing of 50 stores in fiscal 2001.
Cost of sales, including buying, distribution and occupancy costs, was $405,187,000 in fiscal 2001 compared to $419,310,000 in fiscal 2000, a decrease of $14,123,000, or 3.4%. As a percentage of sales, cost of sales decreased to 67.3% in fiscal 2001 from 72.3% in fiscal 2000, a decrease of 5.0%. The decrease in cost of sales as a percentage of sales related primarily to an increase in the initial mark up over the prior year and a decrease in markdowns from the prior year. We also experienced a decrease in occupancy costs due to the leverage on landlord expenses resulting from an increase in comparable
10
store sales and due to a decrease in distribution costs resulting from lower depreciation as the original distribution equipment was fully depreciated in the prior year. Offsetting the overall decrease in cost of sales was an increase in buying costs. The increase in buying costs was due to additional headcount added to support new divisions and to further augment current infrastructure.
Selling, general and administrative expenses were $151,815,000 in fiscal 2001 compared to $134,002,000 in fiscal 2000, an increase of $17,813,000, or 13.3%. As a percentage of sales, selling, general and administrative expenses were 25.2% in fiscal 2001 compared to 23.1% in fiscal 2000, an increase of 2.1%. The increase in selling, general and administrative expenses as a percentage of sales was primarily due to an increase in advertising costs related to the use of print media campaigns and a television sponsorship not used in the prior year. The increase is also due to an increase in selling wages in an effort to improve customer service. Delivery charges increased due to the change in the freight strategy to use three-day air in fiscal 2001 versus the use of ground transportation in fiscal 2000.
Interest income, net, was $5,127,000 in fiscal 2001 compared to $4,857,000 in fiscal 2000, an increase of $270,000. This increase was due primarily to an increase in the average cash balance invested during the year offset in part by lower interest rates during fiscal 2001 versus fiscal 2000.
Income tax provision was $19,005,000 in fiscal 2001 compared to $12,215,000 in fiscal 2000. The effective income tax rate in fiscal 2001 was 38.0% compared to 38.5% in fiscal 2000. The decrease in the effective tax rate in fiscal 2001 compared to fiscal 2000 was due to the apportionment among various states, resulting in lower effective state tax rates.
Based on the factors noted above, net income was $31,015,000 in fiscal 2001 compared to $19,512,000 in fiscal 2000, an increase of $11,503,000, or 59.0%. As a percentage of sales, net income was 5.2% in fiscal 2001 compared to 3.4% in fiscal 2000.
Fiscal 2000 Compared to Fiscal 1999
Sales in fiscal 2000 were $580,182,000 for the 53 week fiscal year compared to sales in fiscal 1999 of $524,407,000 for the 52 week fiscal year, an increase of $55,775,000, or 10.6%. The dollar increase in sales in fiscal 2000 compared to fiscal 1999 was due to the impact of the 36 new store openings in fiscal 2000 and the full year impact in 2000 of the 94 net new
storestores openings in fiscal 1999.TheOn a proforma basis, the increase in sales was also due to the increase in comparable store sales of3.9 percent3.9% for the 52 weeks ended January 27, 2001 compared to the 52 weeks ended January 29, 2000. These increases were somewhat offset by the closing of 32 stores in fiscal 2000.Cost of sales, including buying, distribution and occupancy costs, was $419,310,000 in fiscal 2000 compared to $380,012,000 in fiscal 1999, an increase of $39,298,000, or 10.3%. As a percentage of sales, cost of sales decreased to 72.3% in fiscal 2000, from 72.5% in fiscal 1999, a decrease of 0.2%. The dollar increase in cost of sales in fiscal 2000 compared to fiscal 1999 was due primarily to the increase in the number of new stores and the increase in total sales. The decrease in cost of sales as a percentage of sales related primarily to a decrease in markdowns from the prior year. The prior year markdowns were higher due to the need to clear excess merchandise. Offsetting this decrease in the cost of sales were increases in buying costs, distribution costs and, to a lesser extent, occupancy costs. The increase in buying costs as a percentage of sales was due to additional headcount added to support the new divisions and further augment current infrastructure. Occupancy costs as a percentage of sales increased slightly as a result of an increase in depreciation.
Selling, general and administrative expenses were $134,002,000 in fiscal 2000 compared to $124,712,000 in fiscal 1999, an increase of $9,290,000, or 7.4%. As a percentage of sales, selling, general and administrative expenses was 23.1% in fiscal 2000 compared to 23.8% in fiscal 1999, a decrease of 0.7%. The dollar increase in selling, general and administrative expenses in fiscal 2000 compared to fiscal 1999 was primarily due to leveraging expenses against the increase in total sales. The decrease as
11
a percentage of sales was related to a decrease in advertising from the prior year, a decrease in costs related to the catalog which was discontinued and a decrease in the merchandise delivery cost. Offsetting this decrease to selling, general and administrative expenses as a percentage of sales
waswere an increase in executive salaries due to the separation payment totheour former presidentof the companyand an increase in office wages related to the additional headcount added to support a larger12organization. Included in selling, general and administrative expenses was the loss on disposal of the assets for the Limbo Lounge division of $2.0 million and the income derived from the reversal of a reserve for self insurance (see Note 11 of Notes To Consolidated Financial Statements). The CompanyWe had no other income, net, in fiscal 2000 compared to $1,154,000 in fiscal 1999. Other income, net, for fiscal 1999 was related to the sale of one store lease.
Interest income, net, was $4,857,000 in fiscal 2000 compared to $3,005,000 in fiscal 1999, an increase of $1,852,000. This increase was due primarily to an increase in the average cash balance invested during the year as well as an increase in the effective interest rates for the year.
Income tax provision was $12,215,000 in fiscal 2000 compared to $9,659,000 in fiscal 1999. The effective income tax rate in fiscal 2000 was 38.5% compared to 40.5% in fiscal 1999. The decrease in the effective tax rate in fiscal 2000 compared to fiscal 1999 was due to an increase in income generated from states with lower effective tax rates.
Based on the factors noted above, net income was $19,512,000 in fiscal 2000 compared to $14,183,000 in fiscal 1999, an increase of $5,329,000, or 37.6%. As a percentage of sales, net income was 3.4% in fiscal 2000 compared to 2.7% in fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998 Sales in fiscal 1999 were $524,407,000 compared to sales in fiscal 1998 of $485,389,000, an increase of $39,018,000, or 8.0%. The dollar increase in sales in fiscal 1999 compared to fiscal 1998 was due to the impact of the 109 new store openings in fiscal 1999Liquidity and
the full year impact in 1999 of the net 65 new store openings in fiscal 1998. These increases were somewhat offset by the closing of 15 stores in fiscal 1999 and by the decrease in comparable store sales of 9.8%. Cost of sales, including buying, distribution and occupancy costs, was $380,012,000 in fiscal 1999 compared to $336,527,000 in fiscal 1998, an increase of $43,485,000 or 12.9%. As a percentage of sales, cost of sales increased to 72.5% in fiscal 1999, from 69.3% in fiscal 1998, an increase of 3.2%. The dollar increase in cost of sales in fiscal 1999 compared to fiscal 1998 was due primarily to the increase in the number of stores. The increase in cost of sales as a percentage of sales related primarily to an increase in occupancy costs as a percent of sales due to the decrease in comparable store sales. To a lesser extent, the increase was due to an increase in buying costs as a percentage of sales due to additional headcount added in fiscal 1999 to support the increase in the number of stores. Offsetting these increases was a decrease in distribution costs related primarily to the decrease in the unit cost of processing in the current year and to leveraging of fixed costs, such as rent and depreciation due to the increase in total sales. The cost of merchandise as a percent of sales was the same as the prior year. There was an improvement in the initial mark up and the shrink rate in fiscal 1999 compared to fiscal 1998, which was offset by an increase in markdowns. The increase in markdowns was related primarily with the need to clear merchandise due to the decrease in comparable store sales, particularly in the fourth quarter. Selling, general and administrative expenses were $124,712,000 in fiscal 1999 compared to $110,554,000 in fiscal 1998, an increase of $14,158,000, or 12.8%. As a percentage of sales, selling, general and administrative expenses was 23.8% in fiscal 1999 compared to 22.8% in fiscal 1998, an increase of 1%. The dollar increase in selling, general and administrative expenses in fiscal 1999 compared to fiscal 1998 was primarily due to the increase in total sales. The increase as a percentage of sales was primarily related to the increases in selling wages and advertising expenses in the current year as a percentage of sales offset somewhat by a decrease in the fixed costs associated with catalog production as a percentage of sales. Without the impact of the catalog operation, selling, general and administrative expenses increased 1.8%. This increase related primarily to the increase in selling expense as a percentage of sales due to the impact of the decrease in the comparable store sales on the 13fixed portion of store wages. Also contributing to the increase as a percentage of sales was an increase in advertising expense related to a national advertising campaign in fiscal 1999 for both the Blue Asphalt and Arden B. brands. Other income, net, was $1,154,000, or 0.2% of sales in fiscal 1999. Other income, net, was related to the sale of one store lease. Interest income, net, was $3,005,000 in fiscal 1999 compared to $3,894,000 in fiscal 1998, a decrease of $889,000. This decrease was due primarily to a decrease in the average cash balance invested during the year. Income tax provision was $9,659,000 in fiscal 1999 compared to $16,248,000 in fiscal 1998. The effective income tax rate in fiscal 1999 was 40.5% compared to 38.5% in fiscal 1998. The increase in the effective tax rate in fiscal 1999 compared to fiscal 1998 was due to the impact of the lower pretax income in fiscal 1999 and the permanent timing differences between book and tax, as well as to the decrease in tax exempt securities. Based on the factors noted above, net income was $14,183,000 in fiscal 1999 compared to $25,954,000 in fiscal 1998, a decrease of $11,771,000, or 45.4%. As a percentage of sales, net income was 2.7% in fiscal 1999 compared to 5.3% in fiscal 1998. LIQUIDITY AND CAPITAL RESOURCESCapital ResourcesWorking capital at the end of fiscal 2001, 2000 and 1999 was $77,191,000, $44,213,000 and
1998 was $44,213,000,$47,707,000,and $21,856,000,respectively. Thedecreaseincrease in working capital in fiscal20002001 compared to fiscal19992000 was primarily due to a net increase inlong-termshort-term investments of$32,731,000,$29,463,000, ascurrent year excess cash has been investedwell as the timing of maturity dates, an increase inlong-term investments with maturities of more than one year. This decrease was offset to some extent by theconstruction allowance receivable, an increase in prepaidexpensesproperty taxes andthesystem maintenance agreements and a decrease inthe current portion of long-term debt.income taxes payable. Net cash provided by operating activities in fiscal 2001, 2000 and 1999 was $54,328,000, $46,395,000 and1998 was $46,395,000,$28,795,000,and $43,950,000,respectively. The increase in net cash provided by operating activities in fiscal20002001 compared to fiscal19992000 was due primarily to the increase in net earnings. Further contributing to the increase was the increase inincome taxesaccounts payable andthe decrease in merchandise inventories.accrued liabilities. This was offset to some extent by theincreasedecrease inprepaid rent expenses and net deferred taxes.income taxes payable. Theincreasedecrease in income taxes payable was due to theincrease in taxable income, particularly in the fourth quarter. The decrease in inventory over the prior year was related to the planned decrease in inventory levels.timing of tax payments.In fiscal 2001, 2000 and 1999 we invested $38,953,000, $18,134,000 and
1998 the Company invested $18,134,000,$26,819,000,and $26,503,000,respectively, in property and equipment and leasehold improvements. These expenditures related primarily to new store openings and remodels. In fiscal2000, the Company2001, we opened3651 stores and remodeled2032 stores. In fiscal 2001, we acquired the leases, merchandise inventory and furniture and fixtures for 18 Zutopia stores from Gymboree, Inc. for $3,550,000. In fiscal 2000, there were no acquisitions. In fiscal 1999,the Companywe acquired the leases and equipment and leasehold improvements for 78 store locations from Britches of Georgetowne, Inc. for $15,704,000, of which $6,972,000 was classified as goodwill. In fiscal 1998,the Companywe acquired the leases and equipment and leasehold improvements for 19 store locations from Mothers Work, Inc. for $1,911,000. The majority of the locations acquired were converted to Arden B. stores. Capital expenditures for fiscal20012002 are currently estimated to be$44,000,000,$50,000,000, related primarily to planned new store openings, remodels, minor Wet Seal store renovations, as well as, new point of sale systems for all stores, andremodels. On March 25, 2001, the Company acquired the leases, merchandise inventory and furniture and fixtures for 18 Zutopia stores from Gymboree, Inc. Zutopia is a "tween" retail concept which caters to the female customer ages 5 to 12. The Company intends to continue to operate the acquired store locations under the Zutopia name.other key financial system conversions.In September 1998,
the Company'sour Board of Directors authorized the repurchase of up to 20% of the outstanding shares ofthe Company'sour Class A Common Stock. As of February3, 2001, 1,367,600 142, 2002, 2,051,400 shares had been repurchased at aan aggregate cost of $20,349,000. Such repurchased shares are reflected as treasury12
stock in the accompanying consolidated financial statements. The
Companynumber of shares has been adjusted for the three-for-two stock split which was effected July 24, 2001.We have a secured revolving line of credit arrangement with
Bank of America National Trust and Savings Association ("Bank of America")a major financial institution, in an aggregate principal amount of $50,000,000, maturing onJulyJanuary 1,2001. The Company also had a five year amortizing unsecured term loan with Bank of America in an amount up to $10,000,000. This loan was repaid in full on May 24, 2000.2004. At February3, 2001,2, 2002, there were no outstanding borrowings under the credit arrangement and there were$5,512,000$7,250,000 open letters of credit related to imported inventory orders.The Company wasWe believe we are in compliance with all material terms and covenants of the credit arrangement.The Company invests itsWe invest our excess funds primarily inashort-term investment grade money marketfund,funds, investment grade commercial paper and U.S. Treasury and Agency obligations.ManagementOur management believesthe Company'sour working capital, investments and cash flows from operating activities will be sufficient to meetthe Company'sour operating and capital requirements in theforeseeable future. SEASONALITY AND INFLATION The Company'sfiscal 2002. However, if cash flow from operations should decline significantly or we accelerate our store expansion program or launch of our Wet Seal catalog, it may be necessary to seek additional capital.Seasonality and Inflation
Our business is seasonal by nature with the Christmas season,
(beginningbeginning the week of Thanksgiving and ending the first Saturday afterChristmas)Christmas, and the back-to-school season,(beginningbeginning the last week of July and ending the first week ofSeptember),September, historically accounting for the largest percentage of sales volume.InFor theCompany'spast three fiscal years,ended February 3, 2001,the Christmas and back-to-school seasons together accounted for an average of approximately31%30% ofthe Company'sour annual sales, after adjusting for sales increases related to new stores.The Company doesWe do not believe that inflation has had a material effect on the results of operations during the past three years. However,there can be no assurancewe cannot assure you thatthe Company'sour business will not be affected by inflation in the future.STATEMENT REGARDING FORWARD LOOKING DISCLOSURE The preceding "Business"Commitments and
"Management's DiscussionContingenciesWe lease retail stores, automobiles, computers and
Analysiscorporate office and warehouse facilities under operating lease agreements expiring at various times through 2013. Substantially all ofFinancial Conditionour leases require us to pay maintenance, insurance, property taxes andResults of Operations" sections may contain various forward looking statements withinpercentage rent based on sales volume over certain minimum sales levels. Effective February 1998, we entered into a sublease agreement for our former warehouse facility, which expires July 31, 2002.Minimum annual rental commitments under non-cancelable leases, including the
meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),corporate office andSection 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectationswarehouse facility lease are; $65,800,000 for fiscal 2002, $61,900,000 for fiscal 2003, $55,700,000 for fiscal 2004, $49,700,000 for fiscal 2005, $47,100,000 for fiscal 2006 and $135,400,000 thereafter.We do not maintain any long-term or
beliefs concerning future events. The Company cautions that these statements are further qualified by important factors that could cause actual resultsexclusive commitments or arrangements todiffer materiallypurchase merchandise fromthose in the forward looking statements, including, without limitation, the retention by the Company of suppliers for both brand name and Company-developed merchandise, the ability of the Company to expand and to continue to increase comparable store sales, and the sufficiency of the Company's working capital and cash flows from operating activities. In addition, these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, including, without limitation, a decline in demand for the merchandise offered by the Company, the ability of the Company to locate and obtain acceptable store sites and lease terms or renew existing leases, the ability of the Company to obtain adequate merchandise supply, the ability of the Company to hire and train employees, the ability of the Company to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand, management's ability to manage the Company's expansion, the effect of economic conditions, the effect of severe weather or natural disasters and the effect of competitive pressures from other retailers. The Company disclaimsanyobligation 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. 15NEW ACCOUNTING PRONOUNCEMENTSsingle supplier.New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--DeferralActivities—Deferral of the Effective Date of FASB Statement No. 133," whichdelaysdelayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000.The CompanyWe adopted SFAS No. 133 effective February 4, 2001. The adoption of SFAS No. 133willdid not have a material effect onthe Company'sour consolidated results of operations or financial condition.In
December 1999,July 2001, theSecuritiesFASB issued SFAS No. 141 "Business Combinations", which, among other things, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, no longer permits the use of the pooling-of-interests method of accounting for business13
combinations and
Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 summarizesbroadens thestaff's views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. The Company adopted SAB No. 101 in the fourth quarter of fiscal year 2000.criteria for recording intangible assets separate from goodwill. The adoption ofSABSFAS No.101141 during the third quarter of 2001 did not have a material impact on the Company's consolidated results of operations, financial position orequity.cash flows.In
March 2000,July 2001, the FASB issuedInterpretation ("FIN")SFAS No.44, "Accounting142 "Goodwill and Other Intangible Assets", which, among other things, establishes new standards forCertain Transactions involving Stock Compensation." FINgoodwill acquired in a business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and identifiable intangibles to be evaluated for impairment on an annual basis. Identifiable intangible assets with a determinable useful life will continue to be amortized over that period. SFAS No.44142 isan interpretation of Accounting Principal Board's ("APB") Opinion No. 25, "Accountingeffective forStock Issued to Employees". Among other matters, FIN No. 44 clarifiesfiscal years beginning after December 15, 2001. Management does not believe theapplication of APB Opinion No. 25 regarding the definition of employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as non compensatory and the accounting consequences of modifications to the terms of a previously issued stock options or similar awards. The Company adopted the provisions of FIN No. 44 in the third quarter of fiscal 2000. Theadoption ofFINSFAS No.44 did not142 will have a material impact on the Company's consolidated results of operations, financial position or cash flows.In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations", which addresses financial
condition. ITEMaccounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe the adoption of SFAS No. 143 will have a material impact on the Company's consolidated results of operations, financial position or cash flows.In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of either by sale or other than by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe the adoption of SFAS No. 144 will have a material impact on the Company's consolidated results of operations, financial position or cash flows.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market RiskTo the extent
the Company borrowswe borrow underitsour credit facility,the Company wouldwe will be exposed to market risk related to changes in interest rates. At February3, 20012, 2002, no borrowings were outstanding under theCompany'scredit facility. See Notes 1 and 3 tothe Company's Consolidated Financial Statementsour consolidated financial statements for further discussion ofthe Company'sour accounting policies for financial instruments.The Company isWe are not a party to any derivative financial instruments. Additionally, we are exposed to market risk related to interest rate risk on the short-term investment of excess cash in short-term investment grade interest-bearing securities. These investments are considered to be cash equivalents and are shown that way on our balance sheet. If there are changes in interest rates, those changes would affect the investment income we earn on those investments.
Item 8. Financial Statements and Supplementary DataInformation with respect to
derivative financial instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Filedthis item is set forth under Item 14.ITEM
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREChanges in and Disagreements with Accountants on Accounting and Financial DisclosureNot Applicable.
1614
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 AllDirectors and Executive Officers of the RegistrantThe information
called forrequired byPart III (Items 10 through 13)this item is incorporated by referencefromto theCompany's definitive Proxy Statementinformation set forth inconnection with its Annual Meetingour proxy statement for our 2002 annual meeting ofStockholdersstockholders to beheld May 30, 2001,filedpursuantwith the Commission within 120 days after the end of our fiscal year ended February 2, 2002.
Item 11. Executive CompensationThe information required by this item is incorporated by reference to
Regulation 14A.the information set forth in our proxy statement for our 2002 annual meeting of stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended February 2, 2002.
Item 12. Security Ownership of Certain Beneficial Owners and ManagementThe information required by this item is incorporated by reference to the information set forth in our proxy statement for our 2002 annual meeting of stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended February 2, 2002.
Item 13. Certain Relationships and Related TransactionsThe information required by this item is incorporated by reference to the information set forth in our proxy statement for our 2002 annual meeting of stockholders to be filed with the Commission within 120 days after the end of our fiscal year ended February 2, 2002.
Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMExhibits, Financial Statement Schedules and Reports on Form 8-K
- (a)
- The following documents are filed as part of this report:
- 1.
- Financial
Statements SeeStatements: The financial statements listed in the "Index to Consolidated Financial Statements and Financial Statement Schedules".at page F-1 are filed as part of this report.- 2.
- Financial Statement
Schedules See "Index to Consolidated Financial Statements and Financial Statement Schedules".Schedules: All schedules are omitted as they are not required, or the required information is shown in the consolidated financial statements or notes thereto.- 3.
Exhibits- Exhibits; See "Exhibit
Index".Index."
- (b)
- Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal year ended February
3, 2001. 172, 2002. 15
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)
(registrant)
By:/s/
/s/ KATHY BRONSTEIN------------------------------------------
Kathy BronsteinVICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Vice Chairman and Chief Executive Officer
By:/s/ ANN CADIER KIM ------------------------------------------ Ann Cadier Kim EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
/s/ WALTER J. PARKS
Walter J. Parks
Executive Vice President and Chief Administrative OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
SIGNATURES TITLE DATE SIGNED - -------------------------------------- -------------------------------------- -------------/s/Signatures Title Date Signed /s/ IRVING TEITELBAUM
Irving TeitelbaumChairman of the Board and Director April 5, 2001 - ------------------------------------- Irving Teitelbaum /s/16, 2002
/s/ KATHY BRONSTEIN
Kathy Bronstein
Vice Chairman and Chief ExecutiveApril 5, 2001 - -------------------------------------Officer and Director (PrincipalKathy BronsteinExecutive Officer)/s/
April 16, 2002
/s/ STEPHEN GROSS
Stephen Gross
Secretary and Director
April5, 2001 - ------------------------------------- Stephen Gross /s/ ANN CADIER KIM16, 2002
/s/ WALTER J. PARKS
Walter J. Parks
Executive Vice Presidentof Finance April 5, 2001 - -------------------------------------and ChiefFinancialAdministrative Officer (PrincipalAnn Cadier KimFinancial and Accounting Officer)/s/
April 16, 2002
/s/ GEORGE H. BENTER JR.Director April 5, 2001 - -------------------------------------
George H. Benter Jr./s/
Director
April 16, 2002
/s/ WALTER F. LOEBDirector April 5, 2001 - -------------------------------------
Walter F. Loeb/s/
Director
April 16, 2002
/s/ WILFRED POSLUNSDirector April 5, 2001 - -------------------------------------
Wilfred Posluns/s/
Director
April 16, 2002
/s/ GERALD RANDOLPHDirector April 5, 2001 - -------------------------------------
Gerald Randolph/s/
Director
April 16, 2002
/s/ ALAN SIEGELDirector April 5, 2001 - -------------------------------------
Alan Siegel
Director
April 16, 20021816
THE WET SEAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE --------Page INDEPENDENT AUDITORS' REPORT: Report of Deloitte & Touche LLP............................. F-2LLPF–2
FINANCIAL STATEMENTS:Consolidated balance sheets as of February 2, 2002 and February 3, 2001 and January 29, 2000.......................................... F-3F–3 Consolidated statements of income for the fiscal years ended February 2, 2002, February 3, 2001, and January 29, 2000 and January 30, 1999... F-4F–4 Consolidated statements of comprehensive income for the fiscal years ended February 2, 2002, February 3, 2001, and January 29, 2000 and January 30, 1999.......................................... F-5F–5 Consolidated statements of stockholders' equity for the fiscal years ended February 2, 2002, February 3, 2001, and January 29, 2000 and January 30, 1999.......................................... F-6F–6 Consolidated statements of cash flows for the fiscal years ended February 2, 2002, February 3, 2001, and January 29, 2000 and January 30, 1999...................................................... F-7F–7 Notes to consolidated financial statements.................. F-8statementsF–8
FINANCIAL STATEMENT SCHEDULES:All schedules are omitted as they are not required, or the required information is shown in the consolidated financial statements or the notes thereto. F-1
To the Board of Directors and Stockholders
The Wet Seal, Inc.:We have audited the accompanying consolidated balance sheets of The Wet Seal, Inc. (the Company) as of February 2, 2002 and February 3, 2001
and January 29, 2000and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three fiscal years in the period ended February3, 2001.2, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Wet Seal, Inc. as of February 2, 2002 and February 3, 2001
and January 29, 2000and the results of its operations and its cash flows for each of the three fiscal years in the period ended February3, 2001,2, 2002 in conformity with accounting principles generally accepted in the United States of America.Deloitte & Touche LLP
Costa Mesa, California
March16, 200120, 2002F-2
THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ---------------- (IN THOUSANDS)ASSETS Current Assets: Cash and cash equivalents (Note 1).......................... $ 30,122 $ 44,921 Short-term investments (Note 3)............................. 38,060 26,395 Other receivables........................................... 2,412 3,909 Merchandise inventories (Note 1)............................ 30,102 33,288 Prepaid expenses, including prepaid rent of $8,856 as of February 3, 2001 (Note 1)................................. 9,463 -- Deferred tax charges (Note 4)............................... 1,094 1,560 -------- -------- Total current assets.................................... 111,253 110,073 -------- -------- Equipment and Leasehold Improvements (Note 1): Leasehold improvements...................................... 99,873 99,679 Furniture, fixtures and equipment........................... 54,048 47,488 Leasehold rights............................................ 2,944 2,944 -------- -------- 156,865 150,111 Less accumulated depreciation............................... (85,483) (73,167) -------- -------- Net equipment and leasehold improvements................ 71,382 76,944 Long-Term Investments (Note 3).............................. 40,018 7,287 OTHER ASSETS: Deferred tax charges and other assets (Notes 4 and 12)...... 14,541 11,594 Goodwill, net of accumulated amortization of $1,386,000 and $992,000 as of February 3, 2001 and January 29, 2000, respectively (Note 1)..................................... 6,717 7,111 -------- -------- Total other assets...................................... 21,258 18,705 -------- -------- $243,911 $213,009 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................ $ 43,681 $ 39,448 Accrued liabilities (Note 11)............................... 17,811 20,611 Income taxes payable (Note 4)............................... 5,548 543 Current portion of long-term debt........................... -- 1,764 -------- -------- Total current liabilities............................... 67,040 62,366 -------- -------- Long-Term Liabilities: Deferred rent (Note 1)...................................... 9,191 8,501 Other long-term liabilities (Note 12)....................... 3,887 3,909 -------- -------- Total long-term liabilities............................. 13,078 12,410 -------- -------- Total liabilities....................................... 80,118 74,776 -------- -------- Commitments and Contingencies (Note 7) Stockholders' Equity (Notes 5 and 6): Preferred Stock, $.01 par value, authorized, 2,000,000 shares; none issued and outstanding....................... -- -- Common Stock, Class A, $.10 par value, authorized 20,000,000 shares; 11,236,879 and 10,900,023 shares issued and outstanding at February 3, 2001 and January 29, 2000, respectively.............................................. 1,124 1,090 Common Stock, Class B convertible, $.10 par value, authorized 10,000,000 shares; 2,912,665 shares issued and outstanding at February 3, 2001 and January 29, 2000...... 291 291 Paid-in capital............................................. 68,658 62,493 Retained earnings........................................... 114,069 94,557 Other comprehensive loss (Note 12).......................... -- (139) Treasury stock, 1,367,600 and 1,347,600 shares, at cost, at February 3, 2001 and January 29, 2000, respectively....... (20,349) (20,059) -------- -------- Total stockholders' equity.............................. 163,793 138,233 -------- -------- $243,911 $213,009 ======== ========
February 2,
2002February 3,
2001(In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 34,345 $ 30,122 Short-term investments (Note 3) 67,523 38,060 Other receivables 4,830 2,412 Merchandise inventories (Note 1) 32,020 30,102 Prepaid expenses, including prepaid rent of $9,149 as of February 2, 2002 11,018 9,463 Deferred tax charges (Note 4) 2,500 1,094 Total current assets 152,236 111,253 EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Note 1): Leasehold improvements 117,284 99,873 Furniture, fixtures and equipment 66,880 54,048 Leasehold rights 2,848 2,944 187,012 156,865 Less accumulated depreciation (93,304 ) (85,483 ) Net equipment and leasehold improvements 93,708 71,382 LONG-TERM INVESTMENTS (Note 3) 30,433 40,018 OTHER ASSETS: Deferred tax charges and other assets (Notes 4 and 12) 13,017 14,541 Goodwill, net of accumulated amortization of $1,780,000 and $1,386,000 as of February 2, 2002 and February 3, 2001, respectively (Note 1) 6,323 6,717 Total other assets 19,340 21,258 $ 295,717 $ 243,911 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 51,890 $ 43,681 Accrued liabilities (Note 11) 19,321 17,811 Income taxes payable (Note 4) 3,834 5,548 Total current liabilities 75,045 67,040 LONG-TERM LIABILITIES: Deferred rent (Note 1) 8,624 9,191 Other long-term liabilities (Note 12) 4,438 3,887 Total long-term liabilities 13,062 13,078 Total liabilities 88,107 80,118 COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (Notes 5 and 6): Preferred Stock, $.01 par value, authorized, 2,000,000 shares; none issued and outstanding — — Common Stock, Class A, $.10 par value, authorized 60,000,000 shares; 18,845,637 and 16,855,319 shares issued and outstanding at February 2, 2002 and February 3, 2001, respectively 1,885 1,685 Common Stock, Class B convertible, $.10 par value, authorized 10,000,000 shares; 3,202,833 and 4,368,998 shares issued and outstanding at February 2, 2002 and February 3, 2001, respectively 320 437 Paid-in capital 80,670 67,951 Retained earnings 145,084 114,069 Treasury stock, 2,051,400 shares, at cost, at February 2, 2002 and February 3, 2001, respectively (20,349 ) (20,349 ) Total stockholders' equity 207,610 163,793 $ 295,717 $ 243,911 See accompanying notes to consolidated financial statements.
F-3
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF INCOME(IN THOUSANDS, EXCEPT SHARE DATA)
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 ---------------- ---------------- ----------------SALES............................................ $ 580,182 $ 524,407 $ 485,389 COST OF SALES (including buying, distribution and occupancy costs)............................... 419,310 380,012 336,527 ---------- ---------- ---------- GROSS MARGIN..................................... 160,872 144,395 148,862 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 134,002 124,712 110,554 ---------- ---------- ---------- OPERATING INCOME................................. 26,870 19,683 38,308 OTHER INCOME..................................... -- 1,154 -- INTEREST INCOME, NET............................. 4,857 3,005 3,894 ---------- ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES......... 31,727 23,842 42,202 PROVISION FOR INCOME TAXES (Note 4).............. 12,215 9,659 16,248 ---------- ---------- ---------- NET INCOME....................................... $ 19,512 $ 14,183 $ 25,954 ========== ========== ========== NET INCOME PER SHARE, BASIC (Note 13)............ $ 1.56 $ 1.14 $ 1.98 ========== ========== ========== NET INCOME PER SHARE, DILUTED (Note 13).......... $ 1.54 $ 1.11 $ 1.91 ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC (Note 1)............................................. 12,484,409 12,425,704 13,085,587 ========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED (Note 1)....................................... 12,662,307 12,813,338 13,581,233 ========== ========== ==========
February 2,
2002February 3,
2001January 29,
2000(In thousands, except share data) SALES $ 601,895 $ 580,182 $ 524,407 COST OF SALES (including buying, distribution and occupancy costs) 405,187 419,310 380,012 GROSS MARGIN 196,708 160,872 144,395 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 151,815 134,002 124,712 OPERATING INCOME 44,893 26,870 19,683 OTHER INCOME — — 1,154 INTEREST INCOME, NET 5,127 4,857 3,005 INCOME BEFORE PROVISION FOR INCOME TAXES 50,020 31,727 23,842 PROVISION FOR INCOME TAXES (Note 4) 19,005 12,215 9,659 NET INCOME $ 31,015 $ 19,512 $ 14,183 NET INCOME PER SHARE, BASIC (Note 13) $ 1.57 $ 1.04 $ 0.76 NET INCOME PER SHARE, DILUTED (Note 13) $ 1.52 $ 1.03 $ 0.74 WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC (Note 1) 19,734,245 18,726,614 18,638,556 WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED (Note 1) 20,343,201 18,993,461 19,220,007 See accompanying notes to consolidated financial statements.
F-4
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 ---------------- ---------------- ----------------NET INCOME....................................... $19,512 $14,183 $25,954 ------- ------- ------- OTHER COMPREHENSIVE INCOME (LOSS): SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ADJUSTMENT (Note 12)...................................... 139 -- (139) ------- ------- ------- COMPREHENSIVE INCOME............................. $19,651 $14,183 $25,815 ======= ======= =======
February 2,
2002February 3,
2001January 29,
2000(In thousands, except share data) NET INCOME $ 31,015 $ 19,512 $ 14,183 OTHER COMPREHENSIVE INCOME: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ADJUSTMENT (Note 12) — 139 — COMPREHENSIVE INCOME $ 31,015 $ 19,651 $ 14,183 See accompanying notes to consolidated financial statements.
F-5
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ---------------------------------------------- CLASS A CLASS B ---------------------- --------------------- PAID-IN RETAINED SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS ---------- --------- --------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA)Balance at January 31, 1998................ 10,656,578 $1,066 2,912,665 $291 $57,217 $54,420 Stock issued pursuant to long-term incentive plan (Note 6)............ 12,308 1 -- -- 462 -- Exercise of stock options (Note 6).... 36,000 4 -- -- 269 -- Tax benefit related to exercise of stock options (Note 6).... -- -- -- -- 408 -- Repurchase of common stock (Note 5)...... -- -- -- -- -- -- Supplemental Employee Retirement Plan adjustment (Note 12)........... -- -- -- -- -- -- Net income............ -- -- -- -- -- 25,954 ---------- ------ --------- ---- ------- -------- Balance at January 30, 1999................ 10,704,886 1,071 2,912,665 291 58,356 80,374 Stock issued pursuant to long-term incentive plan (Note 6)............ 10,137 1 -- -- 110 -- Exercise of stock options (Note 6).... 185,000 18 -- -- 1,691 -- Tax benefit related to exercise of stock options (Note 6).... -- -- -- -- 2,336 -- Repurchase of common stock (Note 5)...... -- -- -- -- -- -- Net income............ -- -- -- -- -- 14,183 ---------- ------ --------- ---- ------- -------- Balance at January 29, 2000................ 10,900,023 1,090 2,912,665 291 62,493 94,557 Stock issued pursuant to long-term incentive plan (Note 6)............ 12,756 1 -- -- 394 -- Exercise of stock options (Note 6).... 324,100 33 -- -- 3,846 -- Tax benefit related to exercise of stock options (Note 6).... -- -- -- -- 1,925 -- Repurchase of common stock (Note 5)...... -- -- -- -- -- -- Supplemental Employee Retirement Plan adjustment (Note 12)........... -- -- -- -- -- -- Net income............ -- -- -- -- -- 19,512 ---------- ------ --------- ---- ------- -------- Balance at February 3, 2001................ 11,236,879 $1,124 2,912,665 $291 $68,658 $114,069 ========== ====== ========= ==== ======= ========OTHER TOTAL COMPREHEN- TREASURY STOCKHOLDERS' SIVE LOSS STOCK EQUITY -------------- -------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA)Balance at January 31, 1998................ $ -- $ -- $112,994 Stock issued pursuant to long-term incentive plan (Note 6)............ -- -- 463 Exercise of stock options (Note 6).... -- -- 273 Tax benefit related to exercise of stock options (Note 6).... -- -- 408 Repurchase of common stock (Note 5)...... -- (19,675) (19,675) Supplemental Employee Retirement Plan adjustment (Note 12)........... (139) -- (139) Net income............ -- -- 25,954 ---- -------- -------- Balance at January 30, 1999................ (139) (19,675) 120,278 Stock issued pursuant to long-term incentive plan (Note 6)............ -- -- 111 Exercise of stock options (Note 6).... -- -- 1,709 Tax benefit related to exercise of stock options (Note 6).... -- -- 2,336 Repurchase of common stock (Note 5)...... -- (384) (384) Net income............ -- -- 14,183 ---- -------- -------- Balance at January 29, 2000................ (139) (20,059) 138,233 Stock issued pursuant to long-term incentive plan (Note 6)............ -- -- 395 Exercise of stock options (Note 6).... -- -- 3,879 Tax benefit related to exercise of stock options (Note 6).... -- -- 1,925 Repurchase of common stock (Note 5)...... -- (290) (290) Supplemental Employee Retirement Plan adjustment (Note 12)........... 139 -- 139 Net income............ -- -- 19,512 ---- -------- -------- Balance at February 3, 2001................ $ -- $(20,349) $163,793 ==== ======== ========
Common Stock Class A Class B Paid-In
CapitalRetained
EarningsOther
Comprehensive
Income (Loss)Treasury
StockTotal
Stockholders'
EquityShares Par Value Shares Par Value (In thousands, except share data) Balance at January 30, 1999 16,057,329 $ 1,606 4,368,998 $ 437 $ 57,675 $80,374 $ (139 ) $ (19,675 ) $ 120,278 Stock issued pursuant to long-term incentive plan (Note 6) 15,206 1 — — 110 — — — 111 Exercise of stock options (Note 6) 277,500 27 — — 1,682 — — — 1,709 Tax benefit related to exercise of stock options (Note 6) — — — — 2,336 — — — 2,336 Repurchase of common stock (Note 5) — — — — — — — (384 ) (384 ) Net income — — — — — 14,183 — — 14,183 Balance at January 29, 2000 16,350,035 1,634 4,368,998 437 61,803 94,557 (139 ) (20,059 ) 138,233 Stock issued pursuant to long-term incentive plan. (Note 6) 19,134 2 — — 393 — — — 395 Exercise of stock options (Note 6) 486,150 49 — — 3,830 — — — 3,879 Tax benefit related to exercise of stock options (Note 6) — — — — 1,925 — — — 1,925 Repurchase of common stock (Note 5) — — — — — — — (290 ) (290 ) Supplemental Employee Retirement Plan adjustment (Note 12) — — — — — — 139 — 139 Net income — — — — — 19,512 — — 19,512 Balance at February 3, 2001 16,855,319 1,685 4,368,998 437 67,951 114,069 — (20,349 ) 163,793 Stock issued pursuant to long-term incentive plan (Note 6) 17,507 2 — — 463 — — — 465 Exercise of stock options (Note 6) 806,778 81 — — 8,713 — — — 8,794 Tax benefit related to exercise of stock options (Note 6) — — — — 3,543 — — — 3,543 Cancellation of fractional shares due to three-for-two stock split (Note 5) (132 ) — — — — — — — — Shares converted from Class B to Class A 1,166,165 117 (1,166,165 ) (117 ) Net income — — — — — 31,015 — — 31,015 Balance at February 2, 2002 18,845,637 $ 1,885 3,202,833 $ 320 $ 80,670 $ 145,084 $ — $ (20,349 ) $ 207,610 See accompanying notes to consolidated financial statements.
F-6
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 ---------------- ---------------- ----------------CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 19,512 $14,183 $25,954 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 22,284 18,771 13,039 Loss on disposal of equipment and leasehold improvements............................................ 2,295 546 -- Stock issued pursuant to long-term incentive plan......... 395 111 463 Deferred tax, net......................................... (2,742) 271 (1,124) Changes in operating assets and liabilities: Other receivables..................................... 1,497 (244) (456) Merchandise inventories............................... 3,186 (5,286) (1,118) Prepaid expenses...................................... (9,463) -- 330 Other assets.......................................... 261 43 (594) Accounts payable and accrued liabilities.............. 1,433 2,114 1,517 Income taxes payable.................................. 6,930 (3,311) 4,045 Deferred rent......................................... 690 1,043 1,204 Other long-term liabilities........................... 117 554 690 -------- ------- ------- Net cash provided by operating activities............. 46,395 28,795 43,950 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in equipment and leasehold improvements.......... (18,134) (26,819) (26,503) Acquisition of store leases and store assets................ -- (15,704) (1,911) Investment in marketable securities......................... (103,221) (4,452) (83,018) Proceeds from sale of marketable securities................. 58,336 30,686 43,418 -------- ------- ------- Net cash used in investing activities................. (63,019) (16,289) (68,014) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt........................ (1,764) (500) (1,000) Purchase of treasury stock.................................. (290) (384) (19,675) Proceeds from issuance of common stock...................... 3,879 1,709 273 -------- ------- ------- Net cash provided by (used in) financing activities... 1,825 825 (20,402) -------- ------- ------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (14,799) 13,331 (44,466) CASH AND CASH EQUIVALENTS, beginning of year................ 44,921 31,590 76,056 -------- ------- ------- CASH AND CASH EQUIVALENTS, end of year...................... $ 30,122 $44,921 $31,590 ======== ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest.................................................. $ 38 $ 146 $ 194 Income taxes, net......................................... $ 8,108 $12,902 $13,326SCHEDULE OF NONCASH TRANSACTIONS:
February 2,
2002February 3,
2001January 29,
2000(In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 31,015 $ 19,512 $ 14,183 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,347 22,284 18,771 Loss on disposal of equipment and leasehold improvements 750 2,295 546 Stock issued pursuant to long-term incentive plan — 395 111 Deferred tax, net — (2,742 ) 271 Changes in operating assets and liabilities: Other receivables (2,418 ) 1,497 (244 ) Merchandise inventories (1,918 ) 3,186 (5,286 ) Prepaid expenses (1,555 ) (9,463 ) — Other assets 118 261 43 Accounts payable and accrued liabilities 9,719 1,433 2,114 Income taxes payable (1,714 ) 6,930 (3,311 ) Deferred rent (567 ) 690 1,043 Other long-term liabilities 551 117 554 Net cash provided by operating activities 54,328 46,395 28,795 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in equipment and leasehold improvements (38,953 ) (18,134 ) (26,819 ) Acquisition of store leases and store assets (3,550 ) — (15,704 ) Investment in marketable securities (105,335 ) (103,221 ) (4,452 ) Proceeds from sale of marketable securities 84,931 58,336 30,686 Net cash used in investing activities (62,907 ) (63,019 ) (16,289 ) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt — (1,764 ) (500 ) Purchase of treasury stock — (290 ) (384 ) Proceeds from issuance of common stock 12,802 3,879 1,709 Net cash provided by financing activities 12,802 1,825 825 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 4,223 (14,799 ) 13,331 CASH AND CASH EQUIVALENTS, beginning of year 30,122 44,921 31,590 CASH AND CASH EQUIVALENTS, end of year $ 34,345 $ 30,122 $ 44,921 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 23 $ 38 $ 146 Income taxes, net $ 16,972 $ 8,108 $ 12,902 SCHEDULE OF NONCASH TRANSACTIONS: During the
fifty-three52 weeks ended February 2, 2002, 53 weeks ended February 3, 2001 andfifty-two52 weeks ended January 29, 2000,and January 30, 1999,the Company recorded an increase to paid-in capital and a decrease to income taxes payable of $3,543,000, $1,925,000$2,336,000and$408,000,$2,336,000, respectively, related to tax benefits associated with the exercise of non-qualified stock options.During the
fifty-three weeks ended February 3, 2001, the Company recorded an increase to other comprehensive income of $139,000 and a corresponding decrease to other long-term liabilities of $139,000, related to the Supplemental Employee Retirement Plan (see note 13). During the fifty-two52 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).See accompanying notes to consolidated financial statements.
F-7
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED FEBRUARY
For the years ended February 2, 2002, February 3, 2001JANUARYand January 29, 2000AND JANUARY 30, 1999NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF THE BUSINESS1: Summary of Significant Accounting PoliciesNature of the Business
The Wet Seal, Inc. (the "Company") is a
nationwidenational specialty retailer of fashionable and contemporary apparel and accessory items designed for consumers with a young, active lifestyle. The Company's success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand. The Company's failure to anticipate, identify or react to changes in fashion trends could adversely affect its results of operations.Approximately
32%26% 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 whom is the Chairman of theBoard.Board of Directors.The Company's fiscal year ends on the Saturday closest to the end of January. The reporting period includes 52 weeks in fiscal 2001, 53 weeks
inthe fiscal 2000 and 52 weeks ineachfiscal 1999.Principles of
the fiscal years 1999 and 1998. PRINCIPLES OF CONSOLIDATIONConsolidationThe consolidated financial statements include the accounts of The Wet Seal, Inc. and its wholly owned subsidiary, The Wet Seal Retail, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
BASIS OF PRESENTATIONBasis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
CASH AND CASH EQUIVALENTSCash and Cash Equivalents
The Company considers all
highly-liquidhighly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents.MERCHANDISE INVENTORIESMerchandise 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 IMPROVEMENTSEquipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Expenditures for betterment or improvement are capitalized, while expenditures for repairs that do not significantly increase the life of the asset are expensed as incurred.
Depreciation is provided using primarily the straight-line method over the estimated useful lives of the assets. Furniture, fixtures and equipment are typically depreciated over three to five years. Leasehold improvements and the cost of acquiring leasehold rights are depreciated over the lesser of the term of the lease or 10 years.
F-8
THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETSLong-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS"), No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. At February
3, 2001,2, 2002, the Company believes there has been no impairment of the value of such assets.INTANGIBLE ASSETSIntangible Assets
Excess of cost over net assets acquired (goodwill), which resulted from the acquisition of certain store assets in 1990 and 1999 is being amortized on the straight-line method over 20
years for the 1999 acquisition and overto 25years for the 1990 acquisition.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 acquired assets. At February3, 20012, 2002, the Company determined the goodwill was recoverable.REVENUE RECOGNITIONRevenue Recognition
Sales are recognized upon purchase by customer.
RENTAL EXPENSERental Expense
Any defined rental escalation is averaged over the term of the related lease in order to provide level recognition of rental expense.
STORE PRE-OPENING COSTSStore PreOpening Costs
Store opening and
pre-openingpreopening costs are charged to expense as they are incurred.ADVERTISING COSTSAdvertising Costs
Costs for advertising related to retail operations consisting of magazine ads, in-store signage and promotions are expensed as incurred. Total advertising expenses related primarily to retail operations in fiscal 2001, 2000 and 1999 were $6,039,000, $2,788,000, and
1998 were $2,788,000,$5,567,000,and $1,993,000. In fiscal 1999, approximately $2,872,000 was related to a print media advertising campaign. INCOME TAXrespectively.Income Tax
The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Deferred tax charges are provided on items, principally depreciation and rent, for which there are temporary differences in recording such items for financial reporting purposes and for income tax purposes.
F-9THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER SHARENet Income Per Share
In accordance with SFAS No. 128, "Earnings Per Share", net income per share, basic, is computed based on the weighted-average number of common shares outstanding for the period. Net income per
F-9
share, diluted, is computed based on the weighted-average number of common and potentially dilutive common equivalent shares outstanding for the period (see note 13).
NEW ACCOUNTING PRONOUNCEMENTS In June 1998,During the
Financial Accounting Standards Board ("FASB") issued Statementyear ended February 2, 2002, the Company effected a three-for-two stock split (see note 5).Use of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133," which delays the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 effective February 4, 2001. The adoption of SFAS No. 133 will not have a material effect on the Company's consolidated results of operations or financial condition. In December 1999, the Security and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 summarizes the staff's views in applying accounting principles generally accepted in the United States of America to revenue recognition in financial statements. The Company adopted SAB No. 101 in the fourth quarter of fiscal year 2000. The adoption of SAB No. 101 did not have a material impact on the Company's consolidated results of operations or equity. In March 2000, the FASB issued Interpretation ("FIN") No. 44, "Accounting for Certain Transactions involving Stock Compensation." FIN No. 44 is an interpretation of Accounting Principal Board's ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Among other matters, FIN No. 44 clarifies the application of APB Opinion No. 25 regarding the definition of employee for purposes of applying APB Opinion No. 25, the criteria for determining whether a plan qualifies as non compensatory and the accounting consequences of modifications to the terms of a previously issued stock options or similar awards. The Company adopted the provisions of FIN No. 44 in the third quarter of fiscal 2000. The adoption of FIN No. 44 did not have a material impact on the Company's consolidated results of operations or financial condition. USE OF ESTIMATESEstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTSFair Value of Financial Instruments
Management believes the carrying amounts of cash and cash equivalents, other receivables and accounts payable approximate fair value due to the short maturity of these financial instruments.
F-10THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)Short-term and Long-term investments consist of highly liquidinterestinterest- bearing securities that are carried at amortized cost plus accrued income, which management believes approximates market.STOCK-BASED COMPENSATIONStock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with
APBAccounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (see note 6).SEGMENT INFORMATIONSegment Information
The Company has one reportable segment due to the similarities of the economic characteristics between the operations represented by the Company's store formats.
The Company's success is largely dependent upon its ability to gauge the fashion tastes of its customers and provide merchandise that satisfies customers' preferences. Any inability to provide appropriate merchandise in sufficient quantities in a timely manner could have a material adverse effect on the Company's operating results.
New Accounting Pronouncements
In June
1997,1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. In July 1999, the FASB issued SFAS No.131, "Disclosures about Segments137, "Accounting for Derivative Instruments and Hedging Activities—Deferral ofan Enterprise and Related Information". This statement establishes standards fortheway companies report information about operating segments in financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. In accordance withEffective Date of FASB Statement No. 133," which delayed theprovisionseffective date of SFAS No.131,133 to fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133 effective February 4, 2001. The adoption of SFAS No. 133 did not have a material effect on theCompany has determinedCompany's consolidated financial position or results of operations or cash flows.F-10
In July 2001, the FASB issued SFAS No. 141 "Business Combinations", which, among other things, requires that
itthe purchase method of accounting be used for all business combinations initiated after June 30, 2001, no longer permits the use of the pooling-of-interests method of accounting for business combinations and broadens the criteria for recording intangible assets separate from goodwill. The adoption of SFAS No. 141 during the third quarter of 2001 did not have a material impact on the Company's consolidated financial position, results of operations or cash flows.In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets", which, among other things, establishes new standards for goodwill acquired in a business combination, eliminates the amortization of goodwill and requires the carrying value of goodwill and identifiable intangibles to be evaluated for impairment on an annual basis. Identifiable intangible assets with a determinable useful life will continue to be amortized over that period. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Management does not
currentlybelieve the adoption of SFAS No. 142 will haveany separately reportable operating segments. NOTE 2. ACQUISITION On December 1, 1998,a material impact on theCompany acquired the leases and furniture and fixtures for 19 store locations from Mothers Work, Inc. The purchase price of $1,911,000 was allocated to leasehold improvements and furniture, fixtures and equipment in the accompanyingCompany's consolidated financialstatements. The majorityposition, results of operations or cash flows.In August 2001, the
locations acquired were convertedFASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations", which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. Management does not believe the adoption of SFAS No. 143 will have a material impact on the Company's consolidated financial position, results of operations or cash flows.In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to
Arden B. stores.be disposed of either by sale or other than by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe the adoption of SFAS No. 144 will have a material impact on the Company's consolidated financial position, results of operations or cash flows.NOTE 2: Acquisition
On February 1, 1999, the Company acquired the leases and furniture and fixtures for 78 store locations from Britches of Georgetowne, Inc. for $15,704,000. Based upon a third-party appraisal, the purchase price was allocated to leasehold improvements, lease rights, and furniture, fixtures and equipment in the accompanying consolidated financial statements. Excess of cost over net assets acquired (goodwill) totaling $6,972,000 is being amortized on the straight-line method over 20 years. The majority of the locations acquired were converted to Arden B. stores.
F-11THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3,On March 25, 2001,
JANUARY 29, 2000 AND JANUARY 30, 1999the Company acquired the leases, merchandise inventory and furniture and fixtures for 18 Zutopia stores from Gymboree, Inc. for $3,550,000. Zutopia is a "tween" retail concept which caters to the female customer ages 5 to 12. The purchase price was allocated to the tangible assets acquired.F-11
NOTE
3. INVESTMENTS3: InvestmentsShort-term investments consist of highly liquid
interest bearinginterest-bearing deposits purchased with an initial maturity exceeding three months with a remaining maturity at February3, 20012, 2002 less than 12 months. Long-term investments consist of highly liquidinterest bearinginterest-bearing securities that mature beyond 12 months from the balance sheet date. It is management's intent to hold short-term and long-term investments to maturity. Short-term and long-term investments are carried at amortized cost plus accrued income, which approximates market at February3, 2001.2, 2002.Investments are comprised of the following (in thousands):
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR DESCRIPTION MATURITY DATES COST GAINS LOSSES VALUE - ----------- ---------------- --------- ---------- ---------- ---------FEBRUARY 3, 2001 Corporate bonds.................... Within one year $ 6,480 $ 30 $ -- $ 6,510 Municipal bonds.................... Within one year 26,884 16 -- 26,900 Government obligations............. Within one year 3,946 4 -- 3,950 Floating rate/Adjustable Notes..... Within one year 750 -- -- 750 Corporate bonds.................... One to two years 25,782 315 -- 26,097 Municipal bonds.................... One to two years 14,236 131 -- 14,367 ------- ---- ---- ------- $78,078 $496 $ -- $78,574 ======= ==== ==== =======
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR DESCRIPTION MATURITY DATES COST GAINS LOSSES VALUE - ----------- ---------------- --------- ---------- ---------- ---------JANUARY 29, 2000 Corporate bonds.................... Within one year $ 3,588 $ -- $ 90 $ 3,498 Municipal bonds.................... Within one year 10,507 -- 236 10,271 Government obligations............. Within one year 10,800 -- 103 10,697 Floating rate/Adjustable Notes..... Within one year 1,500 -- -- 1,500 Municipal bonds.................... One to two years 7,287 -- 108 7,179 ------- ---- ---- ------- $33,682 $ -- $537 $33,145 ======= ==== ==== =======
Description Maturity Dates Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesEstimated
Fair ValueFebruary 2, 2002 Corporate bonds Within one year $ 27,400 $ 353 $ — $ 27,753 Municipal bonds Within one year 35,023 277 — 35,300 Government obligations Within one year 5,100 6 — 5,106 Corporate bonds One to two years — — — Municipal bonds One to two years 30,433 111 (63 ) 30,481 $ 97,956 $ 747 $ (63 ) $ 98,640
Description Maturity Dates Amortized
CostGross
Unrealized
GainsGross
Unrealized
LossesEstimated
Fair ValueFebruary 3, 2001 Corporate bonds Within one year $ 6,480 $ 30 $ — $ 6,510 Municipal bonds Within one year 26,884 16 — 26,900 Government obligations Within one year 3,946 4 — 3,950 Floating rate/adjustable notes Within one year 750 — — 750 Corporate bonds One to two years 25,782 315 — 26,097 Municipal bonds One to two years 14,236 131 — 14,367 $ 78,078 $ 496 $ — $ 78,574 NOTE
4. PROVISION FOR INCOME TAXES4: Provision for Income TaxesSFAS No. 109 requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. The measurement of deferred items is based on enacted tax laws. In the event that the future consequences of differences between financial reporting bases and the tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
F-12
THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 4. PROVISION FOR INCOME TAXES (CONTINUED)The components of the income tax provision are as follows (in thousands):
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 ---------------- ---------------- ----------------CURRENT: Federal................................ $12,375 $7,067 $13,442 State.................................. 2,582 2,321 3,930 ------- ------ ------- 14,957 9,388 17,372 DEFERRED: Federal................................ (2,352) (47) (1,126) State.................................. (390) 318 2 ------- ------ ------- (2,742) 271 (1,124) ------- ------ ------- $12,215 $9,659 $16,248 ======= ====== =======
February 2,
2002February 3,
2001January 29,
2000Current: Federal $ 15,810 $ 12,375 $ 7,067 State 3,025 2,582 2,321 18,835 14,957 9,388
Deferred:
Federal 124 (2,352 ) (47 ) State 46 (390 ) 318 170 (2,742 ) 271 $ 19,005 $ 12,215 $ 9,659 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:
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 ---------------- ---------------- ----------------Provision for income taxes at federal statutory rate......................... 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit............................ 4.5 7.2 5.6 Tax exempt interest...................... (0.9) (1.7) (1.5) Inventory contributions.................. (1.5) (2.0) -- Other.................................... 1.4 2.0 (0.6) ---- ---- ---- Effective tax rate....................... 38.5% 40.5% 38.5% ==== ==== ====
February 2,
2002February 3,
2001January 29,
2000Provision for income taxes at federal statutory rate 35.0 % 35.0 % 35.0 % State income taxes, net of federal income tax benefit 4.0 4.5 7.2 Tax exempt interest (0.9 ) (0.9 ) (1.7 ) Inventory contributions (1.1 ) (1.5 ) (2.0 ) Other 1.0 1.4 2.0 Effective tax rate 38.0 % 38.5 % 40.5 % As of February 2, 2002 and February 3, 2001,
and January 29, 2000the Company's net deferred tax asset was$13,180,000$13,010,000 and$10,438,000$13,180,000, respectively. The major components of the Company's net deferred taxes at February 2, 2002 and February 3, 2001and January 29, 2000are as follows (in thousands):
FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ----------------Deferred rent............................ $ 3,602 $ 3,316 Acquisition related reserves............. -- 608 Inventory cost capitalization............ 1,006 919 Difference between book and tax basis of fixed assets........................... 7,180 4,022 State income taxes....................... (428) (279) Supplemental Employee Retirement Plan.... 1,224 860 Other.................................... 596 992 ------- ------- $13,180 $10,438 ======= =======
February 2,
2002February 3,
2001Deferred rent $ 3,473 $ 3,602 Inventory cost capitalization 1,157 1,006 Difference between book and tax basis of fixed assets 6,051 7,180 State income taxes (349 ) (428 ) Supplemental Employee Retirement Plan 1,460 1,224 Other 1,218 596 $ 13,010 $ 13,180 F-13
THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999NOTE
5. STOCKHOLDERS' EQUITY5: Stockholders' EquityThe
2,912,6653,202,833 shares of the Company's Class B Common Stock outstanding as of February3, 20012, 2002 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 Class A Common Stock has one vote per share.On July 16, 2001, the Wet Seal's shareholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 20,000,000 to 60,000,000 and effect a three-for-two stock split of The Wet Seal's common stock. The effective date of the three-for-two stock split was July 24, 2001. All share and per share amounts included in the accompanying consolidated financial statements and footnotes have been restated for all periods presented to reflect the stock split. The Stockholders equity section has been restated to give retroactive recognition to the stock splits by reclassifying the par value of the additional shares arising from the split from additional paid-in capital to common stock.
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 February
3, 2001, 1,367,6002, 2002, 2,051,400 shares had been repurchased at a cost of $20,349,000. Such repurchased shares are reflected as treasury stock in the accompanying consolidated financial statements. As of February3, 20012, 2002, there were767,7161,717,727 shares remaining that are authorized for repurchase.NOTE
6. LONG-TERM INCENTIVE PLAN6: Long-Term Incentive PlanUnder 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-qualifiednonqualified stock options. The Plans provide that the per share exercise price of an incentive stock option may not be less than the fair market value of the Company's Class A Common Stock on the date the option is granted. Options become exercisable over periods of up to five years and generally expire 10 years from the date of grant or 90 days after employment or services are terminated. The Plans also provide that the Company may grant restricted stock and other stock-based awards. An aggregate of2,425,0005,887,500 shares of the Company's Class A Common Stock may be issued pursuant to the Plans. As of February3, 2001, 406,6522, 2002, 1,024,383 shares were available for future grants.F-14
Stock option activity for each of the three years in the period ended February
3, 20012, 2002 was as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ----------------Outstanding at January 31, 1998.................... 967,500 $14.53 Granted.......................................... 130,000 16.93 Canceled......................................... (12,000) 13.57 Exercised........................................ (36,000) 7.58 --------- Outstanding at January 30, 1999.................... 1,049,500 14.42 Granted.......................................... 705,500 15.13 Canceled......................................... (58,000) 16.17 Exercised........................................ (185,000) 9.24 --------- Outstanding at January 29, 2000.................... 1,512,000 15.32 Granted.......................................... 661,500 13.38 Canceled......................................... (284,800) 15.57 Exercised........................................ (324,100) 11.97 --------- Outstanding at February 3, 2001.................... 1,564,600 $15.14 =========F-14THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 6. LONG-TERM INCENTIVE PLAN (CONTINUED)
Number of
SharesWeighted Average
Exercise PriceOutstanding at January 30, 1999 1,574,250 $ 9.61 Granted 1,058,250 10.09 Canceled (87,000 ) 10.78 Exercised (277,500 ) 6.16 Outstanding at January 29, 2000 2,268,000 10.21 Granted 992,250 8.92 Canceled (427,200 ) 10.38 Exercised (486,150 ) 7.98 Outstanding at February 3, 2001 2,346,900 10.09 Granted 1,361,250 18.99 Canceled (266,595 ) 15.73 Exercised (806,778 ) 10.90 Outstanding at February 2, 2002 2,634,777 $ 13.78 At February 2, 2002, February 3, 2001 and January 29, 2000
and January 30, 1999there were355,300, 380,500328,849, 532,950 and283,500570,750 outstanding options exercisable at aweighted averageweighted-average exercise price of$16.24, $11.71$11.53, $10.83 and$8.42,$7.81, respectively.The following table summarizes information on outstanding and exercisable stock options as of February
3, 2001:2, 2002:
OPTIONS EXERCISABLE OPTIONS OUTSTANDING ---------------------- ------------------------------------------ NUMBER NUMBER WEIGHTED WEIGHTED EXERCISABLE WEIGHTED OUTSTANDING AVERAGE AVERAGE AS OF AVERAGE RANGE OF AS OF REMAINING EXERCISE FEB. 3, EXERCISE EXERCISE PRICES FEB. 3, 2001 CONTRACTUAL LIFE PRICE 2001 PRICE - --------------- ------------ ---------------- -------- ----------- --------$ 3.00 - $ 3.63....................... 14,000 3.34 $ 3.54 14,000 $ 3.54 4.13 - 5.13....................... 33,500 3.48 4.40 33,500 4.40 8.00 - 12.02....................... 427,500 9.16 11.54 7,000 8.00 13.94 - 16.88....................... 748,600 8.37 15.44 126,800 15.92 19.31 - 27.63....................... 341,000 6.92 20.56 174,000 20.11 --------- ------- $ 3.00 - $27.63....................... 1,564,600 8.12 $15.14 355,300 $16.24 ========= =======
Options Outstanding Options Exercisable Range of
Exercise PricesNumber
Outstanding
as of
Feb. 2, 2002Weighted
Average
Remaining
Contractual LifeWeighted
Average
Exercise
PriceNumber
Exercisable
As of
Feb. 2, 2002Weighted
Average
Exercise
Price$ 2.00–$ 2.75 9,750 2.32 $ 2.42 9,750 $ 2.42 7.67– 10.00 618,577 8.25 8.37 64,599 8.83 10.08– 14.50 775,200 7.06 10.82 221,750 11.33 15.27– 19.42 916,750 9.32 17.17 12,000 16.99 20.69– 25.06 314,500 8.81 22.21 20,750 23.17 $ 2.00–$25.06 2,634,777 8.32 $ 13.78 328,849 $ 11.53 During the years ended February 2, 2002, February 3, 2001 and January 29, 2000,
and January 30, 1999,the Company recognized tax benefits of $3,543,000, $1,925,000$2,336,000and$408,000,$2,336,000, respectively, resulting from the exercise of certainnon-qualifiednonqualified stock options.ADDITIONAL LONG-TERM INCENTIVE PLAN INFORMATIONF-15
Additional Long-Term Incentive Plan Information
As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. Accordingly, no compensation expense has been recognized in the consolidated financial statements for employee incentive stock options or
non-qualifiednonqualified stock options.SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of
option pricingoption-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'sstock optionstock-option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values.F-15THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 6. LONG-TERM INCENTIVE PLAN (CONTINUED)The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions:
FISCAL 2000 FISCAL 1999 FISCAL 1998 ----------- ----------- -----------Dividend Yield............................... 0.00% 0.00% 0.00% Expected Volatility.......................... 78.16% 62.74% 49.93% Risk-Free Interest Rate...................... 4.84% 5.81% 4.74% Expected Life of Option following Vesting (in Months).................................... 48 48 48
Fiscal
2001Fiscal
2000Fiscal
1999Dividend Yield 0.00 % 0.00 % 0.00 % Expected Volatility 77.50 % 78.16 % 62.74 % Risk-Free Interest Rate 4.30 % 4.84 % 5.81 % Expected Life of Option following Vesting (in Months) 60 48 48 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 2001, fiscal 2000 and fiscal 1999
and fiscal 1998awards had been amortized to expense over the vesting period of the awards, net income (in thousands) and earnings per share would have been reduced to the pro forma amounts indicated below:xxxx
FISCAL 2000 FISCAL 1999 FISCAL 1998 ----------- ----------- -----------Net Income...................... As reported $19,512 $14,183 $25,954 Pro forma $17,480 $12,759 $24,804 Net Income Per Share, Basic..... As reported $ 1.56 $ 1.14 $ 1.98 Pro forma $ 1.40 $ 1.03 $ 1.90 Net Income Per Share, Diluted... As reported $ 1.54 $ 1.11 $ 1.91 Pro forma $ 1.38 $ 1.00 $ 1.83
Fiscal 2001 Fiscal 2000 Fiscal 1999 Net Income As reported $ 31,015 $ 19,512 $ 14,183 Pro forma $ 27,366 $ 17,480 $ 12,759 Net Income Per Share, Basic As reported $ 1.57 $ 1.04 $ 0.76 Pro forma $ 1.39 $ 0.93 $ 0.68 Net Income Per Share, Diluted As reported $ 1.52 $ 1.03 $ 0.74 Pro forma $ 1.35 $ 0.92 $ 0.66 The impact of outstanding
non-vestednonvested 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 February
3, 2001,2, 2002, the Company has granted an aggregate of98,639163,662 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 theirsalary.salaries. TheseF-16
bonus shares vest at the rate of 33.33% per year, and
non-vestednonvested shares are subject to forfeiture if the participant terminates employment. Compensation expense, equal to the market value of the shares as of the issue date, is being charged to earnings over the period that the employees provide service. In each of the years ended February 2, 2002, February 3, 2001, and January 29, 2000, 17,507, 19,134, andJanuary 30, 1999, 12,756, 10,137, and 12,30815,206 shares, respectively, were fully vested and issued. In connection with the issuance of these shares, the Company recorded compensation expense of $465,000, $395,000,$111,000,and$463,000$111,000 for the years ended February 2, 2002, February 3, 2001, and January 29, 2000, respectively.NOTE 7: Commitments and
January 30, 1999, respectively. F-16THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 7. COMMITMENTS AND CONTINGENCIES LEASESContingenciesLeases
The Company leases retail stores, automobiles, computers and corporate office and warehouse facilities under operating lease agreements expiring at various times through 2013. Substantially all of the leases require the Company to pay maintenance, insurance, property taxes and percentage rent based on sales volume over certain minimum sales levels. Effective February 1998, the Company entered into a sublease agreement for its former warehouse facility, which expires
in AugustJuly 31, 2002.Minimum annual rental commitments under
non-cancelablenoncancelable leases, including the corporate office and warehouse facility lease, are as follows (in thousands):
MINIMUM LEASE SUBLEASE NET LEASE COMMITMENTS INCOME COMMITMENTS ------------- -------- -----------Fiscal year ending: 2001................ $ 63,150 $ 677 $ 62,473 2002................ 51,303 395 50,908 2003................ 47,888 -- 47,888 2004................ 41,737 -- 41,737 2005................ 35,992 -- 35,992 Thereafter.......... 103,903 -- 103,903 -------- ------ -------- $343,973 $1,072 $342,901 ======== ====== ========
Minimum Lease
CommitmentsSublease
IncomeNet Lease
CommitmentsFiscal year ending: 2002 $ 66,205 $ 395 $ 65,810 2003 61,916 — 61,916 2004 55,663 — 55,663 2005 49,740 — 49,740 2006 47,051 — 47,051 Thereafter 135,381 — 135,381 $ 415,956 $ 395 $ 415,561 Rental expense, including common area maintenance, was $100,406,000, $98,543,000,
$90,613,000,and$72,533,000,$90,613,000, of which $289,000, $32,000,$28,000,and$295,000$28,000 was paid as percentage rent based on sales volume, for the years ended February 2, 2002, February 3, 2001 and January 29, 2000,and January 30, 1999,respectively.EMPLOYMENT CONTRACTSEmployment Contracts
The Company has an employment contract with one officer, which provides for minimum annual salary, customary benefits and allowances, and incentive bonus,
if specified Companybased upon the Company's earningslevels are achieved.level. The agreement provides this same officer with severance benefits which approximate three years' salary, if the agreement is terminated without cause before expiration of its term or if the individual's duties materially change following a change in control of the Company.LITIGATIONF-17
Litigation
The Company
iswas a defendant in a lawsuit entitled Agnes Troublevsversus The Wet Seal, Inc.pendingin the United States District Court for the Southern District of NewYork. The plaintiff seeks money damages in an unspecified amount and an injunction againstYork contending theCompany's use of the trademark Arden B. Plaintiff contends that itstrademark and style, agnes b.are, were infringed by Arden B.whichThe litigation was settled on March 20, 2002. The settlement cost and substantially all the costs of defense were covered by insurance. The Companydenies. Trial is likely to occur in calendar year 2001. If the Company were to lose at trial and is orderedagreed to change theArden B. name or logo it could have a negative impact on the businessstyling of the Arden B.division andlogo to a mutually acceptable form. The Company does not believe that changing theCompany would incur costs to comply with the orderslogo will have a material adverse effect on its results ofthe Court.operations.Additionally, 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
F-17THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999 NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)certainty, the Company is of the opinion that their resolution will not likely have a material adverse effect on the Company's consolidated financial statements.LETTERS OF CREDITLetters of Credit
At February
3, 2001,2, 2002, the Company had outstanding letters of credit amounting to$5,512,000.$7,250,000.NOTE
8. REVOLVING CREDIT ARRANGEMENT8: Revolving Credit ArrangementUnder a secured revolving
line of creditline-of-credit arrangement with abank,major financial institution, the Company may borrow up to a maximum of $50,000,000 on a revolving basis throughJuly 2001.January 2004. The cash borrowings under the arrangement bear interest at the bank's prime rate or, at the Company's option, LIBOR plus 1.5%.The credit arrangement imposes quarterly and annual financial covenants requiring the Company to maintain certain financial ratios and achieve certain levels of annual income. In addition, the credit arrangement requires that the bank approve the payment of dividends and restrict the level of capital expenditures. At February
3, 2001,2, 2002, the Company was in compliance with these covenants. The Company had no borrowings outstanding under the credit arrangement at February3, 2001.2, 2002.NOTE
9. RELATED PARTY TRANSACTIONS9: Related-Party TransactionsCertain 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 $575,000 in the year ended February 2, 2002, $500,000 in the year ended February 3, 2001 and $437,500 in the year ended January 29,
2000 and $375,000 in2000. In June 2001, theyear ended January 30, 1999. TheCompanyhasentered into an agreement with these officers, requiring annual payments of$575,000$639,500 through2002.2006.NOTE
10. RETIREMENT PLAN10: Retirement PlanEffective June 1, 1993, the Company established a qualified defined contribution retirement plan under the Internal Revenue Code, Section 401(k). The Wet Seal Retirement Plan (the "Plan") is available to all employees who meet the Plan's eligibility requirements. The Plan is funded by employee contributions, and additional contributions may be made by the Company at its discretion. As of February
3, 2001,2, 2002, the Company had accrued$145,000$300,000 as its fiscal20002001 contribution to the Plan.F-18
NOTE
11. ACCRUED LIABILITIES11: Accrued LiabilitiesAccrued liabilities consist of the following (in thousands):
FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ----------------Reserve for self-insurance..................... $ 384 $ 2,672 Accrued wages, bonuses and benefits............ 5,116 5,570 Gift certificate and credit memo liability..... 4,273 4,261 Sales tax payable.............................. 2,489 2,376 Other.......................................... 5,549 5,732 ------- ------- $17,811 $20,611 ======= =======F-18THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
February 2,
2002February 3,
2001Reserve for self-insurance $ 334 $ 384 Accrued wages, bonuses and benefits 6,401 5,116 Gift certificate and credit memo liability 5,483 4,273 Sales tax payable 1,525 2,489 Other 5,578 5,549 $ 19,321 $ 17,811 NOTE
11. ACCRUED LIABILITIES (CONTINUED) In connection with the acquisition of Contempo Casuals, Inc. in fiscal 1995, the Company assumed certain accruals, including the reserve for self-insurance, which were estimated by the seller. In fiscal 2000 the Company reversed $1,900,000 of the reserve for self-insurance based upon management's estimate of its remaining liability. NOTE 12. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN12: Supplemental Employee Retirement PlanThe Company maintains a defined benefit Supplemental Employee Retirement Plan (the "SERP") for
certain of itsone keyemployeesemployee and a director. The SERP provides for preretirement death benefits through life insurance and for retirement benefits. The Company funded the SERP in 1998 and 1997 through contributions to a trust fund known as a "Rabbi" trust. Assets held in the Rabbi trust ($1,024,0001,367,000 and$1,292,000$1,024,000 at February 2, 2002 and February 3, 2001,and January 29, 2000,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 No. 132, "Employers' Disclosures about Pensions and other Postretirement
Benefits.Benefits," the following presents a reconciliation of the SERP's funded status (in thousands):
CHANGE IN BENEFIT OBLIGATION FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ----------------Benefit obligation at beginning of year........ $3,909 $3,355 Service cost................................. 350 328 Interest cost................................ 264 226 Actuarial loss............................... (488) -- Benefits paid................................ (148) -- ------ ------ Benefit obligation at end of year.............. $3,887 $3,909 ====== ======
CHANGE IN PLAN ASSETS FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ----------------Fair value of plan assets at beginning of year......................................... $ -- $ -- Actual return on assets -- -- Employer contribution........................ 148 -- Benefits paid................................ (148) -- ------- ------- Fair value of plan assets at end of year....... $ -- $ -- ======= ======= Funded status.................................. $(3,887) $(3,909) Unrecognized transition (asset)/obligation... -- -- Unrecognized prior service cost.............. 1,641 1,804 Unrecognized net loss........................ (349) 139 ------- ------- Net amount recognized.......................... $(2,595) $(1,966) ======= ======= Weighted average assumptions: Discount rate................................ 6.75% 6.75% Expected return on plan assets............... 0.00% 0.00% Rate of compensation increase................ n/a n/aCHANGE IN BENEFIT OBLIGATION
February 2,
2002February 3,
2001Benefit obligation at beginning of year $ 3,887 $ 3,909 Service cost 289 350 Interest cost 262 264 Actuarial loss — (488 ) Benefits paid — (148 ) Benefit obligation at end of year $ 4,438 $ 3,887 F-19
THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999CHANGE IN PLAN ASSETS
February 2,
2002February 3,
2001(In thousands) Fair value of plan assets at beginning of year $ — $ — Actual return on assets — — Employer contribution — 148 Benefits paid — (148 ) Fair value of plan assets at end of year $ — $ — Funded status $ (4,438 ) $ (3,887 ) Unrecognized transition (asset)obligation — — Unrecognized prior service cost 1,477 1,641 Unrecognized net loss (484 ) (349 ) Net amount recognized $ (3,445 ) $ (2,595 ) Weighted-average assumptions: Discount rate 6.75 % 6.75 % Expected return on plan assets 0.00 % 0.00 % Rate of compensation increase n/a n/a AMOUNTS RECOGNIZED IN BALANCE SHEET
February 2, 2002 February 3, 2001 Prepaid pension cost $ — $ — Accrued benefit liability (4,438 ) (3,887 ) Intangible asset (unrecognized prior service cost) 993 1,292 Accumulated other comprehensive loss — — Net amount recognized $ (3,445 ) $ (2,595 ) COMPONENTS OF NET PERIODIC PENSION COST
February 2, 2002 February 3, 2001 Service cost—benefits earned during the period $ 289 $ 350 Interest cost on projected benefit obligation 262 264 Expected return on plan assets — — Amortization of unrecognized prior service cost 164 163 Amortization of (gain)loss (13 ) — Net periodic pension cost $ 702 $ 777 F-20
NOTE
12. SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (CONTINUED)
AMOUNTS RECOGNIZED IN BALANCE SHEET FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ----------------Prepaid pension cost........................................ $ -- $ -- Accrued benefit liability................................. (3,887) (3,909) Intangible asset (unrecognized prior service cost)........ 1,292 1,804 Accumulated other comprehensive loss...................... -- 139 ------- ------- Net amount recognized....................................... $(2,595) $(1,966) ======= =======COMPONENTS OF NET PERIODIC PENSION COST FEBRUARY 3, 2001 JANUARY 29, 2000 ---------------- ---------------- Service cost--benefits earned during the period. $ 350 $ 328Interest cost on projected benefit obligation............. 264 226 Expected return on plan assets............................ -- -- Amortization of unrecognized prior service cost........... 163 164 ------- ------- Net periodic pension cost................................... $ 777 $ 718 ======= =======NOTE 13. NET INCOME PER SHARE13: Net Income Per ShareA reconciliation of the numerators and denominators used in basic and diluted net income per share is as follows (in thousands, except for share data):
FEBRUARY 3, 2001 JANUARY 29, 2000 JANUARY 30, 1999 ---------------- ---------------- ----------------Net income....................................... $ 19,512 $ 14,183 $ 25,954 ========== ========== ========== Weighted average number of common shares: Basic............................................ 12,484,409 12,425,704 13,085,587 Effect of dilutive securities--stock options..... 177,898 387,634 495,646 ---------- ---------- ---------- Diluted.......................................... 12,662,307 12,813,338 13,581,233 ========== ========== ========== Net income per share: Basic............................................ $ 1.56 $ 1.14 $ 1.98 Effect of dilutive securities--stock options..... 0.02 0.03 0.07 ---------- ---------- ---------- Diluted.......................................... $ 1.54 $ 1.11 $ 1.91 ========== ========== ==========F-20THE WET SEAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED FEBRUARY 3, 2001, JANUARY 29, 2000 AND JANUARY 30, 1999
February 2,
2002February 3,
2001January 29,
2000Net income $ 31,015 $ 19,512 $ 14,183 Weighted-average number of common shares: Basic 19,734,245 18,726,614 18,638,556 Effect of dilutive securities—stock options 608,956 266,847 581,451 Diluted 20,343,201 18,993,461 19,220,007 Net income per share: Basic $1.57 $1.04 $0.76 Effect of dilutive securities—stock options 0.05 0.01 0.02 Diluted $1.52 $1.03 $0.74 NOTE
14. SHAREHOLDER RIGHTS PLAN14: Shareholder Rights PlanOn 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.investments. 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 accumulates12 percent12% or more of the Company's voting stock, or if a party announces an offer to acquire20 percent20% 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 a12 percent12% position in its voting stock.NOTE
15. UNAUDITED QUARTERLY FINANCIAL DATA FISCAL YEAR ENDED FEBRUARY15: Unaudited Quarterly Financial DataFiscal Year Ended February 2, 2002
Quarter Sales Gross Margin Net Income Net Income
Per Share,
BasicNet Income
Per Share,
Diluted(In thousands, except for share data) First Quarter $ 137,913 $ 41,666 $ 5,360 $ 0.28 $ 0.26 Second Quarter 135,580 40,078 3,573 0.18 0.18 Third Quarter 146,888 47,243 6,817 0.34 0.34 Fourth Quarter 181,514 67,721 15,265 0.77 0.74 For the Year $ 601,895 $ 196,708 $ 31,015 $ 1.57 $ 1.52 F-21
Fiscal Year Ended February 3, 2001
NET INCOME PER NET INCOME PER QUARTER SALES GROSS MARGIN NET INCOME SHARE, BASIC SHARE, DILUTED - ------- -------- ------------ ---------- -------------- -------------- (IN THOUSANDS EXCEPT FOR SHARE DATA)First Quarter................... $130,600 $ 33,717 $ 2,217 $ .18 $ .18 Second Quarter.................. 128,194 29,992 461 .04 .04 Third Quarter................... 144,858 40,193 3,955 .32 .31 Fourth Quarter.................. 176,530 56,970 12,879 1.03 .98 -------- -------- ------- For the Year.................... $580,182 $160,872 $19,512 $1.56 $1.54 ======== ======== =======FISCAL YEAR ENDED JANUARY 29, 2000
NET INCOME PER NET INCOME PER QUARTER SALES GROSS MARGIN NET INCOME SHARE, BASIC SHARE, DILUTED - ------- -------- ------------ ---------- -------------- -------------- (IN THOUSANDS EXCEPT FOR SHARE DATA)First Quarter................... $122,835 $ 35,843 $ 4,399 $ .36 $ .34 Second Quarter.................. 126,904 35,965 3,686 .30 .29 Third Quarter................... 131,465 36,843 2,747 .22 .22 Fourth Quarter.................. 143,203 35,744 3,351 .27 .27 -------- -------- ------- For the Year.................... $524,407 $144,395 $14,183 $1.14 $1.11 ======== ======== =======
Quarter Sales Gross Margin Net Income Net Income
Per Share,
BasicNet Income
Per Share,
Diluted(In thousands, except for share data) First Quarter $ 130,600 $ 33,717 $ 2,217 $ 0.12 $ 0.12 Second Quarter 128,194 29,992 461 0.03 0.03 Third Quarter 144,858 40,193 3,955 0.21 0.21 Fourth Quarter 176,530 56,970 12,879 0.68 0.65 For the Year $ 580,182 $ 160,872 $ 19,512 $ 1.04 $ 1.03 Net income per share is computed independently for each of the quarters presented and, therefore, may not sum to the totals for the year.
During the quarter ended February 3, 2001 the Company recorded a $2,000,000 loss on disposal of certain store assets and income of $1,900,000 associated with the reversal of a reserve for self-insurance (see note 11). F-21F-22
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------*3.1Exhibit No. Description 3.1 Restated Certificate of Incorporation of the Company. *3.2(1)3.1.1 Amendment to Restated Certificate of Incorporation of the Company. 3.2 Bylaws of the Company. *4.1(1)4.1 Specimen Certificate of the Class A Stock, par value $.10 per share. *4.2(1)4.2 Specimen Certificate of the Class B Stock, par value $.10 per share. *******(1)4.3 Shareholder Rights Plan. ********(7)10.1 Lease between the Company and Foothill-Parkstone I, LLC, dated November 21, 1996. *10.3(8)10.3 Services Agreement, dated December 30, 1988, and First amendment to Services Agreement, dated June 1, 1990, between the Company and Kathy Bronstein. **(1)10.3.1 Second amendment to Services Agreement between the Company and Kathy Bronstein, dated March 23, 1992. ***(2)10.3.2 Services Agreement between the Company and Edmond Thomas, dated June 22, 1992. ****10.3.3Third 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(4)10.3.3 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(4)10.3.4 Fifth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 30, 1995. *****10.3.8(5)10.3.5 Sixth amendment to Services Agreement between the Company and Kathy Bronstein, dated February 2, 1996. *****10.3.9 Third amendment to Services Agreement between the Company and Edmond Thomas, dated February 2, 1996. *********10.3.9.1 Fourth amendment to Services Agreement between the Company and Edmond Thomas, dated January 1, 1995. **********10.3.9. Fifth amendment to Services Agreement between the Company and Edmond Thomas, dated March 31, 1999. **********10.3.9. Sixth amendment to Services Agreement between the Company and Edmond Thomas, dated April 16, 1999. **********10.3.9.(5)10.3.6 Seventh amendment to Services Agreement between the Company and Kathy Bronstein, dated April 16, 1999. *10.4(10)10.3.7 Eighth Amendment to Services Agreement between the Company and Kathy Bronstein, dated February 4, 2001. 10.3.8 Supplemental Compensation Agreement between the Company and Kathy Bronstein, dated April 1, 2001. 10.4 1990 Long-Term Incentive Plan. **(1)10.5 Credit Agreement between the Company and Bank of America, dated as of April 20, 1992. ***(2)10.5.1 Credit Agreement between the Company and Bank of America, dated June 23, 1993, as amended. ****(3)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. *****(4)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. *****(5)10.5.4 Business Loan Agreement between the Company and Bank of America, containing Revolving Line of Credit for Contempo Casuals,Casualss, Inc. dated June 30, 1995.*********(5)10.5.5 Amendment No. 1 to Business Loan Agreement between the Company and Bank of America, containing Term Loan Agreement between the CompanyandBankRevolving Line ofAmerica, containing Term Loan and Revolving Line of Credit, dated May 7, 1998.
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------*********Credit, dated May 7, 1998. (9)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. *********(9)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. *********(9)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. ***********(9)10.5.9 Business Loan Agreement between the Company and Bank of America, containing Loan and Revolving Line of Credit; Term dated October 29, 1999. ******10.6.1 "Key Man" life insurance policy for Edmond Thomas. *********10.6.2 "Key(11)10.5.10 Amendment No. 5 to Business Loan Agreement between the Company and Bank of America, containing Term Loan and Revolving Line of Credit, dated December 21, 2001. 10.6 "Key Man" life insurance policy for Kathy Bronstein. ***(9)10.7 1994 Long-Term Incentive Plan. *10.8(3)10.8 Stock Purchase and Stock Transfer Restriction Agreement among Kathy Bronstein, Suzy Shier, Inc. and the Company dated December 30, 1988. ****(1)10.9 Indemnification Agreement between the Company and various Executives and Directors, dated January 3, 1995, and schedule listing all parties thereto. ******(4)10.10 1996 Long-Term Incentive Plan. ********(6)
10.10.1 Amendment to 1996 Long-Term Incentive Plan. 10.11 Supplemental Employee Retirement Plan. (8) 10.12 2000 Stock Incentive Plan. *****(12)21.1 Subsidiaries of the Registrant. (5) 23.1 Consent of Deloitte & Touche LLP, independent auditors. 99.1 Factors Affecting Future Financial Results. - ------------------------ *
- (1)
- Denotes exhibits incorporated by reference to the Company's Registration Statement File No. 33-34895.
**- (2)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1993.
***- (3)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994.
****- (4)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995.
*****- (5)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1996.
******- (6)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997.
*******- (7)
- Denotes exhibits incorporated by reference to the Company's Current Report on Form 8-K filed on August 25, 1997.
********- (8)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January
31,1, 1998.*********- (9)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1999.
**********- (10)
- Denotes exhibits incorporated by reference to the Company's Proxy Statement dated May 4, 1999.
***********- (11)
- Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2000.