-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TkzTgLDn16VHEC5j1rfgilW+VNPHOYz95zj85ErKuWCxLo+x6BIPCAmWCq6qIWSb toGf/zg3YqTJKbzbttXI/g== 0001047469-99-016566.txt : 19990428 0001047469-99-016566.hdr.sgml : 19990428 ACCESSION NUMBER: 0001047469-99-016566 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990130 FILED AS OF DATE: 19990427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WET SEAL INC CENTRAL INDEX KEY: 0000863456 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-WOMEN'S CLOTHING STORES [5621] IRS NUMBER: 330415940 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18632 FILM NUMBER: 99602108 BUSINESS ADDRESS: STREET 1: 26972 BURBANK CITY: FOOTHILL RANCH STATE: CA ZIP: 92610 BUSINESS PHONE: 7145839029 MAIL ADDRESS: STREET 1: 26972 BURBANK CITY: FOOTHILL RANCH STATE: CA ZIP: 92610 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-18632 ------------------------ THE WET SEAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0415940 (State of incorporation) (I.R.S. Employer Identification No.) 26972 BURBANK, FOOTHILL RANCH, CA 92610 (Address of principal executive (Zip Code) offices)
(949) 583-9029 (Registrant's telephone number, including area code) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: CLASS A COMMON STOCK PREFERRED STOCK PURCHASE RIGHTS (Title of Class) (Title of Class)
------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. / / The aggregate market value of voting stock held by non-affiliates as of April 3, 1999 was $372,834,756. The number of shares outstanding of the registrant's Class A Common Stock and Class B Common Stock, par value $.10 per share, at April 3, 1999 was 10,729,886 and 2,912,665, respectively. There were no shares of Preferred Stock, par value $.01 per share, outstanding at April 3, 1999. DOCUMENTS INCORPORATED BY REFERENCE: PART III incorporates information by reference from the Registrant's definitive Proxy Statement for its Annual Meeting of Stockholders' to be filed with the Commission within 120 days of January 30, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL The Wet Seal, Inc., a Delaware corporation ("Wet Seal" or the "Company"), founded in 1962, is a nationwide specialty retailer of fashionable and contemporary apparel and accessory items designed for consumers with a young, active lifestyle. As of April 3, 1999, the Company operated 522 retail stores in 42 states, Washington D.C. and Puerto Rico, including 120 in California, 57 in Florida, and 41 in Texas. Of the 522 stores, 248 operate under the "CONTEMPO CASUALS" trademark, 190 operate under the "WET SEAL" trademark, 66 operate under the "ARDEN B." trademark, 17 operate under the "LIMBO LOUNGE" trademark and one of the stores operates under the "NEXT" trademark. Arden B. is the latest retail concept introduced by the Company in November 1998, and offers a collection of dressy and casual apparel, accessories and footwear for the young contemporary customer. Arden B. serves to fill the void between a "junior" and a "missy" customer. Limbo Lounge was introduced by the Company in fiscal 1996 and offers both junior's and young men's apparel and accessories in a unique and entertaining store environment. On July 1, 1995, the Company acquired the business, assets and properties of Contempo Casuals, Inc. ("Contempo Casuals"), a 237-store junior women's retail chain. This acquisition substantially increased the size of the Company. Effective February 2, 1997, Contempo Casuals, Inc. was merged with and into The Wet Seal, Inc. The Company introduced the "Wet Seal Catalog" in late January 1998. The catalog focuses on the junior customer and features both private label and branded apparel, shoes and accessories. The Company had six catalog mailings throughout fiscal 1998. In fiscal 1999, the Company plans to reposition the catalog under the "Blue Asphalt" brand name. Blue Asphalt is the number one denim brand in both Wet Seal and Contempo Casuals stores, and has been expanded to a full assortment of fashion apparel and accessories. The Company also plans to introduce a related web-site under the Blue Asphalt name by mid-1999. The new site will include an on-line shopping "magalog," as well as links to the Wet Seal and Contempo Casuals web-sites. The Blue Asphalt magalog and web-site will both offer Blue Asphalt merchandise and youth-targeted editorial content to build brand awareness and increase customer base and sales. PRODUCTS AND MERCHANDISING Both Wet Seal and Contempo Casuals stores target the same fashion-conscious junior customer. The Company merchandises both stores similarly. In duplicate locations (stores located in malls where the Company operates both a Wet Seal and a Contempo Casuals store), the Company differentiates the locations by displaying the merchandise differently in each of the stores, and will occasionally differentiate the merchandise mix. The Company provides a balance of moderately-priced, fashionable brand name and Company-developed apparel and accessories that appeal to consumers with young, active lifestyles. The Company believes that Company-developed apparel differentiates it from its competitors. In the fourth quarter of fiscal 1998, the Company opened the first Arden B. store. Arden B. caters to the fashionable young contemporary woman who falls between a "junior" and a "missy" customer. Arden B. stores offer a collection of dressy and casual apparel, accessories and footwear, all under the "Arden B." brand name. The Company currently operates 66 Arden B. stores nationwide and plans to open up to 13 additional stores in fiscal 1999. In the fourth quarter of fiscal 1996, the Company introduced a store concept called Limbo Lounge. The product offerings include both junior's and young men's apparel and accessories in a unique and entertaining store environment. The Company currently operates 17 Limbo Lounge stores and plans to open up to eight additional stores in fiscal 1999. 2 With respect to each of the retail concepts, the Company frequently updates its product offerings to provide a regular flow of fresh, new fashionable merchandise. Management carefully monitors pricing and markdowns to expedite sales of slower-moving inventory, facilitate the introduction of new merchandise and maintain an updated fashion image. Generally, the Company's stores display merchandise within a current fashion trend which reflects a color statement and key items related to that trend. Rather than always displaying garments together by type (blouses with blouses, for example), the Company combines items of apparel and accessories which the customer might buy as an ensemble. Store displays are designed to enable customers to create ensembles within a current fashion statement or trend group. Management believes that the trend grouping concept strengthens the fashion image of the merchandise offered in the stores and enables the customer to locate combinations of blouses, skirts, pants and accessories in a manner which enhances the Company's opportunity to make multiple unit sales. From time to time certain key items are merchandised together on tables or wall shelf sections in order to emphasize those particular items. The general layout of merchandise in the stores is planned by the Company's management. The Company makes use of in-store image posters to help focus customers on particular fashion themes. The Company frequently changes the visual display of the merchandise in its stores to reflect the changing tastes of the Company's target customer. DESIGN, BUYING AND PRODUCT DEVELOPMENT The Company's experienced design and buying teams are responsible for identifying evolving fashion trends and then developing themes to guide the Company's merchandising strategy. These teams monitor emerging fashion trends by attending domestic and international fashion shows, engaging the services of international fashion consultants, following industry publications and conducting regular market research, including monitoring cutting-edge, alternative stores, visiting Company stores to interact with customers and employees and visiting competitors' stores. Additionally, the Company holds "open to buy" days once a week to allow vendors to meet with buyers. Management believes that these open sessions provide buyers with the opportunity to purchase fresh and innovative products that help to further differentiate the Company's merchandise mix. The Company's commitment to Company-developed apparel is an important element in differentiating its merchandise from that of its competitors. After selecting a fashion theme to promote, the design and buying teams work closely with vendors to modify colors, materials and designs and create an image consistent with the theme for the Company's product offerings. Additionally, the Company has increased its focus on developing exclusive designs and brands to reinforce the fashion statements of its merchandise offerings as well as to increase the perception of Wet Seal, Contempo Casuals, Arden B. and Limbo Lounge as destination stores for the customer. The Company focused on the Blue Asphalt, Evolution Not Revolution and Arden B. brands in particular in fiscal 1998 and given the success of these brands, plans to continue this focus. SOURCING AND VENDOR RELATIONSHIPS The Company purchases its merchandise from numerous domestic vendors and an increasing number of foreign vendors. Although in fiscal 1998 no single vendor accounted for more than 10% of the Company's merchandise and only two vendors accounted for more than 5%, management believes the Company is the largest customer of many of its smaller vendors. Management believes the Company's importance to these vendors allows it to provide significant input into their design, manufacturing and distribution processes, and has enabled the Company to negotiate favorable terms with such vendors. Quality control is monitored carefully at the distribution points of its largest vendors and manufacturers, and all merchandise is inspected upon arrival at the Company's Foothill Ranch, California distribution center. The Company does not have any long term or exclusive contracts with any particular manufacturer or supplier for either brand name or Company-developed apparel. 3 ALLOCATION AND DISTRIBUTION The Company's merchandising effort primarily focuses on maintaining a regular flow of fresh, fashionable merchandise into its stores. Successful execution depends in large part on the Company's integrated planning, allocation and distribution functions. Planning and allocation are managed by a team headed by the Company's Vice President of Planning and Allocation. By working closely with District and Regional Directors and merchandise buyers, this team manages inventory levels and coordinates the allocation of merchandise to each of the Company's stores based on sales volume, climate and other factors that may influence individual stores' product mix. All merchandise for retail stores is received from vendors at the Company's Foothill Ranch, California distribution facility, where items are inspected for quality and prepared for shipping to the Company's stores. Merchandise for the catalog is distributed through a third party fulfillment house. The Company ships merchandise to stores within a 100-mile radius of the distribution center by its fleet of Company-owned trucks. The remainder of the Company's stores are shipped merchandise by common carrier. Consistent with the Company's goal of maintaining the freshness of its product offerings, the Company ships new merchandise to each store daily. In keeping with the Company's policy of introducing new merchandise, markdowns are taken regularly to effect a rapid sale of slow-moving inventory. Merchandise which remains unsold is periodically shipped to the Company's clearance stores where further markdowns are taken as needed in order to move the merchandise. Sales of merchandise at these stores aggregated $7.9 million for the fiscal year ended January 30, 1999. These stores operate under the Wet Seal, Contempo Casuals and Arden B. names. MARKETING, ADVERTISING AND PROMOTION The Company believes that the highly-visible locations of its stores within regional shopping malls, broad selection of fashionable merchandise and dynamic, entertaining in-store environments have contributed significantly to the Company's reputation as a destination store addressing the lifestyle of fashion- conscious young consumers. Consequently, the Company has historically relied more heavily on these factors and "word-of-mouth" advertising than more traditional forms of advertising such as print, radio and television. The Company utilizes a variety of advertising and promotional programs that allow the Company to gain exposure in a cost-effective manner. By introducing frequent shopper cards in its Wet Seal and Contempo Casuals stores, the Company has developed a marketing database that helps to track customers. The cards, which are sold for $20 each, entitle customers to a standard 10% discount on purchases made within a one-year period. As part of these programs, sales representatives call selected cardholders personally to notify customers of special in-store promotions, such as preferred customer sales during which cardholders receive additional incentives. Management believes these promotions foster customer loyalty and encourage frequent visits and multiple item purchases. The Company also sponsors special events such as snowboarding competitions and beach festivals that focus on the interests and active lifestyles of its target customers. Further, the Company utilizes its Company-owned trucks as "rolling billboards" in California, painting them to promote the Company as well as certain of its Company-developed labels such as Blue Asphalt and Evolution Not Revolution. STORE OPERATIONS The Company's Wet Seal and Contempo Casuals stores are divided into seven geographic regions. Each region is managed by a Regional Director who reports to the Company's Senior Vice President of Store Operations. Each region is further divided into districts consisting of between 9 to 16 stores and managed by a District Director. The Limbo Lounge stores are located nationwide and are currently overseen by the local Wet Seal/Contempo Casuals Regional and District Directors. The Arden B. stores are divided into eight geographic districts consisting of 8 to 10 stores each. Each district is managed by a 4 District Director who reports to the Arden B. Director of Store Operations, who in turn reports to the Company's Senior Vice President of Store Operations. The Company delegates substantial authority to regional, district and store-level employees, while taking advantage of economies of scale by centralizing functions such as finance, data processing, merchandise purchasing and allocation, human resources and real estate at the corporate level. The Company encourages communication between and among its Regional and District Directors and senior management. Each of the Company's 53 District Directors provides weekly reports to senior management concerning overall business conditions and specific aspects of their stores' operations. These reports are used to identify competitive trends and store level concerns in a timely manner. Store performance is also evaluated by senior management through the use of a "secret shopper" service that shops each store twice a month. Stores are typically staffed with one full-time manager, one or two full-time co-managers, one full-time customer service leader and 9 to 16 customer service representatives and cashiers, most of whom are part-time. During peak seasons, stores may increase staffing levels to accommodate the additional in-store traffic. The Company seeks to hire store-level employees who are energetic, fashionable and friendly and who can identify with its targeted customers. The Company's policy is to promote store managers from within while also hiring from outside. Highly-regarded store managers are often given opportunities to move to higher-volume stores. The Company sets weekly sales goals for each store and devises incentives to reward stores that meet or exceed their sales targets. In addition, from time to time the Company runs sales contests to encourage its store level employees to maximize sales volume. Most of the Company's stores are, and the Company expects that most of its new stores will be, located in regional, high-traffic shopping malls which contain at least one "anchor" department store. The Company places great emphasis on its location within a mall and attempts to locate stores in the higher-traffic areas of a mall and to obtain the greatest amount of frontage possible. The Company's average store size is approximately 4,100 square feet. Store hours are determined by the mall in which the store is located. INFORMATION AND CONTROL SYSTEMS While the Company believes its information systems are adequate to support its current needs, in order to accommodate future growth the Company plans to convert and upgrade to a state of the art client server based merchandising system. This conversion began at the end of fiscal 1998 and is expected to be completed by the third quarter of fiscal 1999. Prior to the purchase of the new system and hardware the Company obtained assurance from the vendors that the products purchased are in fact Year 2000 compliant. All of the Company's stores have a point-of-sale system operating on in-store computer hardware and internally developed software. The system features bar-coded ticket scanning, dial-out check and credit authorization and provides nightly polling transmittal of sales and inventory data between the stores and the Company's corporate office. The Company has performed a thorough review of its existing computer software systems and hardware to identify processes which may be affected by Year 2000 problems. At this time, no significant issues have been identified and the Company has developed a plan for Year 2000 compliance should the conversion noted above fall behind schedule. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000 Compliance." EXPANSION STRATEGY The Company currently plans to open up to 105 new stores in fiscal 1999 and plans to continue to grow in the following year. The Company may, in limited instances and to the extent it deems advisable, seek to acquire additional businesses which complement or enhance the Company's operations. The Company currently has no commitments or understandings with respect to such business opportunities. 5 The following table sets forth the number of stores in each state as of April 3, 1999:
# OF # OF # OF STATE STORES STATE STORES STATE STORES - ---------------------------- --------- ---------------------------- --------- ---------------------------- --------- Alabama..................... 1 Louisiana................... 3 Oklahoma.................... 4 Arizona..................... 10 Maine....................... 2 Oregon...................... 1 Arkansas.................... 1 Maryland.................... 14 Pennsylvania................ 15 California.................. 120 Massachusetts............... 16 Rhode Island................ 1 Colorado.................... 9 Michigan.................... 13 South Carolina.............. 3 Connecticut................. 12 Minnesota................... 9 Tennessee................... 3 Delaware.................... 1 Missouri.................... 3 Texas....................... 41 Florida..................... 57 Nebraska.................... 1 Utah........................ 6 Georgia..................... 12 Nevada...................... 7 Virginia.................... 13 Hawaii...................... 6 New Hampshire............... 3 Washington.................. 6 Illinois.................... 28 New Jersey.................. 24 Wisconsin................... 6 Iowa........................ 3 New Mexico.................. 3 West Virginia............... 2 Indiana..................... 7 New York.................... 28 Washington D.C.............. 2 Kansas...................... 3 North Carolina.............. 5 Puerto Rico................. 2 Kentucky.................... 4 Ohio........................ 12
Management does not believe there are significant geographic constraints on the locations of future stores. The Company's strategy is to enter a particular geographic region with a base of two or three solid stores, and then continue expansion in such geographic regions while simultaneously entering new markets in a similar manner, thereby increasing the recognition of the Company's name. When deciding whether to open a new store, the Company typically targets regional malls as well as prime street locations in select markets. In making its selection, the Company evaluates, among other factors, market area, demographics, "anchor stores," store location, the volume of consumer traffic, rent payments and other costs associated with opening a new store. The average store size the Company intends to consider is between 3,000 and 4,500 square feet depending on the chain selected for the particular location. However, in making its decision, management reviews all leases in order to match closely the store size to the sales potential of the store. The Company's ability to expand in the future will depend, in part, on general business conditions, the demand for the Company's merchandise, the ability to find suitable malls or other locations with acceptable sites on satisfactory terms, and the continuance of satisfactory cash flows from existing operations. TRADEMARKS The Company's primary trademarks and service marks are "WET SEAL," "CONTEMPO CASUALS," "LIMBO LOUNGE" and "NEXT," which are registered in the U.S. Trademark Office. The Company has pending registrations in a number of classes for the trademark, "Arden B.," which are being opposed by Elizabeth Arden. It is the opinion of the Company's trademark counsel that the Company should be able to register its Arden B. marks and even if the Company is unable to register the marks (or any one of them), the absence of such registration will not cause any interruption in the use of Arden B. as a trademark by the Company to designate the merchandise sold under the Arden B. name and the stores in which that merchandise is sold. The Company also uses and has registered, or has a pending registration, on a number of marks, including "A. AUBREY," "ACCESSORIES FOR LIFE," "ACCOMPLICE," "BLUE ASPHALT," "CEMENT," "CLUB CONTEMPO," "EVOLUTION NOT REVOLUTION," "FORMULA X," "MEOW GENES," "UNCIVILIZED," "URBAN LIFE" and "URBAN VIBE." In general, the registrations for these trademarks and service marks are renewable indefinitely as long as the Company continues to use the marks as required by applicable trademark law. The Company is the owner of an allowed and currently pending service mark application for the mark "SEAL PUPS." Other than 6 with respect to Arden B., the Company is not aware of any adverse claim or other infringement relating to its trademarks or service marks. COMPETITION The young women's retail apparel industry is highly competitive, with fashion, quality, price, location, in-store environment and service being the principal competitive factors. The Company competes with specialty apparel retailers, department stores and certain other apparel retailers, including The Limited and The GAP, and on a regional basis, with such retailers as Charlotte Russe, Gadzooks and Pacific Sunwear. Many competitors are large national chains which have substantially greater financial, marketing and other resources than the Company. While the Company believes it competes effectively for favorable site locations and lease terms, competition for prime locations within a mall is intense. EMPLOYEES As of January 30, 1999, the Company had 7,404 employees, consisting of 2,033 full-time employees and 5,371 part-time employees. Full-time personnel consisted of 1,140 salaried and 893 hourly employees. All part-time personnel are hourly employees. Of the total employees, 7,085 were sales personnel and 319 were administrative and distribution center personnel. Personnel at all levels of store operations are provided with cash incentives based upon various individual store sales targets. All of the Company's employees are non-union and, in management's opinion, are paid competitively with current standards in the industry. The Company considers its relationship with its employees to be satisfactory. ITEM 2. PROPERTIES The Company's corporate headquarters is located at 26972 Burbank, Foothill Ranch, California, consisting of 283,200 square feet of leased office and distribution facility space (including 74,500 square feet of merchandise handling and storage mezzanine space in the distribution facility and 20,500 square feet of second floor office space). This lease expires on December 4, 2007. The Company's former distribution facility located in Los Angeles, California was subleased beginning in fiscal 1998 for the remainder of the lease term. The Los Angeles lease was acquired with the acquisition of Contempo Casuals and expires on July 31, 2002. The Company leases all of its stores. Lease terms for the Company's stores are typically 10 years in length and generally do not contain renewal options. The leases generally provide for a fixed minimum rental and a rental based on a percent of sales once a minimum sales level has been reached. As a lease expires, the Company generally renews such lease at current market terms. However, each renewal is based upon an analysis of the individual store's profitability and sales potential. The following table sets forth information with respect to store openings and closings since fiscal 1994:
FISCAL YEARS -------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Stores open at beginning of year............................ 389 364 364 133 129 Stores acquired during period(1)............................ 0 0 0 237 0 Stores opened during period................................. 86 34 10 3 6 Stores closed during period................................. 21 9 10 9 2 ---- ---- ---- ---- ---- Stores open at end of period................................ 454 389 364 364 133 ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
- ------------------------ (1) Contempo Casuals was acquired on July 1, 1995. 7 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. Management believes that, in the event of a settlement or an adverse judgment of any pending litigation, the Company is adequately covered by insurance. As of April 3, 1999, the Company was not engaged in any legal proceedings which are expected, individually or in the aggregate, to have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through solicitations of proxies or otherwise. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock ("Common Stock") is listed on The Nasdaq Stock Market ("Nasdaq") under the symbol "WTSLA". As of April 1, 1999, there were 296 shareholders of record of the Company's Class A Common Stock. Additionally, the number of beneficial owners of the Company's Common Stock was estimated to be in excess of 4,500. The closing price of the Common Stock on April 1, 1999 was $36. The following table reflects the high and low sale prices of the Company's Common Stock as reported by Nasdaq for the last two fiscal years.
FISCAL 1998 FISCAL 1997 --------------- --------------- QUARTER HIGH LOW HIGH LOW - -------------------------------------------------- --------- --------- --------- --------- First Quarter..................................... $38 1/4 $26 7/8 $27 1/4 $18 Second Quarter.................................... 37 9/16 25 3/4 31 5/8 22 1/2 Third Quarter..................................... 31 13 5/8 27 1/4 17 3/8 Fourth Quarter.................................... 38 16 7/8 31 1/2 22 3/4
The Company has reinvested earnings in the business and has never paid any cash dividends to holders of the Company's Common Stock. The declaration and payment of future dividends, which are subject to the terms and covenants contained in the Company's bank line of credit, are at the sole discretion of the Board of Directors and will depend upon the Company's profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. ITEM 6. SELECTED FINANCIAL DATA The following table of certain selected data regarding the Company should be read in conjunction with the financial statements and notes thereto and with the "Management's Discussion and Analysis of Financial Condition and Results of Operations." The data for the fiscal years ended February 3, 1996 and January 28, 1995 are derived from the Company's financial statements for such years which are not included herein. 9 FIVE YEAR FINANCIAL SUMMARY
FISCAL YEAR 1998 1997 1996 1995 1994 - --------------------------- ------------- ------------- ------------- ------------- ------------- JANUARY 30, JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, FISCAL YEAR ENDED 1999 1998 1997 1996(1) 1995 - --------------------------- ------------- ------------- ------------- ------------- ------------- OPERATING RESULTS Sales...................... $ 485,389,000 $ 412,463,000 $ 374,942,000 $ 266,695,000 $ 132,997,000 Income (loss) before provision (benefit) for income taxes............. 42,202,000 36,325,000 26,217,000 9,948,000 (1,366,000) Net income (loss).......... $ 25,954,000 $ 21,250,000 $ 15,252,000 $ 5,815,000 $ (1,013,000) PER SHARE DATA Net income (loss), basic... $ 1.98 $ 1.57 $ 1.15 $ 0.47 $ (0.08) Net income (loss), diluted.................. $ 1.91 $ 1.53 $ 1.13 $ 0.47 $ (0.08) Weighted average shares outstanding, basic....... 13,085,587 13,552,502 13,219,284 12,387,140 12,234,502 Weighted average shares outstanding, diluted..... 13,581,233 13,899,877 13,459,810 12,500,564 12,234,502 OTHER FINANCIAL INFORMATION Net income (loss) as a percent of sales......... 5.3% 5.2% 4.1% 2.2% (0.8)% Return on average stockholders' equity..... 22.3% 20.8% 20.5% 10.7% (2.0)% Cash and marketable securities............... $ 91,506,000 $ 95,873,000 $ 89,183,000 $ 57,153,000 $ 25,369,000 Working capital(4)......... $ 21,856,000 $ 66,452,000 $ 59,791,000 $ 26,051,000 $ 22,473,000 Ratio of current assets to current liabilities...... 1.3 2.1 2.1 1.5 2.8 Total assets............... $ 197,490,000 $ 184,223,000 $ 154,752,000 $ 117,564,000 $ 67,298,000 Long-term debt............. 1,264,000 1,264,000 3,264,000 5,264,000 -- Total stockholders' equity................... $ 120,278,000 $ 112,994,000 $ 91,120,000 $ 57,735,000 $ 50,724,000 Number of stores open at year end................. 454 389 364 364 133 Number of stores acquired during the year.......... -- -- -- 237 -- Number of stores opened during the year.......... 86 34 10 3 6 Number of stores closed during the year.......... 21 9 10 9 2 Square footage of leased store space at year end...................... 1,848,513 1,637,347 1,539,777 1,530,891 596,685 Percent of increase in leased square footage.... 12.9% 6.3% 0.6% 156.6% 2.3% Avg. sales per square foot of leased space(2)....... $ 271 $ 263 $ 244 $ 229 $ 226 Average sales per store(2)................. $ 1,132,000 $ 1,112,000 $ 1,030,000 $ 976,000 $ 1,008,000 Comparable store sales increase (decrease)(3)... 2.1% 5.8% 8.8% (4.1)% (9.2)%
- -------------------------- (1) The Company's fiscal 1995 data include the results of operations of Contempo Casuals since July 1, 1995. Fiscal 1995 consisted of 53 weeks. (2) In fiscal 1995, the 53rd week of sales was excluded from "Sales" for purposes of calculating "Average sales per square foot" and "Average sales per store" in order to make fiscal 1995 comparable to prior years. (3) In fiscal 1996, "Comparable store sales" were calculated by excluding sales during the first week of fiscal 1995 in order to make fiscal 1995 comparable to fiscal 1996. In fiscal 1995, "Comparable store sales" were calculated by adding the first week of fiscal 1995 to fiscal 1994 sales in order to make fiscal 1994 comparable to fiscal 1995. Comparable store sales are defined as sales in stores that were open throughout the full fiscal year and throughout the full prior fiscal year. (4) The decrease in working capital in fiscal 1998 is due to the classification of $37,973,000 of cash investments as long-term in fiscal 1998. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The Company is one of the largest national mall-based specialty retailers focusing primarily on young women's apparel, and currently operates 522 retail stores in 42 states, Washington D.C. and Puerto Rico under the names "Wet Seal," "Contempo Casuals," "Arden B.," "Limbo Lounge" and "Next." In January 1998, the Company initiated a catalog which operates under the name "Wet Seal." On July 1, 1995, the Company acquired Contempo Casuals. The purchase price consisted of a $100,000 cash payment and the issuance of 254,676 shares of Class A Common Stock which had a market value of $1,178,000 as of the acquisition date. In addition, the Company assumed approximately $27,700,000 of current liabilities of Contempo Casuals. The transaction was accounted for under the purchase method and resulted in negative goodwill. The acquisition substantially increased the number of stores the Company operates. Effective February 2, 1997, Contempo Casuals, Inc. was merged with and into The Wet Seal, Inc. As of January 30, 1999, the Company operated 454 stores compared to 389 stores as of January 31, 1998, the end of fiscal 1997. The Company opened 86 stores during fiscal 1998 and closed 21 stores. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Financial Statements and the Notes thereto. RESULTS OF OPERATIONS Fiscal 1998 consists of the 52 week period ended January 30, 1999, Fiscal 1997 consists of the 52 week period ended January 31, 1998 and Fiscal 1996 consists of the 52 week period ended February 1, 1997. Comparable store sales are defined as sales in stores that were open throughout the full fiscal year and throughout the full prior fiscal year. The following table sets forth selected income statement data of the Company expressed as a percent of sales for the years indicated:
AS A PERCENTAGE OF SALES FISCAL YEAR ENDED ------------------------------------- JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ----------- ----------- ----------- Sales (including frequent buyer sales income and catalog sales).................................................... 100.0% 100.0% 100.0% Cost of sales (including buying, distribution and occupancy costs).................................................... 69.3 71.0 72.6 ----- ----- ----- Gross margin................................................ 30.7 29.0 27.4 Selling, general and administrative expenses................ 22.8 21.1 21.1 ----- ----- ----- Operating income............................................ 7.9 7.9 6.3 Interest income, net........................................ 0.8 0.9 0.7 ----- ----- ----- Income before provision for income taxes.................... 8.7 8.8 7.0 Provision for income taxes.................................. 3.4 3.6 2.9 ----- ----- ----- Net income.................................................. 5.3% 5.2% 4.1% ----- ----- ----- ----- ----- -----
FISCAL 1998 COMPARED TO FISCAL 1997 Sales in fiscal 1998 were $485,389,000 compared to sales in fiscal 1997 of $412,463,000, an increase of $72,926,000 or 17.7%. The dollar increase in sales in fiscal 1998 compared to fiscal 1997 was primarily due to the impact of the 86 new store openings in fiscal 1998 and the full year impact in 1998 of the net 25 new store openings in fiscal 1997. These increases were somewhat offset by the closing of 21 stores in fiscal 1998. To a lesser extent, the increase in sales was due to an increase in comparable store sales of 2.1%. 11 Cost of sales, including buying, distribution and occupancy costs, was $336,527,000 in fiscal 1998 compared to $292,644,000 in fiscal 1997, an increase of $43,883,000 or 15.0%. As a percentage of sales, cost of sales decreased to 69.3% in fiscal 1998, from 71.0% in fiscal 1997, a decrease of 1.7%. The dollar increase in cost of sales in fiscal 1998 compared to fiscal 1997 was due primarily to the increase in total sales. Of the 1.7% decrease in cost of sales as a percentage of sales, 1.2% related to a decrease in occupancy costs, 0.6% related to a decrease in the cost of merchandise and 0.1% related to a decrease in buying costs, offset by a 0.2% increase in distribution costs. The decrease in occupancy costs was associated primarily to the leverage of the catalog operation sales on store occupancy costs. To a lesser extent the decrease in occupancy was due to a decrease in store rental expenses as a percent of sales as a result of the expense leverage related to the increase in comparable store sales. The decrease of 0.6% in merchandise cost was due to an increase in the initial markup rates related to a decrease in the cost of merchandise. The 0.1% decrease in buying costs as a percentage of sales was due to the leverage associated with the increase in total sales. The 0.2% increase in distribution costs was related primarily to the catalog operation. Selling, general and administrative expenses were $110,554,000 in fiscal 1998 compared to $86,999,000 in fiscal 1997, an increase of $23,555,000 or 27.1%. As a percentage of sales, selling, general and administrative expenses was 22.8% in fiscal 1998 compared to 21.1% in fiscal 1997. The dollar increase in selling, general and administrative expenses in fiscal 1998 compared to fiscal 1997 was primarily due to the increase in total sales and to a lesser extent the expenses related to the catalog operation. The increase as a percent of sales was primarily due to the impact of the fixed costs associated with catalog production. Without the impact of the catalog operation, selling, general and administrative expenses increased 0.5%. This increase related primarily to the increase in selling expense as a percentage of sales due to the increases in minimum wage and to the start up costs associated with new store openings. Also contributing to the increase as a percentage of sales was an increase in administrative wages to support the expanded operations in fiscal 1998. Interest income, net, was $3,894,000 in fiscal 1998 compared to $3,505,000 in fiscal 1997, an increase of $389,000. This increase was due primarily to an increase in the average cash balance invested during the year. Income tax provision was $16,248,000 in fiscal 1998 compared to $15,075,000 in fiscal 1997. The effective income tax rate in fiscal 1998 was 38.5% compared to 41.5% in fiscal 1997. The decrease in the effective tax rate in fiscal 1998 compared to fiscal 1997 was due to the increase in income generated from states with lower effective tax rates as well as the impact of changes in the corporate cash investment strategy which resulted in higher balances invested in tax exempt securities. Based on the factors noted above, net income was $25,954,000 in fiscal 1998 compared to $21,250,000 in fiscal 1997, an increase of $4,704,000 or 22.1%. As a percentage of sales, net income was 5.3% in fiscal 1998 compared to 5.2% in fiscal 1997. FISCAL 1997 COMPARED TO FISCAL 1996 Sales in fiscal 1997 were $412,463,000 compared to sales in fiscal 1996 of $374,942,000, an increase of $37,521,000 or 10%. The dollar increase in sales in fiscal 1997 compared to fiscal 1996 was primarily due to the increase in the comparable store sales and the increase in frequent buyer sales income in fiscal 1997 compared to fiscal 1996. The Company attributes the increase in comparable store sales of 5.8% to the continued resurgence of fashion that began in fiscal 1996. The increase in sales was also due to a slightly lesser extent to the impact of the 34 new store openings in fiscal 1997 and the full year impact in 1997 of the 10 new store openings in fiscal 1996. These increases were somewhat offset by the closing of nine stores in fiscal 1997. Cost of sales, including buying, distribution and occupancy costs, was $292,644,000 in fiscal 1997 compared to $272,189,000 in fiscal 1996, an increase of $20,455,000 or 7.5%. As a percentage of sales, cost of sales decreased to 71.0% in fiscal 1997, from 72.6% in fiscal 1996, a decrease of 1.6%. The dollar 12 increase in cost of sales in fiscal 1997 compared to fiscal 1996 was due primarily to the increase in total sales. Of the 1.6% decrease in cost of sales as a percentage of sales, 1.0% related to a decrease in occupancy costs, 0.4% related to a decrease in the cost of merchandise and 0.3% related to a decrease in distribution costs, offset by a 0.1% increase in buying costs. The decrease in occupancy costs was due primarily to a decrease in store rental expenses as a percent of sales as a result of the expense leverage related to the increase in comparable store sales. The decrease of 0.4% in merchandise cost was due to an increase in the initial markup rates related to a decrease in the cost of merchandise. The 0.3% decrease in distribution costs was related to a decrease in depreciation due to the impact of fully depreciated assets in the current year and to cost efficiencies related to processing the merchandise. These decreases were offset by a 0.1% increase in buying costs which was associated with payroll and personnel increases during the year to support the larger operations. Selling, general and administrative expenses were $86,999,000 in fiscal 1997 compared to $79,238,000 in fiscal 1996, an increase of $7,761,000 or 9.8%. As a percentage of sales, selling, general and administrative expenses remained the same at 21.1% in fiscal 1997 as compared to fiscal 1996. The dollar increase in selling, general and administrative expenses in fiscal 1997 compared to fiscal 1996 was primarily due to the increase in total sales and an increase in management expenses related to bonuses and retirement plans, offset by a decrease in office depreciation related to the impact of fully-depreciated assets, proceeds related to an insurance reimbursement and a decrease in non-payroll related selling expenses as a result of the economies of scale associated with the increase in comparable store sales. Interest income, net, was $3,505,000 in fiscal 1997 compared to $2,702,000 in fiscal 1996, an increase of $803,000. This increase was due primarily to an increase in the average cash balance invested. Income tax expense was $15,075,000 in fiscal 1997 compared to $10,965,000 in fiscal 1996. The effective income tax rate in fiscal 1997 was 41.5% compared to a rate of 41.8% in fiscal 1996. Based on the factors noted above, net income was $21,250,000 in fiscal 1997 compared to $15,252,000 in fiscal 1996, an increase of $5,998,000 or 39.3%. As a percentage of sales, net income was 5.2% in fiscal 1997 compared to 4.1% in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES Working capital at the end of fiscal 1998, 1997 and 1996 was $21,856,000, $66,452,000 and $59,791,000, respectively. The decrease in working capital in fiscal 1998 compared to fiscal 1997 was due to a net increase in long term investments of $37,474,000 as current year cash was invested to a larger extent in investments with maturities beyond one year. The decrease in working capital was also due to the purchase of treasury stock for $19,675,000 in the third quarter of fiscal 1998. Net cash provided by operating activities in fiscal 1998, 1997 and 1996 was $43,950,000, $31,948,000 and $28,187,000, respectively. The increase in net cash provided by operating activities in fiscal 1998 was due primarily to the increase in net earnings. Further contributing to the increase was the increase in income taxes payable and accounts payable offset to some extent by the increase in inventory and deferred tax, net. The increase in income taxes payable is due to the timing of tax payments. The increase in accounts payable was attributable to the increase in payables associated with capital expenditures. The increase in inventory over the prior year was related to the increase in the number of stores offset to some extent by the decrease in catalog inventory as compared to prior year. The increase in cash provided by operating activities in fiscal 1997 was due primarily to the increase in net earnings. Further contributing to the increase was the increase in accounts payable and accrued liabilities offset to some extent by the increase in inventory. The increase in accounts payable was attributable to the increase in payables associated with capital expenditures as well as to the timing of inventory receipts. The increase in inventory over the prior year was related to the increase in the number of stores as well as to the inventory held for the new catalog operations at the end of fiscal 1997. 13 Additions to property and equipment are the Company's most significant investment activities. In fiscal 1998, 1997 and 1996 the Company invested $26,503,000, $22,973,000 and $8,620,000, respectively, in property and equipment and leasehold improvements. These expenditures related primarily to new store openings and remodels. In fiscal 1997, the Company constructed a new office and distribution facility. On December 1, 1998, the Company acquired the leases and furniture and fixtures for 19 store locations from Mothers Work, Inc. for $1,911,000. The majority of the locations acquired were converted to Arden B. stores. On February 1, 1999, the Company acquired the leases and furniture and fixtures for 80 stores from Britches of Georgetowne, Inc. The Company plans to convert the locations to Arden B., Wet Seal, Contempo Casuals and Limbo Lounge stores by the end of the first quarter of fiscal 1999, with the majority of the locations planned as Arden B. Primarily as a result of the Company's expanded operations and the real estate acquisition of 80 stores, capital expenditures for fiscal 1999 are currently estimated to be $53,000,000. In September 1998, the Company's Board of Directors authorized the repurchase of up to 20% of the outstanding shares of the Company's Class A Common Stock. As of January 30, 1999, 1,327,000 shares had been repurchased at a cost of $19,675,000. Such repurchased shares are reflected as treasury stock in the accompanying financial statements. On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as part of a public offering pursuant to a registration statement on Form S-3. The net proceeds to the Company from the sale of shares were $14,459,000. The Company has an unsecured revolving line of credit arrangement with Bank of America National Trust and Savings Association ("Bank of America") in an aggregate principal amount of $30,000,000, maturing on July 1, 1999 and a five year amortizing term loan with Bank of America in the amount of $10,000,000. As of January 30, 1999 the term loan has an outstanding balance of $2,264,000. On March 31, 1999, the line of credit was extended to a maturity date of July 1, 2000. At January 30, 1999, there were no outstanding borrowings under the credit arrangement, and the Company was in compliance with all terms and covenants of the credit arrangement and the term loan. The Company invests its excess funds primarily in a short-term investment grade money market fund, investment grade commercial paper and U.S. Treasury and Agency obligations. Management believes the Company's working capital and cash flows from operating activities will be sufficient to meet the Company's operating and capital requirements in the foreseeable future. SEASONALITY AND INFLATION The Company's business is seasonal by nature with the Christmas season (beginning the week of Thanksgiving and ending the first Saturday after Christmas) and the back-to-school season (beginning the last week of July and ending the first week of September) historically accounting for the largest percentage of sales volume. In the Company's three fiscal years ended January 30, 1999, the Christmas and back-to-school seasons together accounted for an average of approximately 33% of the Company's annual sales, after adjusting for sales increases related to new stores. The Company does not believe that inflation has had a material effect on the results of operations during the past three years. However, there can be no assurance that the Company's business will not be affected by inflation in the future. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE The preceding "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections may contain various forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, 14 including, without limitation, the retention by the Company of suppliers for both brand name and Company-developed merchandise, the ability of the Company to expand and to continue to increase comparable store sales and the sufficiency of the Company's working capital and cash flows from operating activities. In addition, these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements, including, without limitation, a decline in demand for the merchandise offered by the Company, the ability of the Company to locate and obtain acceptable store sites and lease terms or renew existing leases, the ability of the Company to obtain adequate merchandise supply, the ability of the Company to hire and train employees, the ability of the Company to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand, management's ability to manage the Company's expansion, the effect of economic conditions, the effect of severe weather or natural disasters and the effect of competitive pressures from other retailers. The Company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward looking statement contained herein or to reflect any change in the expectations of the Company after the date hereof or any change in events, conditions or circumstances on which any statement is based. NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), in the first quarter of fiscal 1998. SFAS 130 establishes standards for the reporting and display of comprehensive income. Components of comprehensive income, among other items, may include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. In Fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132") which is effective for fiscal years beginning after December 15, 1997. This statement standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer as useful as they were under previous statements. YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. During fiscal 1998 and continuing through fiscal 1999, the Company is in the process of converting substantially all of its computer software systems and hardware. Prior to the purchase of the new systems and hardware the Company obtained or is in the process of obtaining assurance from the vendors that the products purchased are in fact Year 2000 compliant. The Company will also complete an independent review of such systems to further verify Year 2000 compliance. The Company has performed a thorough review of its existing computer software systems and hardware to identify processes which may be affected by Year 2000 problems. At this time, no significant issues have been identified and the Company has developed an adequate plan for Year 2000 compliance should the conversions fall behind schedule. During fiscal 1998 and fiscal 1999, the Company is also in the process of completing a Year 2000 review of its relationships with suppliers and financial institutions to obtain assurance, where necessary, that these entities are Year 2000 compliant. The Company's total Year 2000 project costs include the estimated costs and time associated with the impact of a third party's Year 2000 issue on the Company, and are based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a 15 material adverse effect on the Company's business, results of operations, cash flows and financial condition. If the Company is not completely successful in mitigating internal and external Year 2000 risks, the result could be a system failure causing disruptions of operations, including, among other things, a temporary inability to process transactions, distribute merchandise, or engage in similar normal business activities at the Company or its vendors and suppliers. The Company believes that under a worst case scenario, it could continue the majority of its normal business activities on a manual basis. With respect to potential Year 2000 failures of its vendors and suppliers, the Company plans to mitigate this risk by not depending on any single vendor or supplier for products or merchandise. Due to the fact that the majority of the Company's computer software systems and hardware have been purchased or developed recently and were designed to be Year 2000 compliant, the Company does not expect to incur significant additional costs in addressing the Year 2000 issue. The total cost of the Year 2000 project is estimated at $300,000, and will be funded through operating cash flows. Year 2000 costs as of January 30, 1999 totaled $100,000. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Filed under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS All of the information called for by Part III (Items 10 through 13) is incorporated by reference from the Company's definitive Proxy Statement in connection with its Annual Meeting of Stockholders to be held June 9, 1999, filed pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: 1. Financial Statements--See "Index to Financial Statements and Financial Statement Schedules". 2. Financial Statement Schedules--See "Index to Financial Statements and Financial Statement Schedules". 3. Exhibits--See "Exhibit Index". (B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year ended January 30, 1999. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE WET SEAL, INC. (REGISTRANT) By: /s/ KATHY BRONSTEIN ----------------------------------------- Kathy Bronstein VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER By: /s/ EDMOND THOMAS ----------------------------------------- Edmond Thomas PRESIDENT AND CHIEF OPERATING OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.
SIGNATURES TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ GEORGE H. BENTER JR. Director April 23, 1999 - ------------------------------ George H. Benter Jr. /s/ KATHY BRONSTEIN Vice Chairman and Chief April 23, 1999 - ------------------------------ Executive Officer and Kathy Bronstein Director (Principal Executive Officer) /s/ STEPHEN GROSS Secretary and Director April 23, 1999 - ------------------------------ Stephen Gross /s/ ANN CADIER KIM Vice President of Finance April 23, 1999 - ------------------------------ and Chief Financial Ann Cadier Kim Officer (Principal Financial and Accounting Officer) /s/ WALTER F. LOEB Director April 23, 1999 - ------------------------------ Walter F. Loeb
17
SIGNATURES TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ WILFRED POSLUNS Director April 23, 1999 - ------------------------------ Wilfred Posluns /s/ GERALD RANDOLPH Director April 23, 1999 - ------------------------------ Gerald Randolph /s/ ALAN SIEGEL Director April 23, 1999 - ------------------------------ Alan Siegel /s/ IRVING TEITELBAUM Chairman of the Board and April 23, 1999 - ------------------------------ Director Irving Teitelbaum /s/ EDMOND THOMAS President and Chief April 23, 1999 - ------------------------------ Operating Officer and Edmond Thomas Director
18 THE WET SEAL, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE --------- INDEPENDENT AUDITORS' REPORT: Report of Deloitte & Touche LLP............................................................................ 20 FINANCIAL STATEMENTS: Balance sheets as of January 30, 1999 and January 31, 1998................................................. 21 Statements of income for the years ended January 30, 1999, January 31, 1998 and February 1, 1997........... 22 Statements of comprehensive income for the years ended January 30, 1999, January 31, 1998 and February 1, 1997..................................................................................................... 22 Statements of stockholders' equity for the years ended January 30, 1999, January 31, 1998 and February 1, 1997..................................................................................................... 23 Statements of cash flows for the years ended January 30, 1999, January 31, 1998 and February 1, 1997....... 24 Notes to financial statements.............................................................................. 25 FINANCIAL STATEMENT SCHEDULES: All schedules are omitted as they are not required, or the required information is shown in the financial statements or the notes thereto.
19 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders The Wet Seal, Inc.: We have audited the accompanying balance sheets of The Wet Seal, Inc. as of January 30, 1999 and January 31, 1998 and the related statements of income, comprehensive income, stockholders' equity and cash flows for each of the three fiscal years in the period ended January 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Wet Seal, Inc. as of January 30, 1999 and January 31, 1998 and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 30, 1999, in conformity with generally accepted accounting principles. Deloitte & Touche LLP March 12, 1999 Costa Mesa, California 20 THE WET SEAL, INC. BALANCE SHEETS
ASSETS JANUARY 30, JANUARY 31, 1999 1998 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents (Note 1).......................... $ 31,590,000 $ 76,056,000 Short-term investments (Note 3)............................. 21,943,000 19,817,000 Other receivables........................................... 3,665,000 3,209,000 Merchandise inventories..................................... 28,002,000 26,884,000 Prepaid expenses (Note 1)................................... -- 330,000 Deferred tax charges (Note 4)............................... 1,791,000 1,137,000 ------------ ------------ Total current assets...................................... 86,991,000 127,433,000 ------------ ------------ EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Leasehold improvements...................................... 75,659,000 65,465,000 Furniture, fixtures and equipment........................... 37,758,000 24,965,000 Leasehold rights............................................ 3,577,000 3,692,000 Construction in progress.................................... 489,000 2,000 ------------ ------------ 117,483,000 94,124,000 Less accumulated depreciation............................... (57,110,000) (49,171,000) ------------ ------------ Net equipment and leasehold improvements.................. 60,373,000 44,953,000 ------------ ------------ LONG-TERM INVESTMENTS (Note 3).............................. 37,973,000 499,000 OTHER ASSETS: Deferred tax charges and other assets (Notes 4 and 13)...... 11,677,000 10,817,000 Goodwill, net of accumulated amortization of $656,000 and $611,000 as of January 30, 1999 and January 31, 1998, respectively.............................................. 476,000 521,000 ------------ ------------ Total other assets........................................ 12,153,000 11,338,000 ------------ ------------ $197,490,000 $184,223,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................ $ 37,515,000 $ 35,858,000 Accrued liabilities (Note 12)............................... 20,430,000 20,570,000 Income taxes payable (Note 4)............................... 6,190,000 2,553,000 Current portion of long-term debt (Note 9).................. 1,000,000 2,000,000 ------------ ------------ Total current liabilities................................. 65,135,000 60,981,000 ------------ ------------ LONG-TERM LIABILITIES: Long-term debt (Note 9)..................................... 1,264,000 1,264,000 Deferred rent............................................... 7,458,000 6,254,000 Other long-term liabilities (Note 13)....................... 3,355,000 2,730,000 ------------ ------------ Total long-term liabilities............................... 12,077,000 10,248,000 ------------ ------------ Total liabilities......................................... 77,212,000 71,229,000 ------------ ------------ COMMITMENTS (Note 7) STOCKHOLDERS' EQUITY: (Notes 5 and 6) Preferred Stock, $.01 par value, authorized, 2,000,000 shares; none issued and outstanding....................... -- -- Common Stock, Class A, $.10 par value, authorized 20,000,000 shares; 10,704,886 and 10,656,578 shares issued and outstanding at January 30, 1999 and January 31, 1998, respectively.............................................. 1,071,000 1,066,000 Common Stock, Class B Convertible, $.10 par value, authorized 10,000,000 shares; 2,912,665 shares issued and outstanding at January 30, 1999 and January 31, 1998...... 291,000 291,000 Paid-in capital............................................. 58,356,000 57,217,000 Retained earnings........................................... 80,374,000 54,420,000 Other comprehensive loss (Note 13).......................... (139,000) -- Treasury stock, 1,327,000 shares at cost.................... (19,675,000) -- ------------ ------------ Total Stockholders' Equity................................ 120,278,000 112,994,000 ------------ ------------ $197,490,000 $184,223,000 ------------ ------------ ------------ ------------
See accompanying notes to financial statements. 21 THE WET SEAL, INC. STATEMENTS OF INCOME
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 -------------- -------------- -------------- SALES........................................................... $ 485,389,000 $ 412,463,000 $ 374,942,000 COST OF SALES (including buying, distribution and occupancy costs)........................................................ 336,527,000 292,644,000 272,189,000 -------------- -------------- -------------- GROSS MARGIN.................................................... 148,862,000 119,819,000 102,753,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 10).......... 110,554,000 86,999,000 79,238,000 -------------- -------------- -------------- OPERATING INCOME................................................ 38,308,000 32,820,000 23,515,000 INTEREST INCOME, NET (Note 9)................................... 3,894,000 3,505,000 2,702,000 -------------- -------------- -------------- INCOME BEFORE PROVISION FOR INCOME TAXES........................ 42,202,000 36,325,000 26,217,000 PROVISION FOR INCOME TAXES (Note 4)............................. 16,248,000 15,075,000 10,965,000 -------------- -------------- -------------- NET INCOME...................................................... $ 25,954,000 $ 21,250,000 $ 15,252,000 -------------- -------------- -------------- -------------- -------------- -------------- NET INCOME PER SHARE, BASIC (Note 14)........................... $ 1.98 $ 1.57 $ 1.15 -------------- -------------- -------------- -------------- -------------- -------------- NET INCOME PER SHARE, DILUTED (Note 14)......................... $ 1.91 $ 1.53 $ 1.13 -------------- -------------- -------------- -------------- -------------- -------------- WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC (Note 1)............. 13,085,587 13,552,502 13,219,284 -------------- -------------- -------------- -------------- -------------- -------------- WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED (Note 1)........... 13,581,233 13,899,877 13,459,810 -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes to financial statements. THE WET SEAL, INC. STATEMENTS OF COMPREHENSIVE INCOME
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ------------- ------------- ------------- NET INCOME.......................................................... $ 25,954,000 $ 21,250,000 $ 15,252,000 ------------- ------------- ------------- OTHER COMPREHENSIVE LOSS: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN ADJUSTMENT (Note 13).......... (139,000) -- -- ------------- ------------- ------------- COMPREHENSIVE INCOME................................................ $ 25,815,000 $ 21,250,000 $ 15,252,000 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. 22 THE WET SEAL, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK --------------------------------------------- CLASS A CLASS B ---------------------- --------------------- OTHER PAID-IN RETAINED COMPREHENSIVE SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS LOSS ---------- ---------- ---------- --------- ----------- ----------- ----------- Balance at February 3, 1996................ 5,687,066 $ 568,000 6,807,665 $681,000 $38,568,000 $17,918,000 -- Issuance of Class A Common Stock pursuant to Public Offering (Note 5).............. 765,000 76,000 -- -- 14,383,000 -- -- Stock issued pursuant to long-term incentive plan (Note 6).................. 5,308 1,000 -- -- 106,000 -- -- Exercise of stock options (Note 6)......... 276,500 28,000 -- -- 1,712,000 -- -- Tax benefit related to exercise of stock options (Note 6)......................... -- -- -- -- 1,827,000 -- -- Conversion of Class B Common Stock to Class A Common Stock (Note 5).................. 3,895,000 390,000 (3,895,000) (390,000 ) -- -- -- Net income................................. -- -- -- -- -- 15,252,000 -- ---------- ---------- ---------- --------- ----------- ----------- ----------- Balance at February 1, 1997................ 10,628,874 1,063,000 2,912,665 291,000 56,596,000 33,170,000 -- Stock issued pursuant to long-term incentive plan (Note 6).................. 8,704 1,000 -- -- 265,000 -- -- Exercise of stock options (Note 6)......... 19,000 2,000 -- -- 212,000 -- -- Tax benefit related to exercise of stock options (Note 6)......................... -- -- -- -- 144,000 -- -- Net income................................. -- -- -- -- -- 21,250,000 -- ---------- ---------- ---------- --------- ----------- ----------- ----------- Balance at January 31, 1998................ 10,656,578 1,066,000 2,912,665 291,000 57,217,000 54,420,000 -- Stock issued pursuant to long-term incentive plan (Note 6).................. 12,308 1,000 -- -- 462,000 -- -- Exercise of stock options (Note 6)......... 36,000 4,000 -- -- 269,000 -- -- Tax benefit related to exercise of stock options (Note 6)......................... -- -- -- -- 408,000 -- -- Repurchase of common stock (Note 5)........ -- -- -- -- -- -- -- Supplemental Employee Retirement Plan adjustment (Note 13)..................... -- -- -- -- -- -- (139,000 ) Net income................................. -- -- -- -- -- 25,954,000 -- ---------- ---------- ---------- --------- ----------- ----------- ----------- Balance at January 30, 1999................ 10,704,886 $1,071,000 2,912,665 $291,000 $58,356,000 $80,374,000 $(139,000 ) ---------- ---------- ---------- --------- ----------- ----------- ----------- ---------- ---------- ---------- --------- ----------- ----------- ----------- TOTAL TREASURY STOCKHOLDERS' STOCK EQUITY ----------- ------------- Balance at February 3, 1996................ -- $ 57,735,000 Issuance of Class A Common Stock pursuant to Public Offering (Note 5).............. -- 14,459,000 Stock issued pursuant to long-term incentive plan (Note 6).................. -- 107,000 Exercise of stock options (Note 6)......... -- 1,740,000 Tax benefit related to exercise of stock options (Note 6)......................... -- 1,827,000 Conversion of Class B Common Stock to Class A Common Stock (Note 5).................. -- -- Net income................................. -- 15,252,000 ----------- ------------- Balance at February 1, 1997................ -- 91,120,000 Stock issued pursuant to long-term incentive plan (Note 6).................. -- 266,000 Exercise of stock options (Note 6)......... -- 214,000 Tax benefit related to exercise of stock options (Note 6)......................... -- 144,000 Net income................................. -- 21,250,000 ----------- ------------- Balance at January 31, 1998................ -- 112,994,000 Stock issued pursuant to long-term incentive plan (Note 6).................. -- 463,000 Exercise of stock options (Note 6)......... -- 273,000 Tax benefit related to exercise of stock options (Note 6)......................... -- 408,000 Repurchase of common stock (Note 5)........ (19,675,000) (19,675,000) Supplemental Employee Retirement Plan adjustment (Note 13)..................... -- (139,000) Net income................................. -- 25,954,000 ----------- ------------- Balance at January 30, 1999................ $(19,675,000) $120,278,000 ----------- ------------- ----------- -------------
See accompanying notes to financial statements. 23 THE WET SEAL, INC. STATEMENTS OF CASH FLOWS
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................... $25,954,000 $21,250,000 $15,252,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................................... 13,039,000 11,295,000 11,848,000 Loss on disposal of equipment and leasehold improvements............... -- -- 153,000 Stock issued pursuant to long-term incentive plan...................... 463,000 266,000 107,000 Deferred tax, net...................................................... (1,124,000) (2,189,000) (3,084,000) Changes in operating assets and liabilities, net of effect of acquisition: Other receivables.................................................... (456,000) (1,632,000) (1,054,000) Merchandise inventories.............................................. (1,118,000) (4,295,000) (6,348,000) Prepaid expenses..................................................... 330,000 (330,000) 428,000 Other assets......................................................... (594,000) (118,000) 38,000 Accounts payable and accrued liabilities............................. 1,517,000 6,329,000 9,276,000 Income taxes payable................................................. 4,045,000 545,000 625,000 Deferred rent........................................................ 1,204,000 137,000 946,000 Other long-term liabilities.......................................... 690,000 690,000 -- ----------- ----------- ------------ Net cash provided by operating activities.............................. 43,950,000 31,948,000 28,187,000 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in equipment and leasehold improvements....................... (26,503,000) (22,973,000) (8,620,000) Investment in marketable securities...................................... (83,018,000) (42,320,000) (17,700,000) Proceeds from sale of marketable securities.............................. 43,418,000 39,704,000 -- Acquisition of store leases and related store assets..................... (1,911,000) -- -- ----------- ----------- ------------ Net cash used in investing activities.................................... (68,014,000) (25,589,000) (26,320,000) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt..................................... (1,000,000) (2,000,000) (3,736,000) Purchase of treasury stock............................................... (19,675,000) -- -- Proceeds from issuance of common stock................................... 273,000 214,000 16,199,000 ----------- ----------- ------------ Net cash (used in) provided by financing activities...................... (20,402,000) (1,786,000) 12,463,000 ----------- ----------- ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................... (44,466,000) 4,573,000 14,330,000 CASH AND CASH EQUIVALENTS, beginning of year............................. 76,056,000 71,483,000 57,153,000 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS, end of year................................... $31,590,000 $76,056,000 $71,483,000 ----------- ----------- ------------ ----------- ----------- ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest............................................................... $ 194,000 $ 337,000 $ 538,000 Income taxes, net...................................................... 13,326,000 16,720,000 13,424,000 SCHEDULE OF NONCASH TRANSACTIONS:
During the fifty-two weeks ended January 30, 1999, January 31, 1998 and February 1, 1997, the Company recorded an increase to paid-in capital of $408,000, $144,000 and $1,827,000, respectively, related to tax benefits associated with the exercise of non-qualified stock options. During the fifty-two weeks ended January 30, 1999, the Company recorded a decrease to other comprehensive income of $139,000 and a corresponding decrease to other long-term liabilities and other assets of $65,000 and $204,000, respectively, related to the Supplemental Employee Retirement Plan. (See Note 13.) During the fifty-two weeks ended February 1, 1997, the Company reduced certain estimated liabilities assumed in connection with the acquisition of Contempo Casuals. As a result, a reduction in accounts payable of $1,481,000 was recorded with a corresponding reduction in fixed assets. See accompanying notes to financial statements. 24 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF THE BUSINESS The Wet Seal, Inc. (the "Company") is a nationwide specialty retailer of fashionable and contemporary apparel and accessory items designed for consumers with a young, active lifestyle. In January 1998, the Company initiated a catalog which operates under the name "Wet Seal". On July 1, 1995, the Company acquired Contempo Casuals, Inc., a 237-store junior women's retail chain. This acquisition substantially increased the Company's size. The Company's success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand. The Company's failure to anticipate, identify or react to changes in fashion trends could adversely affect its results of operations. Approximately 35% of the voting stock of the Company is held by a group of companies directly or indirectly controlled by two directors of the Company, one of which is the Chairman of the Board. Effective February 2, 1997, Contempo Casuals, Inc. was merged with and into The Wet Seal, Inc. The Company's fiscal year ends on the Saturday closest to the end of January. The reporting period includes 52 weeks in each of the fiscal years 1998, 1997 and 1996. MERCHANDISE INVENTORIES Merchandise inventories are stated at the lower of cost (first-in, first-out) or market. Cost is determined using the retail inventory method. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost. Expenditures for betterment or improvement are capitalized, while expenditures for repairs that do not significantly increase the life of the asset are expensed as incurred. Depreciation is provided using primarily the straight-line method over the estimated useful lives of the assets. Furniture, fixtures and equipment are typically depreciated over 3 to 5 years. Leasehold improvements and the cost of acquiring leasehold rights are depreciated over the lesser of the term of the lease or 10 years. LONG-LIVED ASSETS The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). In accordance with SFAS 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. At January 30, 1999, the Company believes there has been no impairment of the value of such assets. INTANGIBLE ASSET Excess of cost over net assets acquired (goodwill) is being amortized on the straight-line method over 25 years. The Company assesses the recoverability of goodwill at each balance sheet date by determining whether the amortization of the balance over its remaining useful life can be recovered through projected undiscounted future operating cash flows from the acquisition. 25 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RENTAL EXPENSE Any defined rental escalations are averaged over the term of the related lease in order to provide level recognition of rental expense. STORE PRE-OPENING COSTS Store opening and pre-opening costs are charged to expense as they are incurred. ADVERTISING COSTS Costs for advertising related to retail operations consisting primarily of in-store signage and promotions are expensed as incurred. Direct response advertising costs consisting primarily of catalog book production and printing costs are capitalized and amortized over the expected life of the catalog, not to exceed 6 months. Direct response advertising costs reported as prepaid assets are $0 and $330,000 at January 30, 1999 and January 31, 1998, respectively. Total advertising expenses related primarily to retail operations in fiscal 1998, 1997 and 1996 were $1,993,000, $1,676,000 and $1,728,000, respectively. INCOME TAX The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred tax charges are provided on items, principally depreciation and rent, for which there are temporary differences in recording such items for financial reporting purposes and for income tax purposes. NET INCOME PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") beginning with the Company's fourth quarter of fiscal 1997. All prior period earnings per common share data have been restated to conform to the provisions of this statement. Net income per share, basic, is computed based on the weighted average number of common shares outstanding for the period. Net income per share, diluted, is computed based on the weighted average number of common and potentially dilutive common equivalent shares outstanding for the period. (See Note 14.) STATEMENTS OF CASH FLOWS For purposes of the statements of cash flows, the Company considers all highly liquid interest-earning deposits purchased with an initial maturity of three months or less to be cash equivalents. At January 30, 1999 and January 31, 1998, cash equivalents totaled $29,298,000 and $72,212,000, respectively, bearing interest at rates ranging from approximately 4.7% to 5.3% at January 30, 1999 and from approximately 5.4% to 5.6% at January 31, 1998. NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), in the first quarter of fiscal 1998. SFAS 130 establishes standards for the reporting and display of comprehensive income. Components of comprehensive income, among other 26 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) items, may include foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on marketable securities classified as available-for-sale. In Fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132") which is effective for fiscal years beginning after December 15, 1997. This statement standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer as useful as they were under previous statements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS Management believes the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short maturity of these financial instruments. Long-term debt bears a variable rate of interest; therefore, management believes the carrying amount for the outstanding borrowings at January 30, 1999 and January 31, 1998 approximate fair value. STOCK-BASED COMPENSATION The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." (See Note 6.) NOTE 2: ACQUISITION On July 1, 1995, the Company acquired the business, assets and properties of Contempo Casuals, Inc., a 237-store junior women's retail chain with stores in 34 states and Puerto Rico. The purchase price consisted of (a) the issuance of 254,676 shares of the Company's Class A Common Stock which had a value of $1,178,000 on the date of the acquisition, and (b) $100,000 in cash. The transaction was accounted for under the purchase method. In connection with the acquisition, the Company assumed certain liabilities which were estimated by the seller. The total amount of these assumed liabilities may not, in fact, be paid as the actual payments will be based on the future claims and losses which are actually submitted and which are related to pre-acquisition events. (See Note 12.) On December 1, 1998, the Company acquired the leases and furniture and fixtures for 19 store locations from Mothers Work, Inc. The purchase price was recorded as leasehold improvements and furniture, fixtures and equipment in the accompanying financial statements. The majority of the locations acquired were converted to Arden B. stores. 27 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 3: INVESTMENTS Short-term investments consist of highly liquid interest bearing deposits purchased with an initial maturity exceeding three months with a remaining maturity at January 30, 1999 less than twelve months. Long-term investments consist of highly liquid interest bearing securities which mature beyond twelve months from the balance sheet date. It is management's intent to hold short-term and long-term investments to maturity. Short-term and long-term investments are carried at amortized cost plus accrued income, which approximates market at January 30, 1999. Investments are comprised of the following:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED DESCRIPTION MATURITY DATES COST GAINS LOSSES FAIR VALUE - ------------------------------------- ------------------- ------------- ----------- ----------- ------------- JANUARY 30, 1999 Commercial paper..................... Within one year $ 1,000,000 $ -- $ -- $ 1,000,000 Corporate bonds...................... Within one year 1,514,000 -- 4,000 1,510,000 Municipal bonds...................... Within one year 7,679,000 3,000 -- 7,682,000 Government obligations............... Within one year 11,750,000 -- 11,000 11,739,000 Corporate bonds...................... One to two years 3,087,000 -- 27,000 3,060,000 Municipal bonds...................... One to two years 34,886,000 31,000 -- 34,917,000 ------------- ----------- ----------- ------------- $ 59,916,000 $ 34,000 $ 42,000 $ 59,908,000 ------------- ----------- ----------- ------------- ------------- ----------- ----------- ------------- JANUARY 31, 1998 Commercial paper..................... Within one year $ 14,905,000 $ -- $ -- $ 14,905,000 Corporate bonds...................... Within one year 1,372,000 1,000 -- 1,373,000 Municipal bonds...................... Within one year 3,540,000 -- 7,000 3,533,000 Corporate bonds...................... One to two years 499,000 1,000 -- 500,000 ------------- ----------- ----------- ------------- $ 20,316,000 $ 2,000 $ 7,000 $ 20,311,000 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
NOTE 4: PROVISION FOR INCOME TAXES SFAS 109 requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company's financial statements or tax returns. The measurement of deferred items is based on enacted tax laws. In the event that the future consequences of differences between financial reporting bases and the tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. 28 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 4: PROVISION FOR INCOME TAXES (CONTINUED) The components of the income tax provision are as follows:
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ------------- ------------- ------------- CURRENT: Federal............................................................. $ 13,442,000 $ 12,886,000 $ 10,674,000 State............................................................... 3,930,000 4,378,000 3,375,000 ------------- ------------- ------------- 17,372,000 17,264,000 14,049,000 ------------- ------------- ------------- DEFERRED: Federal............................................................. (1,126,000) (1,535,000) (2,569,000) State............................................................... 2,000 (654,000) (515,000) ------------- ------------- ------------- (1,124,000) (2,189,000) (3,084,000) ------------- ------------- ------------- $ 16,248,000 $ 15,075,000 $ 10,965,000 ------------- ------------- ------------- ------------- ------------- -------------
A reconciliation of the income tax provision to the amount of the provision that would result from applying the federal statutory rate (35%) to income before taxes is as follows:
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ------------- ------------- ------------- Provision for income taxes at federal statutory rate....................... 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit...................... 5.6 7.2 7.1 Tax exempt interest........................................................ (1.5) (2.0) (0.5) Other...................................................................... (0.6) 1.3 0.2 --- --- --- Effective tax rate......................................................... 38.5% 41.5% 41.8% --- --- --- --- --- ---
As of January 30, 1999 and January 31, 1998, the Company's net deferred tax asset was $10,709,000 and $9,585,000 respectively. The major components of the Company's net deferred taxes at January 30, 1999 and January 31, 1998 are as follows:
JANUARY 30, JANUARY 31, 1999 1998 ------------- ------------ Deferred rent........................................................................ $ 2,987,000 $ 2,782,000 Acquisition related reserves......................................................... 630,000 650,000 Inventory cost capitalization........................................................ 1,080,000 808,000 Difference between book and tax basis of fixed assets................................ 4,632,000 4,643,000 State income taxes................................................................... (179,000) (136,000) Supplemental Employee Retirement Plan................................................ 594,000 307,000 Other................................................................................ 965,000 531,000 ------------- ------------ $ 10,709,000 $ 9,585,000 ------------- ------------ ------------- ------------
29 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 5: STOCKHOLDERS' EQUITY The 2,912,665 shares of the Company's Class B Common Stock outstanding as of January 30, 1999 are convertible on a share-for-share basis into shares of the Company's Class A Common Stock at the option of the holder. The Class B Common Stock has two votes per share while the Class A Common Stock has one vote per share. On May 24, 1996 the Company sold 765,000 shares of Class A Common Stock as a part of a public offering pursuant to a registration statement on Form S-3. The net proceeds to the Company from the sale of shares were $14,459,000. During the year ended February 1, 1997, major stockholders converted 3,895,000 shares of Class B Common Stock to Class A Common Stock. These shares were sold to the public through registration statements on Form S-3. The Company did not receive any proceeds from these transactions. During the year ended January 30, 1999, the Company's Board of Directors authorized the repurchase of up to 20% of the outstanding shares of the Company's Class A Common Stock. As of January 30, 1999, 1,327,000 shares had been repurchased at a cost of $19,675,000. Such repurchased shares are reflected as treasury stock in the accompanying financial statements. NOTE 6: LONG-TERM INCENTIVE PLAN Under the Company's long-term incentive plans (the "Plans"), the Company may grant stock options which are either incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock options. The Plans provide that the per share exercise price of an incentive stock option may not be less than the fair market value of the Company's Class A Common Stock on the date the option is granted. Options become exercisable over periods of up to five years and generally expire ten years from the date of grant or 90 days after employment or services are terminated. The Plans also provide that the Company may grant restricted stock and other stock-based awards. An aggregate of 1,475,000 shares of the Company's Class A Common Stock may be issued pursuant to the Plans. As of January 30, 1999, 19,756 shares were available for future grants. 30 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 6: LONG-TERM INCENTIVE PLAN (CONTINUED) Stock option activity for each of the three years in the period ended January 30, 1999 was as follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- ----------------- Outstanding at February 3, 1996................................ 635,000 $ 5.12 Granted...................................................... 60,000 20.86 Canceled..................................................... (6,000) 4.13 Exercised.................................................... (276,500) 6.29 ---------- Outstanding at February 1, 1997................................ 412,500 6.64 Granted...................................................... 595,000 20.00 Canceled..................................................... (21,000) 17.70 Exercised.................................................... (19,000) 11.24 ---------- Outstanding at January 31, 1998................................ 967,500 14.53 Granted...................................................... 130,000 16.93 Canceled..................................................... (12,000) 13.57 Exercised.................................................... (36,000) 7.58 ---------- Outstanding at January 30, 1999................................ 1,049,500 $ 14.42 ---------- ----------
At January 30, 1999, January 31, 1998 and February 1, 1997 there were 283,500, 119,500 and 19,500 outstanding options exercisable at a weighted average exercise price of $8.42, $4.65 and $4.40, respectively. Additional information regarding options outstanding as of January 30, 1999 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ------------------------ NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF REMAINING EXERCISE AS OF EXERCISE EXERCISE PRICES JAN. 30, 1999 CONTRACTUAL LIFE PRICE JAN. 30, 1999 PRICE - --------------- ------------- ------------------- -------- ------------- -------- $ 3.00 - $ 3.63 30,000 5.33 $ 3.56 19,000 $ 3.63 4.13 - 5.13 269,500 5.20 4.18 174,500 4.17 8.00 - 16.50 290,000 8.65 16.27 50,000 15.82 19.31 - 20.00 460,000 8.60 19.97 40,000 20.00 ------------- ------------- $ 3.00 - $20.00 1,049,500 7.65 $14.42 283,500 $ 8.42
During the years ended January 30, 1999, January 31, 1998 and February 1, 1997, the Company recognized tax benefits of $408,000, $144,000 and $1,827,000, respectively, resulting from the exercise of certain non-qualified stock options. ADDITIONAL LONG-TERM INCENTIVE PLAN INFORMATION As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee incentive stock options or non-qualified stock options. 31 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 6: LONG-TERM INCENTIVE PLAN (CONTINUED) Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 48 months following vesting; stock volatility, 49.93% in fiscal 1998, 72.23% in fiscal 1997 and 65.95% in fiscal 1996; risk free interest rates, 4.74% in fiscal 1998, 6.10% in fiscal 1997 and 6.38% in fiscal 1996; and no dividends during the expected term. The Company's calculations are based on a valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 1998, fiscal 1997 and fiscal 1996 awards had been amortized to expense over the vesting period of the awards, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
FISCAL FISCAL FISCAL 1998 1997 1996 ------------- ------------- ------------- Net Income.......................................... As reported $ 25,954,000 $ 21,250,000 $ 15,252,000 Pro forma $ 24,804,000 $ 20,745,000 $ 15,192,000 Net Income Per Share, Basic......................... As reported $ 1.98 $ 1.57 $ 1.15 Pro forma $ 1.90 $ 1.53 $ 1.15 Net Income Per Share, Diluted....................... As reported $ 1.91 $ 1.53 $ 1.13 Pro forma $ 1.83 $ 1.49 $ 1.13
The impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the above pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options. As of January 30, 1999, the Company has granted an aggregate of 72,244 shares of Class A Common Stock, net of forfeitures, to a group of its key employees under the performance grant award plan which was instituted pursuant to the Company's Plans. Under the performance grant award plan, key employees of the Company receive Class A Common Stock in proportion to their salary. These bonus shares vest at the rate of 33.33% per year and non-vested shares are subject to forfeiture if the participant terminates employment. Compensation expense, equal to the market value of the shares as of the issue date, is being charged to earnings over the period that the employees provide service. In each of the years ended January 30, 1999, January 31, 1998 and February 1, 1997, 12,308, 8,704 and 5,308 shares, respectively, were fully vested and issued. In connection with the issuance of these shares, the Company recorded compensation expense of $463,000, $267,000 and $107,000 for the years ended January 30, 1999, January 31, 1998 and February 1, 1997, respectively. 32 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 7: COMMITMENTS LEASES The Company leases retail stores, automobiles, computers and corporate office and warehouse facilities under operating lease agreements expiring at various times through 2010. Substantially all of the leases require the Company to pay maintenance, insurance, property taxes and percentage rent ranging from 3% to 12%, based on sales volume over certain minimum sales levels. Effective February 1998, the Company entered into a sublease agreement for its former warehouse facility which expires in August 2002. Minimum annual rental commitments under non-cancelable leases, including the corporate office and warehouse facility lease, are as follows:
MINIMUM LEASE SUBLEASE NET LEASE COMMITMENTS INCOME COMMITMENTS --------------- ------------ -------------- FISCAL YEAR ENDING: 2000....................................... $ 51,196,000 $ 647,000 $ 50,549,000 2001....................................... 47,962,000 647,000 47,315,000 2002....................................... 43,352,000 647,000 42,705,000 2003....................................... 36,511,000 377,000 36,134,000 2004....................................... 30,793,000 -- 30,793,000 Thereafter................................. 95,957,000 -- 95,957,000 --------------- ------------ -------------- $ 305,771,000 $ 2,318,000 $ 303,453,000 --------------- ------------ -------------- --------------- ------------ --------------
Rental expense, including common area maintenance, was $72,533,000, $64,384,000 and $62,391,000, of which $295,000, $377,000 and $345,000 was paid as percentage rent based on sales volume, for the years ended January 30, 1999, January 31, 1998 and February 1, 1997, respectively. EMPLOYMENT CONTRACTS The Company has employment contracts with two officers, which provide for minimum annual salaries, customary benefits and allowances, and incentive bonuses if specified Company earnings levels are achieved. The agreements provide these same officers with severance benefits which approximate three years' salary if the agreements are terminated without cause before expiration of their terms or if the individual's duties materially change following a change in control of the Company. LITIGATION The Company is a defendant in various lawsuits arising in the ordinary course of its business. While the ultimate liability, if any, arising from these claims cannot be predicted with certainty, the Company is of the opinion that their resolution will not likely have a material adverse effect on the Company's financial statements. LETTERS OF CREDIT At January 30, 1999, the Company had outstanding letters of credit amounting to approximately $15,994,000. 33 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 8: REVOLVING CREDIT ARRANGEMENT Under an unsecured revolving line of credit arrangement with a bank, the Company may borrow up to a maximum of $30 million on a revolving basis through July 1, 1999. The cash borrowings under the arrangement bear interest at the bank's prime rate or, at the Company's option, LIBOR plus 1.75%. On March 31, 1999, the line of credit was extended to a maturity date of July 1, 2000. The credit arrangement imposes quarterly and annual financial covenants requiring the Company to maintain certain financial ratios and achieve certain levels of annual income. In addition, the credit arrangement requires that the bank approve the payment of dividends and restrict the level of capital expenditures. At January 30, 1999 and January 31, 1998, the Company was in compliance with these covenants. The Company had no borrowings outstanding under the credit arrangement at January 30, 1999 or January 31, 1998. NOTE 9: LONG-TERM DEBT In June 1995, the Company entered into an unsecured five-year, $10 million term loan. The loan bears interest at the bank's prime rate plus .25% or, at the Company's option, LIBOR plus 1.75% (6.75% at fiscal year end) payable monthly. Under the terms of the debt agreement, the outstanding balance of $2,264,000 will be repaid in quarterly installments of $500,000, commencing October 31, 1999, until paid. Aggregate principal payments during fiscal 1999 and fiscal 2000 are $1,000,000 and $1,264,000, respectively. The term loan imposes quarterly and annual financial covenants requiring the Company to maintain certain financial ratios and achieve certain levels of annual income. In addition, the term loan requires that the bank approve the payment of dividends and restricts the level of capital expenditures. At January 30, 1999 and January 31, 1998, the Company was in compliance with these covenants. NOTE 10: RELATED PARTY TRANSACTIONS Certain officers of Suzy Shier, Inc., a shareholder, provide management services to the Company. For these services, the officers earned in the aggregate a management fee of $375,000 in the year ended January 31, 1999 and $250,000 during each of the years ended January 31, 1998 and February 1, 1997. NOTE 11: RETIREMENT PLAN Effective June 1, 1993, the Company established a qualified defined contribution retirement plan under the Internal Revenue Code, Section 401(k). The Wet Seal Retirement Plan (the "Plan") is available to all employees who meet the Plan's eligibility requirements. The Plan is funded by employee contributions, and additional contributions may be made by the Company at its discretion. As of January 30, 1999 the Company had accrued $112,000 as its fiscal 1998 contribution to the Plan. 34 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 12: ACCRUED LIABILITIES Accrued liabilities consist of the following:
JANUARY 30, JANUARY 31, 1999 1998 --------------- --------------- Reserve for self insurance................................. $ 2,857,000 $ 3,219,000 Accrued wages, bonuses and benefits........................ 7,272,000 5,972,000 Combination costs.......................................... -- 1,645,000 Gift certificate and credit memo liability................. 3,464,000 2,911,000 Sales tax payable.......................................... 1,651,000 1,204,000 Other...................................................... 5,186,000 5,619,000 --------------- --------------- $ 20,430,000 $ 20,570,000 --------------- --------------- --------------- ---------------
In connection with the acquisition of Contempo Casuals, Inc., the Company assumed certain accruals, including the reserve for self insurance, which were estimated by the seller. The total amount of these assumed accruals may not, in fact be paid as the actual payments will be based on the future claims and losses which are actually submitted and which are related to pre-acquisition events. The accrual for combination costs consisted of management's estimates for the costs of closing and/or combining certain Contempo Casuals facilities and operations into Wet Seal's, as well as the costs of integrating management information and security systems. As of January 31, 1998, the Company had substantially completed the combination of facilities and the acquisition of necessary management information systems to fully integrate Contempo Casuals' operations into Wet Seal's. The accrued combination costs remaining at January 31, 1998 totaling $1,645,000 were fully utilized with the integration of the Company's in-store security systems in fiscal 1998. NOTE 13: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN The Company maintains a defined benefit supplemental employee retirement plan (the "SERP") for certain of its key employees and a director. The SERP provides for preretirement death benefits through life insurance and for retirement benefits. The Company funded the SERP in 1998 and 1997 through contributions to a trust fund known as a "Rabbi" trust. Assets held in the Rabbi trust ($861,000 and $261,000 at January 30, 1999 and January 31, 1998, respectively) are subject to claims of the Company's creditors but otherwise must be used only for purposes of providing benefits under the SERP. In accordance with SFAS 132, the following presents a reconciliation of the SERP's funded status: CHANGE IN BENEFIT OBLIGATION
JANUARY 30, JANUARY 31, 1999 1998 --------------- --------------- Benefit obligation at beginning of year.................... $ 2,730,000 $ 2,295,000 Service cost............................................. 293,000 274,000 Interest cost............................................ 191,000 161,000 Actuarial loss........................................... 141,000 -- Benefits paid............................................ -- -- --------------- --------------- Benefit obligation at end of year.......................... $ 3,355,000 $ 2,730,000 --------------- --------------- --------------- ---------------
35 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 13: SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN (CONTINUED) CHANGE IN PLAN ASSETS
JANUARY 30, JANUARY 31, 1999 1998 --------------- --------------- Fair value of plan assets at beginning of year............. $ -- $ -- Actual return on assets.................................. -- -- Employer contribution.................................... -- -- Benefits paid............................................ -- -- --------------- --------------- Fair value of plan assets at end of year................... $ -- $ -- --------------- --------------- --------------- --------------- Funded status.............................................. $ (3,355,000) $ (2,730,000) Unrecognized transition (asset)/obligation............... -- -- Unrecognized prior service cost.......................... 1,968,000 2,132,000 Unrecognized net loss/(gain)............................. 139,000 (2,000) --------------- --------------- Net amount recognized...................................... $ (1,248,000) $ (600,000) --------------- --------------- --------------- --------------- Weighted average assumptions: Discount rate............................................ 6.75% 7.00% Expected return on plan assets........................... 0.00% 0.00% Rate of compensation increase............................ n/a n/a
AMOUNTS RECOGNIZED IN BALANCE SHEET
JANUARY 30, JANUARY 31, 1999 1998 --------------- --------------- Prepaid pension cost....................................... $ -- $ -- Accrued benefit liability................................ (3,355,000) (2,730,000) Intangible asset (unrecognized prior service cost)....... 1,968,000 2,130,000 Accumulated other comprehensive income................... 139,000 -- --------------- --------------- Net amount recognized...................................... $ (1,248,000) $ (600,000) --------------- --------------- --------------- ---------------
COMPONENTS OF NET PERIODIC PENSION COST
JANUARY 30, JANUARY 31, 1999 1998 --------------- --------------- Service cost--benefits earned during the period............ $ 293,000 $ 274,000 Interest cost on projected benefit obligation............ 191,000 160,000 Expected return on plan assets........................... -- -- Amortization of unrecognized prior service cost.......... 164,000 164,000 --------------- --------------- Net periodic pension cost.................................. $ 648,000 $ 598,000 --------------- --------------- --------------- ---------------
36 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 14: NET INCOME PER SHARE A reconciliation of the numerators and denominators used in basic and diluted net income per share is as follows:
JANUARY 30, JANUARY 31, FEBRUARY 1, 1999 1998 1997 ------------- ------------- ------------- Net income: Basic and diluted....................................... $ 25,954,000 $ 21,250,000 $ 15,252,000 ------------- ------------- ------------- ------------- ------------- ------------- Weighted average number of common shares: Basic............................................................... 13,085,587 13,552,502 13,219,284 Effect of dilutive securities--stock options........................ 495,646 347,375 240,526 ------------- ------------- ------------- Diluted............................................................. 13,581,233 13,899,877 13,459,810 ------------- ------------- ------------- ------------- ------------- ------------- Net income per share: Basic............................................................... $ 1.98 $ 1.57 $ 1.15 Effect of dilutive securities--stock options........................ 0.07 0.04 0.02 ------------- ------------- ------------- Diluted............................................................. $ 1.91 $ 1.53 $ 1.13 ------------- ------------- ------------- ------------- ------------- -------------
NOTE 15: SHAREHOLDER RIGHTS PLAN On August 19, 1997, the Company's Board of Directors adopted a Shareholder Rights Plan (the "Rights Plan") designed to protect company stockholders in the event of takeover action that would deny them the full value of their investment. Terms of the Rights Plan provide for a dividend distribution of one right for each share of common stock to holders of record at the close of business on August 29, 1997. The rights become exercisable only in the event, with certain exceptions, an acquiring party accumulates 12 percent or more of the Company's voting stock, or if a party announces an offer to acquire 20 percent or more of the Company's voting stock. Unless earlier redeemed, the rights will expire on August 29, 2007. Each right will entitle the holder to buy one one-hundredth of a share of a new series of preferred stock at a price of $73.00, subject to adjustment upon the occurrence of certain events. The Company will be entitled to redeem the rights at $0.01 per right at any time until the tenth day following the acquisition of a 12 percent position in its voting stock. NOTE 16: UNAUDITED QUARTERLY FINANCIAL DATA FISCAL YEAR ENDED JANUARY 30, 1999
NET INCOME NET INCOME PER SHARE, PER SHARE, QUARTER SALES GROSS MARGIN NET INCOME BASIC DILUTED - --------------------------------------- -------------- -------------- ------------- ------------- ------------- First Quarter.......................... $ 104,845,000 $ 29,973,000 $ 3,488,000 $ 0.26 $ 0.25 Second Quarter......................... 113,036,000 32,888,000 4,879,000 0.36 0.35 Third Quarter.......................... 121,622,000 36,501,000 5,418,000 0.42 0.41 Fourth Quarter......................... 145,886,000 49,500,000 12,169,000 0.99 0.95 -------------- -------------- ------------- For the Year........................... $ 485,389,000 $ 148,862,000 $ 25,954,000 $ 1.98 $ 1.91 -------------- -------------- ------------- -------------- -------------- -------------
37 THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE YEARS ENDED JANUARY 30, 1999, JANUARY 31, 1998 AND FEBRUARY 1, 1997 NOTE 16: UNAUDITED QUARTERLY FINANCIAL DATA (CONTINUED) FISCAL YEAR ENDED JANUARY 31, 1998
NET INCOME NET INCOME PER SHARE, PER SHARE, QUARTER SALES GROSS MARGIN NET INCOME BASIC DILUTED - --------------------------------------- -------------- -------------- ------------- ------------- ------------- First Quarter.......................... $ 95,563,000 $ 25,441,000 $ 3,515,000 $ 0.26 $ 0.25 Second Quarter......................... 94,254,000 25,337,000 3,417,000 0.25 0.25 Third Quarter.......................... 104,435,000 30,432,000 5,479,000 0.40 0.39 Fourth Quarter......................... 118,211,000 38,609,000 8,839,000 0.65 0.63 -------------- -------------- ------------- For the year........................... $ 412,463,000 $ 119,819,000 $ 21,250,000 $ 1.57 $ 1.53 -------------- -------------- ------------- -------------- -------------- -------------
Net Income per share is computed independently for each of the quarters presented and therefore may not sum to the totals for the year. NOTE 17: SUBSEQUENT EVENT On February 1, 1999, the Company acquired the leases and furniture and fixtures for 80 stores from Britches of Georgetowne, Inc. The Company plans to convert the locations to Arden B., Wet Seal, Contempo Casuals and Limbo Lounge stores by the end of the first quarter of fiscal 1999, with the majority of the locations planned as Arden B. 38 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------------- -------------------------------------------------------------------------------------------------- *3.1 -- Restated Certificate of Incorporation of the Company. *3.2 -- Bylaws of the Company. *4.1 -- Specimen Certificate of the Class A Stock, par value $.10 per share. *4.2 -- Specimen Certificate of the Class B Stock, par value $.10 per share. *******4.3 -- Shareholder Rights Plan. ********10.1 -- Lease between the Company and Foothill-Parkstone I, LLC, dated November 21, 1996. *10.3 -- Services Agreement, dated December 30, 1988, and First amendment to Services Agreement, dated June 1, 1990, between the Company and Kathy Bronstein. **10.3.1 -- Second amendment to Services Agreement between the Company and Kathy Bronstein, dated March 23, 1992. ***10.3.2 -- Services Agreement between the Company and Edmond Thomas, dated June 22, 1992. ****10.3.3 -- Third amendment to Services Agreement between the Company and Kathy Bronstein, dated November 17, 1994. ****10.3.4 -- First amendment to Services Agreement between the Company and Edmond Thomas, dated November 17, 1994. ****10.3.5 -- Fourth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 13, 1995. ****10.3.6 -- Second amendment to Services Agreement between the Company and Edmond Thomas, dated January 13, 1995. *****10.3.7 -- Fifth amendment to Services Agreement between the Company and Kathy Bronstein, dated January 30, 1995. *****10.3.8 -- Sixth amendment to Services Agreement between the Company and Kathy Bronstein, dated February 2, 1996. *****10.3.9 -- Third amendment to Services Agreement between the Company and Edmond Thomas, dated February 2, 1996. 10.3.9.1 -- Fourth amendment to Services Agreement between the Company and Edmond Thomas, dated January 1, 1995. *10.4 -- 1990 Long-Term Incentive Plan. **10.5 -- Credit Agreement between the Company and Bank of America, dated as of April 20, 1992. ***10.5.1 -- Credit Agreement between the Company and Bank of America, dated June 23, 1993, as amended. ****10.5.2 -- Amendments No. 1 and No. 2 to Credit Agreement between the Company and Bank of America, dated January 25, 1994 and June 1, 1994, respectively. *****10.5.3 -- Business Loan Agreement between the Company and Bank of America, containing Term Loan and Revolving Line of Credit, dated June 30, 1995. *****10.5.4 -- Business Loan Agreement between the Company and Bank of America, containing Revolving Line of Credit for Contempo Casuals, dated June 30, 1995. 10.5.5 -- Amendment No. 1 to Business Loan Agreement between the Company and Bank of America, containing Term Loan and Revolving Line of Credit, dated May 7, 1998. 10.5.6 -- Amendment No. 2 to Business Loan Agreement between the Company and Bank of America, containing Term Loan and Revolving Line of Credit, dated June 12, 1998. 10.5.7 -- Amendment No. 3 to Business Loan Agreement between the Company and Bank of America, containing Term Loan and Revolving Line of Credit, dated November 6, 1998. 10.5.8 -- Amendment No. 4 to Business Loan Agreement between the Company and Bank of America, containing Term Loan and Revolving Line of Credit, dated March 31, 1999. ******10.6.1 -- Key Man life insurance policy for Edmond Thomas. 10.6.2 -- Key Man life insurance policy for Kathy Bronstein. ***10.7 -- 1994 Long-Term Incentive Plan. *10.8 -- Stock Purchase and Stock Transfer Restriction Agreement among Kathy Bronstein, Suzy Shier, Inc. and the Company dated December 30, 1988. ****10.9 -- Indemnification Agreement between the Company and various Executives and Directors, dated January 3, 1995, and schedule listing all parties thereto. ******10.10 -- 1996 Long-Term Incentive Plan. ********10.11 -- Supplemental Employee Retirement Plan. *****21.1 -- Subsidiaries of the Registrant 23.1 -- Consent of Deloitte & Touche LLP, independent auditors. 27.1 -- Financial Data Schedule--Fiscal year end 1998
- ------------------------------ * Denotes exhibits incorporated by reference to the Company's Registration Statement File No. 33-34895. ** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 30, 1993. *** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994. **** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995. ***** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1996. ****** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997. ******* Denotes exhibits incorporated by reference to the Company's Current Report on Form 8-K filed on August 25, 1997. ******** Denotes exhibits incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998.
EX-10.3-9-1 2 EXHIBIT 10.3.9.1 Exhibit 10.3.9.1 FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT This Fourth Amendment to Employment Agreement (the "Amendment") is made and entered into this 1st day of January, 1995, by and between The Wet Seal, Inc., a Delaware corporation ("Wet Seal"), and Edmond S. Thomas ("Thomas"), with respect to the following facts: The parties entered into a Employment Agreement as of June 22, 1992, as amended (the "Employment Agreement"). The parties desire to amend certain terms of the Employment Agreement. The parties therefore agree as follows: 1. Any terms defined by the Employment Agreement as amended shall have the same meanings assigned thereby for purposes of this Agreement. 2. Paragraph 4.1.3 of the Employment Agreement is amended in its entirety to read as follows: 4.1.3 For each fiscal year starting after January 28, 1995, a paid vacation during each year of the Term commencing June 22, 1995, for a duration as may be agreed upon by Employee and the Board of Directors from time to time, it being agreed that such duration will be for a period of not less than four (4) weeks during each year of the Term; further, up to three (3) weeks of vacation amount not used by the end of each year of the Term shall be paid in cash to Employee within thirty (30) days of the end of that Term based on his Adjusted Base Salary for that Term then ended; and, provided further that to the extent that all of such vacation amount for a Term is not utilized by Employee in the year accrued, or paid by Employer under this paragraph, then the portion not so utilized or paid shall not be carried over to any subsequent year, or in the event a carry over is required by law, the amount of vacation time which could accrue in the subsequent year shall be reduced by the amount carried over. The provisions of this paragraph shall apply with respect to Employee's vacation for the Term ending June 21, 1995, provided, however, that all amounts herein shall be adjusted proportionately based on the ratio that the number of days remaining in that Term on and after January 29, 1995, bears to the total number of days in that Term. 3. For purposes of determining the Adjusted Base Salary and the Allowance, the term "pre-tax profit of Wet Seal" is amended to include in the calculation of the net income of Wet Seal from all sources the net income from all sources of subsidiaries of Wet Seal which are consolidated for financial reporting purposes. 4. Except as amended herein, the Employment Agreement, as amended is hereby confirmed and republished in full and acknowledged by the parties to be in full force and effect. The parties hereto have executed this Amendment as of the day and year first above written. "Wet Seal" THE WET SEAL, INC. a Delaware corporation By: /s/Irving Teitelbaum --------------------- Irving Teitelbaum Its: Chairman of the Board "Thomas" /s/Edmond S. Thomas ------------------------ EDMOND S. THOMAS EX-10.5-5 3 EXHIBIT 10.5.5 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO] BANK OF AMERICA AMENDMENT TO DOCUMENTS - ------------------------------------------------------------------------------- AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT This Amendment No. 1 (the "Amendment") dated as of May 7, 1998, is between Bank of America National Trust and Savings Association (the "Bank") and The Wet Seal, Inc. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of March 9, 1998 (the "Agreement"). B. The Bank and the Borrower desire to amend the Agreement. AGREEMENT 1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. AMENDMENTS. The Agreement is hereby amended as follows: 2.1 In Subparagraph 1.5(iv) of the Agreement, the amount "TWENTY MILLION DOLLARS ($20,000,000)" is substituted for the amount "EIGHT MILLION DOLLARS ($8,000,000)." 2.2 Paragraph 1.5(g) of the Agreement is amended to read in its entirety as follows: "(g) to pay the Bank a non-refundable fee equal to one of the following percentages of the outstanding undrawn amount of each standby letter of credit, as applicable: 1.50% per annum if the face amount of the letter of credit is less than One Million Dollars ($1,000,000); 1.25% per annum if the face amount of the letter of credit is equal to or greater than One Million Dollars ($1,000,000) but less than Ten Million Dollars ($10,000,000); and 0.875% per annum if the face amount of the letter of credit is equal to or greater than Ten Million Dollars (10,000,000). Each fee will be payable annually in advance, calculated on the basis of the face amount outstanding on the day the fee is calculated, provided, that in no event shall the fee payable with respect to any standby letter of credit be less than $400 per annum. If there is a default under this Agreement, at the Bank's option, the amount of the fee shall be increased by 2.00% per annum over the fee that would otherwise be applicable, effective starting on the day the Bank provides notice of the increase to the Borrower." 3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION THE WET SEAL, INC. X /s/ Julie R. Weis X /s/ Ann Cadier Kim ---------------------------------- ---------------------------- BY: JULIE R. WEIS, VICE PRESIDENT BY: ANN CADIER KIM VP OF FINANCE X /s/ Edmond Thomas ---------------------------- BY: EDMOND THOMAS PRESIDENT & COO - ------------------------------------------------------------------------------- -1- EX-10.5-6 4 EXHIBIT 10.5.6 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO] BANK OF AMERICA AMENDMENT TO DOCUMENTS - ------------------------------------------------------------------------------- AMENDMENT NO. 2 TO BUSINESS LOAN AGREEMENT This Amendment No. 2 (the "Amendment") dated as of June 12, 1998, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and THE WET SEAL, INC. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of March 9, 1998, as previously amended (the "Agreement"). B. The Bank and the Borrower desire to further amend the Agreement. AGREEMENT 1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. AMENDMENTS. The Agreement is hereby amended as follows: 2.1 Paragraph 1.1(a) of the Agreement is amended to read in its entirety as follows: "(a) During the availability period described below, the Bank will provide a line of credit ("Facility No. 1") to the Borrower. The amount of the line of credit (the "Facility No. 1 Commitment") is equal to the amount indicated for each period set forth below:
Period Amount ------ ------ From the date hereof through $40,000,000 March 31, 1999 From April 1, 1999 and thereafter $30,000,000"
3. CONDITIONS. This Amendment will be effective when the Bank receives the following items, in form and content acceptable to the Bank: 3.1 A guaranty signed by WSCC Buying Group, Inc. in the amount of Forty Five Million Dollars ($45,000,000). 3.2 A Corporate Resolution to Obtain Credit executed by the Borrower in the amount of Forty Five Million Dollars ($45,000,000). 3.3 A Form U-1 Purpose Statement executed by the Borrower. 3.4 A Corporate Resolution Authorizing Execution of Guaranty executed by WSCC Buying Group, Inc. in the amount of Forty Five Million Dollars ($45,000,000). 4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. - ------------------------------------------------------------------------------- -1- This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION THE WET SEAL, INC. X /s/ Julie R. Weis X /s/ Ann Cadier Kim --------------------------------- ---------------------------------- BY: JULIE R. WEIS, VICE PRESIDENT BY: ANN CADIER KIM TITLE: VICE PRESIDENT OF FINANCE & CFO X /s/ Ed Thomas ---------------------------------- BY: ED THOMAS TITLE: PRESIDENT AND CHIEF OPERATIONS Officer - ------------------------------------------------------------------------------- -2- EX-10.5-7 5 EXHIBIT 10.5.7 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO] BANK OF AMERICA AMENDMENT TO DOCUMENTS - ------------------------------------------------------------------------------- AMENDMENT NO. 3 TO BUSINESS LOAN AGREEMENT AND WAIVER This Amendment No. 3 (the "Amendment") dated as of November 6, 1998, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank") and THE WET SEAL, INC. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of March 9, 1998, as previously amended (the "Agreement"). B. The Bank and the Borrower desire to further amend the Agreement. C. The Borrower requests that the Bank waive the provisions of Paragraph 9.8 of the Agreement to permit the Borrower to repurchase up to 20% of its shares (the "Stock Repurchase"). AGREEMENT 1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. AMENDMENTS. The Agreement is hereby amended as follows: 2.1 Paragraph 2.3(b) of the Agreement is amended to read in its entirety as follows: "(b) Subject to the provisions of Paragraph 12.12, the Borrower will repay principal in successive quarterly installments of Five Hundred Thousand Dollars ($500,000) on the last day of each January, April, July and October of each year commencing October 31, 1999. On October 31, 2000, the Borrower will repay the remaining principal balance plus any interest then due." 2.2 Article 4 of the Agreement is amended to read in its entirety as follows: "4. COLLATERAL 4.1 PERSONAL PROPERTY. The Borrower's obligations to the Bank under this Agreement will be secured by personal property the Borrower now owns or will own in the future as listed below. The collateral is further defined in security agreement(s) executed by the Borrower. In addition, all personal property collateral securing this Agreement shall also secure all other present and future obligations of the Borrower to the Bank (excluding any consumer credit covered by the federal Truth in Lending law, unless the Borrower has otherwise agreed in writing). All personal property collateral securing any other present or future obligations of the Borrower to the Bank shall also secure this Agreement. Stock and other securities as follows: 50 shares of the capital stock of WSCC. Regulation U of the Board of Governors of the Federal Reserve System places certain restrictions on loans secured by margin stock (as defined in the Regulation). The Bank and the Borrower shall comply with Regulation U. If any of the collateral is margin stock, the Borrower shall provide to the Bank a Form U-1 Purpose Statement, confirming that none of the proceeds of the loan will be used to buy or carry any margin stock. If the Borrower has any other loan made for the purpose of buying or carrying margin stock (purpose loan), then the collateral securing this loan shall not secure the purpose loan, and the collateral securing the purpose loan shall not secure this loan. - ------------------------------------------------------------------------------- -1- For regulatory reasons, the Bank will not accept as collateral ineligible Securities while they are being underwritten by NationsBanc Montgomery Securities LLC, or for thirty days thereafter. NationsBanc Montgomery Securities LLC is a wholly- owned subsidiary of BankAmerica Corporation, and is a registered broker-dealer which is permitted to underwrite and deal in certain Ineligible Securities. "Ineligible Securities" means securities which may not be underwritten or dealt in by member banks of the Federal Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as amended." 2.3 A new Paragraph 7.7 is added to the Agreement, which reads in its entirety as follows: "7.7 EVIDENCE OF PRIORITY. Evidence that security interests and liens in favor of the Bank are valid, enforceable, and prior to all others' rights and interests, except those the Bank consents to in writing." 2.4 A new Paragraph 11.14 is added to the Agreement, which reads in its entirety as follows: "11.14 LIEN PRIORITY. The Bank fails to have an enforceable first lien (except for any prior liens to which the Bank has consented in writing) on or security interest in any property given as security for this Agreement (or any guaranty)." 3. WAIVER. The Borrower desires to repurchase 20% of its shares effective September 1, 1998. The Stock Repurchase is prohibited by Paragraph 9.8 of the Agreement. The Bank hereby waives the breached covenant for the sole and express purpose of permitting the Borrower to enter into the Stock Repurchase as disclosed by the Borrower to the Bank. The waiver only applies to the breached covenant and does not apply to any other breach that may now exist or may occur after the date of this waiver with respect to the breached covenant or any other term, condition, or covenant of the Agreement. 4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION THE WET SEAL, INC. X /s/ Julie R. Weis X /s/ Ann Cadier Kim ---------------------------------- ------------------------------ BY: JULIE R. WEIS, VICE PRESIDENT BY: ANN CADIER KIM VP OF FINANCE X /s/ Edmond Thomas ---------------------------- BY: EDMOND THOMAS PRESIDENT & COO - ------------------------------------------------------------------------------- -2- EX-10.5-8 6 EXHIBIT 10.5.8 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO] BANK OF AMERICA AMENDMENT TO DOCUMENTS - ------------------------------------------------------------------------------- AMENDMENT NO. 4 TO BUSINESS LOAN AGREEMENT This Amendment No. 4 (the "Amendment") dated as of March 31, 1999, is between Bank of America National Trust and Savings Association (the "Bank") and The Wet Seal, Inc. (the "Borrower"). RECITALS A. The Bank and the Borrower entered into a certain Business Loan Agreement dated as of March 9, 1998, as previously amended (the "Agreement"). B. The Bank and the Borrower desire to further amend the Agreement. AGREEMENT 1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. AMENDMENTS. The Agreement is hereby amended as follows: 2.1 In Paragraph 1.2 of the Agreement, the date "July 1, 2000" is substituted for the date "July 1, 1999". 2.2 The first paragraph of Paragraph 4.1 of the Agreement is amended to read in its entirety as follows: "4.1 PERSONAL PROPERTY SUPPORTING GUARANTY. The obligations of the guarantor, WSCC, to the Bank will be secured by personal property the guarantor now owns or will own in the future as listed below. The collateral is further defined in security agreement(s) executed by the guarantor." 2.3 Paragraph 9.7 of the Agreement is amended to read in its entirety as follows: "9.7 CAPITAL EXPENDITURES. Not to make Capital Expenditures to acquire fixed or capital assets (on a consolidated basis) in an aggregate amount in excess of Forty Million Dollars ($40,000,000) for the fiscal year ending on or about January 31, 1999, Fifty-Five Million Dollars ($55,000,000) commencing on the fiscal year ending on or about January 31, 2000, and Forty Million Dollars ($40,000,000) on the fiscal year ending on or about January 31, 2001 and annually thereafter." 3. REPRESENTATIONS AND WARRANTIES. When the Borrower signs this Amendment, the Borrower represents and warrants to the Bank that: (a) there is no event which is, or with notice or lapse of time or both would be, a default under the Agreement except those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank, (b) the representations and warranties in the Agreement are true as of the date of this Amendment as if made on the date of this Amendment, (c) this Amendment is within the Borrower's powers, has been duly authorized, and does not conflict with any of the Borrower's organizational papers, and (d) this Amendment does not conflict with any law, agreement, or obligation by which the Borrower is bound. 4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms and conditions of the Agreement shall remain in full force and effect. This Amendment is executed as of the date stated at the beginning of this Amendment. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION THE WET SEAL, INC. X /s/ Julie R. Weis X /s/ Ann Cadier Kim ------------------------------- ---------------------------- BY: JULIE R. WEIS, VICE PRESIDENT BY: ANN CADIER KIM, VP FINANCE X /s/ Edmond Thomas -------------------------- BY: EDMOND THOMAS PRESIDENT AND COO - ------------------------------------------------------------------------------- -1- EX-10.6-2 7 EXHIBIT 10.6.2 [LOGO] Transamerica Occidental POLICY FORM TRUL+-CVC Life Insurance Company Individual Life Insurance 1150 South Olive Street Los Angeles, CA 90015 3 - ------------------------------------------------------------------------------- INSURED KATHLEEN BRONSTEIN 60041022 POLICY NUMBER FACE AMOUNT $3,000,000 MAR 17 1990 DATE OF ISSUE - ------------------------------------------------------------------------------- While this policy is in force, Transamerica Occidental Life Insurance Company will pay the death benefit to the Beneficiary if the Insured dies before the policy anniversary nearest the Insured's age 115, or will pay the net cash value, if any, to the Owner on the policy anniversary nearest the Insured's age 115 if the Insured is living on that date. All payments are subject to the provisions of this policy. Signed for the Company at Los Angeles, California, on the date of issue. /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] Executive Vice President, General Counsel President and CEO And Corporate Secretary - ------------------------------------------------------------------------------- RIGHT TO EXAMINE AND RETURN POLICY WITHIN 10 DAYS -- At any time within 10 days after you receive this policy, you may return it to us or the agent through whom you bought it. We will cancel the policy and void it from the beginning. We will refund to you any premiums paid. Life Insurance Minimum Premium Requirement Shown in the Policy Data Flexible Premiums Payable Thereafter During Life Of Insured Prior to Age 100 Subject to the Limitations Described in the Premiums Provision Death Benefit Payable at Death of Insured Prior to Age 115 Net Cash Value, if Any, Payable at Policy Anniversary Nearest Age 115 Nonparticipating - No Annual Dividends THIS POLICY CONTAINS A PREMIUM QUALIFICATION CREDIT PROVISION. TO RECEIVE THIS CREDIT, YOU MUST PAY SPECIFIC PREMIUMS ON OR BEFORE THEIR DUE DATE. SEE DETAILS ON PAGE 13 PAGE 1 This policy is a legal contract between you, the Owner of this policy, and Transamerica Occidental Life Insurance Company. READ YOUR POLICY CAREFULLY POLICY SUMMARY We will pay the death benefit to the Beneficiary if the Insured dies while the policy is in force before the policy anniversary nearest age 115. You must pay at least the minimum premium per year during the required premium period shown in the Policy Data or your policy will lapse or be changed to Paid-Up Life Insurance or Extended Term Insuranc. If you request an increase in the face amount of this policy, you must also pay at least the minimum premium per year for the increased portion for that portion's required premium period following the date of the increase, or your policy will lapse or be changed to Paid-Up Life Insurance or Extended Term Insurance. After that, you may vary the amount of premiums and how often you pay them, within certain limits, as described in the Premiums provision. Generally, you may pay premiums as long as the Insured is living, up to the policy anniversary nearest age 100. If the Insured is living at the policy anniversary nearest age 115, we will pay the net cash value, if any, to you. Additional benefits, if any, are provided by rider. This is only a brief description. The insurance is fully described in the various provisions of the policy. GUIDE TO POLICY PROVISIONS
PAGE ---- Accumulation Values......................................................14 Application Copy ..................................................after 30 Beneficiary's Rights......................................................7 Cash Value...............................................................16 Change of Beneficiary.....................................................7 Death Benefit.............................................................7 Definitions...............................................................5 Guaranteed Values........................................................14 Grace Period.............................................................12 Misstatement of Age or Sex ..............................................28 Nonforfeiture Options....................................................20 Option to Change the Face Amount.........................................19 Ownership and Beneficiary Provision.......................................7 Payment of Cash Value and Loans..........................................27 Payment of Death Benefit..................................................7 Policy Data ......................................................... 2,3,4 Policy Loans............................................................ 16 Policy Statements and Illustrations .....................................27 Premium Qualification Credit.............................................13 Premiums.................................................................11 Reinstatement ...........................................................13 Riders.............................................................after 30 Table of Guaranteed Maximum Monthly Deduction Rates.......................3 Table of Policy Values....................................................4 Table of Surrender Penalties.............................................4A
PAGE 1A P 0 L I C Y D A T A CLASS A LOAN INTEREST RATE 5.21% IN ADVANCE MAR 17, 1999 POLICY DATE CLASS B LOAN 6.00% REINSTATEMENT INTEREST RATE 7.40% IN ADVANCE INTEREST RATE POLICY NUMBER 000060041022 47 AGE OF INSURED INSURED KATHLEEN BRONSTEIN FACE AMOUNT $3,000,000 MAR 17, 1990 DATE OF ISSUE DEATH BENEFIT OPTION OPTION 1 PREFERRED NONSMOKER CLASS OF RISK OWNER WET SEAL INC
- ------------------------------------------------------------------------------- MINIMUM INITIAL PREMIUM: $1,318 PLANNED PERIODIC PREMIUMS: $7,909 ANNUAL REQUIRED PREMIUM PERIOD: 10 YEARS REQUIRED PREMIUM PER YEAR FOR THE BASE POLICY: $7,909 REQUIRED PREMIUM PER YEAR FOR THE BASE POLICY AND ALL ADDITIONAL RIDERS: $7,909 PREMIUM QUALIFICATION CREDIT PERIOD: 10 YEARS PREMIUM QUALIFICATION CREDIT PERCENTAGE: 2% GUARANTEED MAXIMUM MONTHLY POLICY FEE: POLICY YEARS 1-10: $6.00 POLICY YEARS 11 AND LATER: $10.00 GUARANTEED MAXIMUM MONTHLY EXPENSE CHARGE PER THOUSAND: YEARS 1-5: $0.05 YEARS 6-10: $0.05 YEARS 11 & LATER: $0.06 GUARANTEED MINIMUM INTEREST RATE: 4.00% NONFORFEITURE INTEREST RATE: 4.0% SELECT MONTHLY PREMIUM: $1,987.50 SELECT PERIOD: 50 YEARS - ------------------------------------------------------------------------------- NOTE: THIS POLICY MAY TERMINATE PRIOR TO THE INSURED'S AGE 115 IF: (1) THE CASH VALUE MINUS ANY LOAN(S) IS LESS THAN THE MONTHLY DEDUCTION DUE, OR (2) THE REQUIRED PREMIUMS PER YEAR FOR THE BASE POLICY AND ANY RIDERS AND LAYERS IN THEIR REQUIRED PREMIUM PERIOD ARE NOT PAID. PAGE 2 P 0 L I C Y D A T A (C O N T I N U E D) TABLE OF GUARANTEED MAXIMUM MONTHLY DEDUCTION RATES PER $1,000 FOR BASE POLICY*
POLICY POLICY POLICY POLICY POLICY POLICY YEAR EXCLUDING YEAR EXCLUDING YEAR EXCLUDING RIDERS RIDERS RIDERS 1 0.0441 34 5.4266 67 0.0000 2 0.0608 35 6.0633 68 0.0000 3 0.0766 36 6.7991 4 0.0891 37 7.6466 5 0.1075 38 8.5858 6 0.1216 39 9.6150 7 0.1400 40 10.7150 8 0.1600 41 11.8925 9 0.1808 42 13.1341 10 0.2025 43 14.4591 11 0.5875 44 15.8658 12 0.6241 45 17.3816 13 0.6633 46 19.0500 14 0.7091 47 20.9500 15 0.7633 48 23.2758 16 0.8316 49 26.4433 17 0.9175 50 31.3116 18 1.0191 51 39.5808 19 1.1291 52 54.6541 20 1.2475 53 83.3333 21 1.3675 54 0.0000 22 1.4883 55 0.0000 23 1.6175 56 0.0000 24 1.7666 57 0.0000 25 1.9450 58 0.0000 26 2.1658 59 0.0000 27 2.4350 60 0.0000 28 2.7516 61 0.0000 29 3.1100 62 0.0000 30 3.5033 63 0.0000 31 3.9258 64 0.0000 32 4.3775 65 0.0000 33 4.8708 66 0.0000
- ------------------------------------------------------------------------------- * TO FIND THE AMOUNT OF MONTHLY DEDUCTION DURING EACH POLICY YEAR, SEE THE GUARANTEED VALUES SECTION. A MONTHLY POLICY FEE OF $6.00 WILL BE ADDED INTO EACH MONTHLY DEDUCTION FOR THE FIRST TEN POLICY YEARS. IN SUBSEQUENT YEARS, THE MONTHLY POLICY FEE WILL NOT EXCEED $10.00. A MONTHLY EXPENSE CHARGE PER THOUSAND WILL ALSO BE ADDED TO EACH MONTHLY DEDUCTION. THE GUARANTEED MAXIMUM MONTHLY EXPENSE CHARGE PER THOUSAND IS SHOWN ON POLICY DATA PAGE 2. THE RATES SHOWN ABOVE FOR THE FIRST 10 POLICY YEARS ARE CURRENT RATES THAT ARE GUARANTEED FOR THE FIRST 10 POLICY YEARS. THE RATES FOR YEARS 11 AND AFTER ARE THE GUARANTEED MAXIMUM RATES. PAGE 3 TABLE OF POLICY VALUES AND BENEFITS ILLUSTRATIVE PREMIUMS (1) GUARANTEED BASIS (2)
PLANNED CASH END OF POLICY ANNUALIZED DEATH ACCUMULATION VALUE YEAR PREMIUM BENEFIT VALUE (3) (4) 1 $7,909 $3,000,000 $3,963 $0 2 $7,909 $3,000,000 $7,640 $0 3 $7,909 $3,000,000 $10,888 $0 4 $7,909 $3,000,000 $13,811 $0 5 $7,909 $3,000,000 $16,183 $0 6 $7,909 $3,000,000 $18,137 $0 7 $7,909 $3,000,000 $19,502 $0 8 $7,909 $3,000,000 $20,194 $3,394 9 $7,909 $3,000,000 $20,154 $11,754 10 $7,909 $3,000,000 $19,321 $19,321 11 $7,909 $3,000,000 $4,032 $4,032 12 13 14 15 16 17 18 19 20 AGE 60 AGE 65
- ------------------------------------------------------------------------------- (1) THE ACCUMULATION AND CASH VALUES RESULT FROM THE INTEREST RATES, MONTHLY DEDUCTIONS, PREMIUM QUALIFICATION CREDITS AND THE TIMELY PAYMENT OF THE PLANNED ANNUALIZED PREMIUMS. PARTIAL SURRENDERS, SURRENDER-PENALTY-FREE WITHDRAWALS OR LOANS MAY CHANGE THESE RESULTS. (2) RESULTS CALCULATED ON A GUARANTEED BASIS REFLECT GUARANTEED MAXIMUM MONTHLY DEDUCTIONS AND THE GUARANTEED MINIMUM INTEREST RATE OF 4.00%. (3) ACCUMULATION VALUES ILLUSTRATED ON A GUARANTEED BASIS REFLECT ACCUMULATED NET PREMIUMS AND PREMIUM QUALIFICATION CREDIT AMOUNTS PLUS INTEREST AT THE GUARANTEED MINIMUM INTEREST RATE OF 4.00% LESS GUARANTEED MAXIMUM MONTHLY DEDUCTIONS WHICH INCLUDE THE POLICY FEE, THE GUARANTEED MAXIMUM MONTHLY EXPENSE CHARGE PER THOUSAND AND THE COST OF ANY RIDERS. WHILE A POLICY LOAN(S) EXISTS, THE INTEREST RATE APPLICABLE TO THE CASH VALUE SECURING THE LOAN(S) MAY DIFFER FROM THE INTEREST RATE APPLICABLE TO THE CASH VALUE NOT SECURING THE LOAN(S) THE REDUCED PAID-UP VALUES (MAXIMUM NET SINGLE PREMIUMS AND FACE AMOUNTS PER THOUSAND) ARE SHOWN IN THE POLICY AFTER THE NONFORFEITURE OPTIONS PROVISION. PAGE 4 (4) THE DIFFERENCE BETWEEN THE ACCUMULATION VALUE AND THE CASH VALUE IS THE SURRENDER PENALTY. PREMIUMS ARE SUBJECT TO REFUND UNDER CONDITIONS DESCRIBED IN THE POLICY. CURRENT MONTHLY DEDUCTION RATES ARE NOT GUARANTEED AFTER POLICY YEAR 10, NOR ARE THEY ESTIMATES FOR THE FUTURE. TABLE OF SURRENDER PENALTIES PER $1,000 OF BASE POLICY FACE AMOUNT
POLICY SURRENDER PENALTY YEAR FACTOR 1 28.00 2 25.20 3 22.40 4 19.60 5 16.80 6 14.00 7 11.20 8 8.40 9 5.60 10 2.80 11+ 0.00
TO CALCULATE THE FULL SURRENDER PENALTY FOR THE BASE POLICY, FIND THE FACTOR FOR THE CURRENT POLICY YEAR. MULTIPLY THIS FACTOR BY THE NUMBER OF THOUSANDS OF FACE AMOUNT OF THE BASE POLICY. END OF POLICY DATA DEFINITIONS In this policy: WE, OUR or US means Transamerica Occidental Life Insurance Company. YOU and YOUR means the Owner of this policy. ACCUMULATION VALUE is the policy's total value as described in the Accumulation Values provision. ADMINISTRATIVE OFFICE means Transamerica Occidental Life Insurance Company, Box 419521, Kansas City, Missouri 64141-6521. AGE means the Insured's age on the nearest birthday. The BASE POLICY is this policy excluding any face increase layers and any riders. The BENEFICIARY is the person to whom we will pay the death benefit if the Insured dies. CASH VALUE means the accumulation value less any surrender penalty. A GROSS PREMIUM is 100% of any premium you pay. HOME OFFICE means Transamerica Occidental Life Insurance Company, Box 2101, Los Angeles, California, 90051-0101. LAPSE means termination of the policy at the end of the Grace Period due to insufficient premium or unloaned accumulation value. if there is remaining net cash value at the end of the Grace Period, it will be applied to the Nonforfeiture Options. A LAYER is the coverage provided by an increase in the face amount of this policy. A LAYER DATE is the effective date of a layer of coverage. A LAYER REQUIRED PREMIUM PER YEAR is the minimum amount of premium you must pay each year for a layer's Required Premium Period. The MATURITY DATE is the policy anniversary nearest age 115. The MAXIMUM LOAN VALUE is the largest amount you may borrow under the loan provisions. A MONTHLY DEDUCTION is an amount we withdraw from the accumulation value of the policy (or of each layer, respectively) at the beginning of each policy month. The NET CASH VALUE is the cash value less any existing loans. A NET PREMIUM is 93.0% of any gross premium you pay; we take 7.0% of any gross premium as an administrative charge. All net premium payments will become part of the accumulation value. The POLICY FEE is part of the monthly deduction. We may change the policy fee at any time after the first policy year. The guaranteed maximum policy fees are shown in the Policy Data. A POLICY LOAN is indebtedness to us for a loan secured by this policy. REINSTATE means to restore coverage after the policy has lapsed or been changed to Paid-Up Life Insurance or Extended Term Insurance, subject to the requirements in the Reinstatement provision. PAGE 5 The REQUIRED PREMIUM PER YEAR FOR THE BASE POLICY is the minimum amount of premium you must pay each year for the Required Premium Period. The REQUIRED PREMIUM PERIOD is the total number of consecutive years that any required premium must be paid. This period is shown in the Policy Data For the base policy, this period begins on the Policy Date. For a layer, this period begins on the Layer Date. A RIDER is an attachment to the policy that provides an additional benefit. WRITTEN REQUEST means a signed request in a form satisfactory to us that is received at our Administrative Office. We will use the LAYER DATE to determine the layer anniversaries and layer years. We will send any notice under the provisions of this policy to your last known address and to any assignee of record. We will use the POLICY DATE shown in the Policy Data to determine the monthly dates, policy anniversaries and policy years. PAGE 6 OWNERSHIP OWNER OF THE POLICY -- Only you, the Owner, are entitled to the rights granted under this policy while the Insured is living. If you are an individual and you die before the Insured, your rights will pass to the executor or administrator of your estate for disposition unless stated otherwise in this policy. If the Owner is a partnership, the rights belong to the partnership as it exists when a right is exercised. ASSIGNMENT OF THE POLICY -- We are not responsible for the adequacy of any assignment However, if you file the assignment with us and we record it at our Administrative Office, your rights and those of any revocable Beneficiary will be subject to it. THE BENEFICIARY WHO RECEIVES THE DEATH BENEFIT -- If the Insured dies while this policy is in force, we will pay the death benefit to the Beneficiary. The Beneficiary is as designated in the application, unless changed as shown under "How to Change a Beneficiary" below. If the Beneficiary is a partnership, we will pay the death benefit to the partnership as it existed when the Insured died. PROTECTION OF THE DEATH BENEFIT -- To the extent permitted by law, no death benefit will be subject to the claims of the Beneficiary's creditors or to any legal process against the Beneficiary. IF THE BENEFICIARY DIES -- If any Beneficiary dies before the Insured, that Beneficiary's interest in the death benefit will end. If any Beneficiary dies at the same time as the Insured, or within 30 days after the Insured, that Beneficiary's interest in the death benefit will end if no benefits have been paid to that Beneficiary. If the interest of all designated beneficiaries has ended when the Insured dies, we will pay the death benefit to you. If you are not living at that time, we will pay the death benefit to the executor or administrator of your estate. HOW TO CHANGE A BENEFICIARY -- You may change the designated Beneficiary while the Insured is living by sending a satisfactory written notice to us. The change will not be effective until we record it at our Administrative Office. Even if the Insured is not living when we record the change, the change will take effect as of the date it was signed. However, any benefits we pay before we record the change will not be subject to the change. A Beneficiary designated irrevocably may not be changed without the written consent of that Beneficiary. PAYMENT OF THE PROOF OF DEATH -- We will pay any benefit payable because of DEATH BENEFIT death when we receive due proof of the Insured's death while this policy was in force. The proof must be sent to us at our Administrative Office. We will send appropriate forms to the Beneficiary upon request Any of our agents will help the Beneficiary fill out the forms without charge. DEATH BENEFIT -- The amount of the death benefit may be affected by other policy provisions, such as Policy Loans, Misstatement of Age or Sex, or Partial Surrenders. PAGE 7 DEATH BENEFIT OPTION -- The death benefit before policy anniversary nearest age 100 will be based on whether you have chosen Option 1, Option 2 or Option 3 as shown in the Policy Data. If you do not choose an option in the application, Option 1 will automatically take effect. Prior to the policy anniversary nearest age 100, the death benefit is defined as follows: Option 1: The death benefit will be the greater of: (a) the sum of: (i) the total face amount of the base policy; plus, (ii) the total face amount of any layers; or, (b) the death benefit factor multiplied by the total accumulation values of the base policy and any layers in effect on the date of the Insured's death. Option 2: The death benefit will be the greater of: (a) the sum of: (i) the total face amount of the base policy; plus, (ii) the total face amount of any layers; plus, (iii) the total accumulation values of the base policy and any layers in effect on the date of the Insured's death; or (b) the death benefit factor multiplied by the total accumulation values of the base policy and any layers in effect on the date of the Insured's death. Option 3: The death benefit will be the greater of: (a) the sum of: (i) the total face amount of the base policy; plus, (ii) the total face amount of any layers; plus, (iii) the total amount of all gross premium payments for the base policy and any layers, minus any withdrawals, surrenders, partial withdrawals, partial surrenders, surrender penalty free withdrawals, and premium refunds as of the date of death of the Insured; or, (b) the death benefit factor multiplied by the total accumulation values of the base policy and any layers in effect on the date of the Insured's death. Beginning with the policy anniversary nearest age 100, the death benefit will be: the death benefit factor multiplied by the total accumulation values of the base policy and any layers in effect as of the date of the current policy month. (See Accumulation Values provision for details.) We will reduce the death benefit by any existing policy loans and by the portion of any grace period payment necessary to provide insurance to the date of the Insured's death. This policy is intended to qualify under Section 7702 of the Internal Revenue Code as a life insurance contract for federal tax purposes. The death benefit under this policy is intended to qualify for the federal income tax exclusion. The provisions of this policy (including any rider or endorsement) will be interpreted to ensure tax qualification, regardless of any language to the contrary. At no time will the amount of the death benefit under the policy ever be less than the amount needed to ensure tax qualification. To the extent that the death benefit is increased, appropriate adjustments will be made in any monthly deductions or supplemental benefits as of that time, retroactively or otherwise, that are consistent with such an increase. Such adjustments may be made by right of setoff against any death benefits payable. PAGE 8 DEATH BENEFIT FACTORS
Attained Age Policy Years Attained Age Policy Years 1-10 1-10 Male Female Male Female ---- ------ ---- ------ 45 3.33 3.76 75 1.70 1.79 46 3.23 3.65 76 1.68 1.76 47 3.14 3.54 77 1.66 1.73 48 3.05 3.44 78 1.64 1.71 49 2.96 3.34 79 1.62 1.68 50 2.88 3.24 80 1.60 1.66 51 2.80 3.15 81 1.54 1.60 52 2.73 3.06 82 1.49 1.54 53 2.66 2.97 83 1.44 1.49 54 2.59 2.88 84 1.40 1.44 55 2.52 2.80 85 1.37 1.40 56 2.45 2.73 86 1.36 1.39 57 2.40 2.66 87 1.35 1.37 58 2.34 2.59 88 1.33 1.35 59 2.28 2.52 89 1.32 1.34 60 2.23 2.45 90 1.27 1.29 61 2.19 2.39 91 1.23 1.24 62 2.14 2.33 92 1.19 1.20 63 2.09 2.28 93 1.15 1.16 64 2.05 2.22 94 1.11 1.12 65 2.01 2.17 95 1.10 1.10 66 1.97 2.13 96 1.09 1.09 67 1.93 2.08 97 1.07 1.07 68 1.90 2.04 98 1.06 1.06 69 1.86 2.00 70 1.83 1.96 71 1.80 1.92 72 1.78 1.88 73 1.75 1.85 74 1.73 1.81 PAGE 9 DEATH BENEFIT FACTORS Attained Age Policy Years Attained Age Policy Years 11+ 11+ Male Female Male Female ---- ------ ---- ------ 55 2.29 2.59 80 1.29 1.35 56 2.23 2.51 81 1.27 1.33 57 2.16 2.44 82 1.26 1.30 58 2.10 2.37 83 1.24 1.28 59 2.04 2.30 84 1.23 1.26 60 1.99 2.23 85 1.21 1.24 61 1.93 2.17 86 1.20 1.23 62 1.88 2.10 87 1.19 1.21 63 1.83 2.04 88 1.18 1.19 64 1.79 1.99 89 1.17 1.18 65 1.74 1.93 90 1.16 1.17 66 1.70 1.88 91 1.15 1.15 67 1.66 1.83 92 1.14 1.14 68 1.62 1.78 93 1.12 1.13 69 1.58 1.74 94 1.11 1.12 70 1.55 1.69 95 1.10 1.10 71 1.52 1.65 96 1.09 1.09 72 1.48 1.61 97 1.07 1.07 73 1.45 1.57 98 1.06 1.06 74 1.43 1.53 99-115 1.04 1.04 75 1.40 1.50 76 1.38 1.47 77 1.35 1.43 78 1.33 1.41 79 1.31 1.38
PAGE 10 PREMIUMS We will accept any amount you send us as a premium payment while this policy is in force, subject to the Premium Limitation provision and these conditions: 1. The minimum initial premium shown in the Policy Data is payable on or before the Policy Date. Subsequent premiums may be sent to our Administrative Office or you may pay them to an agent we authorize. We will give you a receipt if you ask for one. Premiums received on or before the Policy Date will only begin to earn interest as of the Policy Date. 2. You must pay the Required Premium Per Year for the Base Policy for the Required Premium Period shown in the Policy Data. These premiums may be paid cumulatively in advance. At the end of each year in the Required Premium Period, we will calculate the cumulative total of all gross premiums paid for the base policy, less any partial surrenders and surrender penalty free withdrawals. We will divide this total by the number of years since the Policy Date. This amount must equal or exceed the Required Premium Per Year for the Base Policy for each year in the Required Premium Period, or your policy will enter the grace period. If you request an increase in the face amount of this policy, then you must also pay the Layer Required Premium Per Year for that layer's Required Premium Period; the layer's Required Premium Period begins on the layer effective date. These premiums may be paid cumulatively in advance. At the end of each layer year in the layer's Required Premium Period, we will calculate the cumulative total of all gross premiums paid for that layer, less any partial surrenders and surrender penalty free withdrawals taken from that layer. We will divide this total by the number of years since the layer date. This amount must equal or exceed the Layer Required Premium Per Year for that layer's Required Premium Period. If this amount does not equal or exceed the Layer Required Premium Per Year, we will: (i) determine the cumulative total of all gross premiums paid for the base policy and any other layers, less any partial surrenders and surrender penalty free withdrawals; and, (ii) compare that total to the corresponding required premiums. If there is not enough extra premium to make up the difference, then your policy will enter the grace period. 3. You may pay premiums at any time prior to policy anniversary nearest age 100. Each premium must be at least $25 and may not exceed the limits described in the Premium Limitation provision below. If you stop paying premiums after the Required Premium Period, your coverage will continue until the net cash value is insufficient to pay the monthly deduction due. At that time, your policy will enter the grace period. (See Grace Period provision.) Beginning with the policy anniversary nearest age 100, billing will cease and no further premium payments will be accepted. PREMIUM LIMITATION -- We reserve the right to refund any unscheduled premium during a particular policy year if the total premium paid: (a) increases the difference between the death benefit and the accumulation value; and, (b) is more than $20 per thousand of face amount and more than three times the total of the monthly deductions for the last year. We also reserve the right to refund any unscheduled premiums that exceed $25,000 in any 12-month period. PAGE 11 We will not refund any amount if doing so would cause your policy to enter the grace period before the next anniversary. As of the end of any policy year, if the premiums paid exceed the amount allowable if this policy is to continue to qualify as a life insurance contract under Section 7702 of the Internal Revenue Code, as such Section in effect at the time this policy is issued, and the regulations thereunder, we will remove the excess amount of premiums paid from the policy, with interest, as of the end of that policy year. We will refund to you this excess amount (including interest) within 60 days after the end of that policy year. Such an excess amount could occur, for example, as a result of a partial surrender or other change in the benefits or terms of the policy, since the premium amount allowable for the policy may be reduced. The amount refundable will not exceed the net cash value of the policy. If the entire net cash value is refunded, we will treat the transaction as a full surrender of your policy. CONTINUATION OF INSURANCE -- If you stop paying premiums, we automatically continue your policy at the same face amount and with any additional benefits provided by rider, subject to the grace period and any minimum premium requirements that may be in effect. Refer to the Premiums provision and the Monthly Deduction provision for further explanation. GRACE PERIOD -- During the Required Premium Period, a grace period is a period of 60 days beginning on: (a) a policy anniversary on which the cumulative Required Premium Per Year for the Base Policy has not been paid (see first paragraph under number 2 of the Premiums provision); or, (b) a monthly policy date when the accumulation value minus any existing loan is less than the monthly deduction due. After the Required Premium Period and prior to the policy anniversary nearest age 100, a grace period is a period of 60 days beginning on a monthly policy date when the net cash value is less than the monthly deduction due. If you request an increase in the face amount of this policy, then during the layer's Required Premium Period, a grace period is a period of 60 days beginning on: (a} a layer anniversary on which the cumulative Layer Required Premium Per Year has not been paid (see second paragraph under number 2 of the Premiums provision); or, (b) a monthly policy date when the accumulation value minus any existing loan is less than the monthly deduction due. After the layer's Required Premium Period and prior to the policy anniversary nearest age 100, a grace period is a period of 60 days beginning on a monthly policy date when the net cash value is less than the monthly deduction due for that layer and for all other layers and the base policy. After policy anniversary nearest age 100, a grace period is a period of 60 days beginning on a policy anniversary on which the loan interest due has not been paid in cash and the accumulation value minus any existing loan is less than the loan interest due. If your policy enters the grace period, we will let you know by sending a notice to your last known address. The notice will tell you the amount you must pay. The amount must be large enough to keep the base policy and any layers in force. You must pay this amount before the grace period ends. If you do not pay enough, your policy will lapse at the end of the 60 days. If there is any net cash value remaining at the end of the grace period, we will apply it to the Nonforfeiture Options. (See Nonforfeiture Options provision.) PAGE 12 During the grace period, we will not charge interest on the amount due. If the Insured dies during the grace period and before you pay the amount, we will subtract from the death benefit the amount required to provide insurance to the date the Insured died. PREMIUM QUALIFICATION CREDIT -- At the end of each policy year for the Required Premium Period, we will calculate the total of gross premiums paid for the base policy. (See first paragraph under number 2 of the Premiums provision.) From this total, we will subtract any partial surrenders and surrender penalty free withdrawals. If this result equals or exceeds the Required Premium Per Year for the Base Policy for each year of the Required Premium Period, we will deposit a premium qualification credit to your policy's accumulation value at the beginning of the next policy year. If you request an increase in the face amount of this policy, then at the end of each layer year for the layer's Required Premium Period, we will also calculate the total of gross premiums paid for that layer. (See second paragraph under number 2 of the Premiums provision.) From this total, we will subtract any partial surrenders and surrender penalty free withdrawals taken from that layer. If this result equals or exceeds the Layer Required Premium Per Year for each year of the layer's Required Premium Period, we will deposit a premium qualification credit to that layer's accumulation value at the beginning of the next layer year. We must receive enough premium as described above by the end of each policy year or layer year in the premium qualification period, or you will not receive a premium qualification credit for that policy year or layer year. The amount of the credit will be a specific percentage of the Required Premium Per Year for the Base Policy and the Layer Required Premium Per Year. The Premium Qualification Credit Percentage and the Premium Qualification Credit Period are shown in the Policy Data REINSTATEMENT -- If this policy lapses or is changed to Paid-Up Life Insurance or Extended Term Insurance, it may be reinstated provided it was not surrendered. To reinstate the policy, you must meet the following conditions: l. You must request reinstatement in writing within three years after the date of lapse or change to Paid-Up Life Insurance or Extended Term Insurance, and before the Maturity Date. 2. The Insured must still be insurable by our standards. 3. If any loans existed when the policy lapsed or was changed to Paid-Up Life Insurance or Extended Term Insurance, you must repay or reinstate them, with interest. Interest will be compounded annually from the date of lapse or change to Paid-Up Life Insurance or Extended Term Insurance. Interest will be at the loan reinstatement interest rate of 5.50% (5.21 in advance) for a Class A loan and 8.00% (7.40 in advance) for a Class B loan. 4. The reinstated policy will be subject to the minimum premium requirement during the Required Premium Period. (See first paragraph under number 2 of the Premiums provision.) Any increase in the face amount of the base policy will also be subject to the minimum premium requirement during the layer's Required Premium Period. (See second paragraph under number 2 of the Premiums provision.) This means that the Required Premium Period will be calculated from the original Policy Date or original layer date; it will not start anew. PAGE 13 If the policy lapsed or was changed to Paid-Up Life Insurance or Extended Term Insurance during any Required Premium Period and is reinstated in a different policy year, you must pay a premium large enough to meet the minimum premium requirement at the time of reinstatement, with interest. Interest will be compounded annually at the reinstatement interest rate of 6%. If the policy lapsed or was changed to Paid-Up Life Insurance or Extended Term Insurance after any Required Premium Period, or if it lapsed or was changed to Paid-Up Life Insurance or Extended Term Insurance during one year of any Required Premium Period and is reinstated in the same policy year, you must pay a premium large enough to cover two monthly deductions due when the policy lapsed or was changed to Paid-Up Life Insurance or Extended Term Insurance, and three monthly deductions due when the policy is reinstated. 5. If you reinstate the policy during any Required Premium Period, you must repay any excess net cash value given to you at the time of change to Paid-Up Life Insurance, with interest. Interest will be compounded annually at the reinstatement interest rate of 6%. 6. If the policy is reinstated within the first 10 policy or layer years, any applicable surrender penalties in effect for the reinstated policy will be calculated from the original Policy Date or original layer date. The effective date of a reinstatement will be the date of your request. If a person other than the Insured is covered by any attached rider, that person's coverage will be reinstated under the reinstatement terms of that rider. The accumulation value of the reinstated policy will be: the net cash value of any Paid-Up Life Insurance or Extended Term Insurance on the date of reinstatement; plus the surrender penalty assessed at the time of lapse or change to Paid-Up Life Insurance or Extended Term Insurance; plus any excess net cash value we paid you at the time of change to Paid-Up Life Insurance; plus any loan repaid or reinstated; plus 93% of any premium you pay at reinstatement; minus any monthly deductions due at the time of lapse or change to Paid-Up Insurance or Extended Term Insurance. GUARANTEED VALUES ACCUMULATION VALUES -- The accumulation value of the policy (or any layer) on the Policy Date (or layer date) is equal to all net premiums paid for the policy (or layer). The accumulation value of the policy (or any layer) on any monthly policy date after the Policy Date (or the layer date) is equal to: 1. its accumulation value on the last monthly policy date, plus interest on that amount; plus 2. any premium qualification credit amount deposited to it on the last monthly policy date, plus interest on that amount; plus 3. all net premiums paid into it less any refunds since the last monthly policy date, plus interest from the date each premium is received in the Administrative Office to the monthly policy date; minus 4. the monthly deduction charged against it on the last monthly policy date, plus interest on that amount; minus 5. any partial surrenders and surrender penalty free withdrawals charged against it, including pro rata surrender penalties, since the last monthly policy date, plus interest on that amount from each partial surrender date and/or surrender penalty free withdrawal date to the monthly policy date. PAGE 14 The accumulation value of the policy (or any layer) on any specified date that falls between any two monthly policy dates is equal to: 1. the accumulation value on the last monthly policy date, plus accrued interest from the last monthly policy date to the specified date; plus 2. any premium qualification credit amount deposited to it on the last monthly policy date, plus accrued interest on that amount; plus 3. all net premiums paid into it less any refunds since the last monthly policy date, plus accrued interest from the date each premium is received in the Administrative Office to the specified date; minus 4. the monthly deduction charged against it on the last monthly policy date, plus accrued interest on that amount; minus 5. any partial surrenders and surrender penalty free withdrawals charged against it, including pro rata surrender penalties, since the last monthly policy date, plus accrued interest on that amount from each partial surrender date and/or surrender penalty free withdrawal date to the specified date. A Table of Policy Values is included in this policy. It is based on the information you gave us when the policy was issued. The values shown may change as the declared interest rates, your premium payments, and other factors change from the illustrated data. Every year, we will send you a statement of actual policy values. GUARANTEED INTEREST RATES -- Except for premium received before the Policy Date, the net premium accrues interest from the date we receive it in the Administrative Office. Interest is credited monthly on each monthly policy date. Premiums received on or before the Policy Date will only begin to earn interest as of the Policy Date. The guaranteed minimum interest rate for all policy years is shown in the Policy Data. Prior to the policy anniversary nearest age 100, we may declare an interest rate higher than the guaranteed minimum at any time. We will never declare an interest rate that is lower than the guaranteed minimum interest rate. We may change this rate at any time without notice. Beginning at policy anniversary nearest age 100, the policy accumulation value will accrue interest at the guaranteed minimum interest rate. For Class A loans, the interest rate for any portion of the accumulation value equal to the amount of any existing policy loan will be the effective annual loan interest rate. For Class B loans, the interest rate for any portion of the accumulation value equal to the amount of any existing policy loan will be the effective annual loan interest rate less 2.5%. MONTHLY DEDUCTION RATES -- We will determine the monthly deduction rate for each policy month at the beginning of that policy month. The monthly deduction rate for the base policy will depend on: the face amount of the policy; the Insured's sex; the Insured's smoker or nonsmoker status; the Insured's class of risk as of the Policy Date; the number of years that the policy has been in force; and the Insured's issue age. PAGE 15 A table of guaranteed maximum monthly deduction rates for the base policy is shown in the Policy Data. We may use rates lower than these guaranteed maximum monthly deduction rates. We will never use higher rates. If you request an increase in the face amount of this policy, we will determine the monthly deduction rate for that layer at the beginning of each policy month. The monthly deduction rate for each layer will depend on: the face amount of the policy; the Insured's sex; the Insured's smoker or nonsmoker status; the Insured's class of risk as of the layer date; the number of years that the layer has been in force; and the Insured's layer issue age. A table of guaranteed maximum monthly deduction rates for that layer will be shown in supplemental Policy Data pages that will be issued on the layer date. We may use rates lower than these guaranteed maximum monthly deduction rates. We will never use higher rates. Any change in the monthly deduction rates will be prospective and will be subject to our expectations as to future cost factors. Such cost factors may include, but are not limited to: mortality; expenses; interest; persistency; and any applicable federal, state and local taxes. GUARANTEED MAXIMUM Monthly EXPENSE CHARGE PER THOUSAND -- The guaranteed maximum monthly expense charge per thousand is shown in the Policy Data. We may use an expense charge which is lower than this guaranteed maximum monthly expense charge per thousand. We will never use higher expense charges. MONTHLY DEDUCTION -- At the beginning of each policy month, we will take the monthly deduction for that policy month from the accumulation value of the policy (or of each layer, respectively). The monthly deduction is equal to: (a) the monthly deduction rate, times .001, times the difference between the death benefit and the accumulation value of the policy (or of each layer, respectively) at the beginning of the policy month; plus (b) the monthly deduction for any riders; plus (c) the policy fee; plus (d) the monthly expense charge per thousand times .001, times the face amount of the policy (or of each layer, respectively). If a layer does not have enough accumulation value to pay a monthly deduction that is due, the monthly deduction for that layer will be taken from the accumulation value of the base policy. CASH VALUE You may borrow the cash value, or take part of it or all of it as a partial or full surrender of the policy. All of these transactions are described in this section. We guarantee that the cash value always equals or exceeds the amount required by the law in effect at the time of issue in the jurisdiction in which the application for this policy was signed. Policy loans, partial surrenders and surrender penalty free withdrawals will be divided proportionately among the accumulation value of the base policy and its layer(s). POLICY LOANS -- If you request a policy loan prior to the tenth policy anniversary, we will handle it as a Class B loan. After the tenth policy anniversary, we will handle one loan request per year as a Class A loan, subject to the limitation shown in number 3 under the Class A Policy Loans provision. After the tenth policy anniversary, we will treat any loan request after the first request in any policy year as a Class B loan. PAGE 16 CLASS A POLICY LOAN -- After the tenth policy anniversary, we will make Class A loans subject to the following conditions: 1. Such a loan will only be allowed one time during a policy year. 2. The maximum amount allowed as a Class A loan in any one policy year will be the lesser of 10% of the accumulation value as of the request date or the maximum loan amount, as described in number 3 below. 3. The maximum loan amount is the accumulation value as of the date of the loan request, minus: a. any existing policy loan(s); and, b. interest on the amount of the loan to the end of the policy year; and, c. the full surrender penalty or two monthly deductions, whichever is greater. 4. You must pay interest on the total loan balance each year in advance. The interest is due on the policy anniversary. The annual effective loan interest rate is 5.50% (5.21% in advance). If you do not pay the interest when it is due, we will add the amount of interest to the loan. We will charge interest on this amount at the same interest rate being charged on the loan. 5. You must assign the policy to us to the extent of the outstanding loan. If the Insured dies, we will deduct the outstanding loan from the death benefit before we pay the death benefit to the Beneficiary. 6. The loan will be secured by that portion of the accumulation value equal to the amount of the loan. CLASS B POLICY LOAN -- We will make Class B loans subject to the following conditions: 1. The maximum amount allowed as a Class B loan is the accumulation value as of the date of the loan request, minus: a. any existing policy loan(s); and, b. interest on the amount of the loan to the end of the policy year; and, c. the full surrender penalty or two monthly deductions, whichever is greater. 2. You must pay interest on the total loan balance each year in advance. The interest is due on the policy anniversary. The loan interest rate is 8.00% (7.40% in advance). If you do not pay the interest when it is due, we will add the amount of interest to the loan. We will charge interest on this amount at the same interest rate being charged on the loan. 3. You must assign the policy to us to the extent of the outstanding loan. If the Insured dies, we will deduct the outstanding loan from the death benefit before we pay the death benefit to the Beneficiary. 4. The loan will be secured by that portion of the accumulation value equal to the amount of the loan. LOAN REPAYMENT -- You may repay any part of any outstanding loan at any time while the Insured is living and before the Maturity Date. PAGE 17 If you wish to make a loan repayment, you must tell us that the payment you send us is for that purpose. Unless your payment is clearly marked as a loan repayment, we will assume it is a premium payment unless it is received after the policy anniversary nearest age 100. When we receive a loan repayment, we will apply it to the portion of the accumulation value that secures the loan. If a payment would cause the policy to fail to qualify as a life insurance contract under Section 7702 of the Internal Revenue Code as such Section is in effect at that time, and the regulations thereunder, the portion of the payment that cannot be accepted as premium will be applied against any outstanding policy loans before a refund is made. Loan repayments will first be applied to any outstanding Class B loans. Then, they will be applied to any outstanding Class A loans. Within the Class A and Class B loan categories, the repayments will be applied first to the loans with the most recent loan dates. Your policy will not automatically lapse or be changed to Paid-Up Life Insurance or Extended Term Insurance if you do not repay a loan. However, the net cash value must be large enough to cover the monthly deduction due and any loan interest due not paid in cash. (See Grace Period provision for details.) If the policy loan interest due is not paid in cash by you, a new loan of the same class (A or B) will be created to cover the interest The new loan will have the same interest rate as the loan to which it is added (Class A or B). Any loan interest paid in cash by you will apply first to Class B loans, and then to Class A loans. PARTIAL SURRENDER -- At any time following the tenth day after you have received this policy, you may surrender a portion of this policy's net cash value by sending us a written request, subject to the limitations described below. During the first 10 policy or layer years, a pro rata surrender penalty will be assessed on any surrender amount you request that exceeds the amount eligible for Surrender Penalty Free Withdrawal as described on the next page. Minimum pro rata surrender penalty is $25. Surrender Penalties are shown in the Policy Data We deduct from the policy's accumulation value: (a) the surrender amount you request; plus (b) the pro rata surrender penalty on the surrender amount that exceeds the amount eligible for surrender without penalty. If you chose Death Benefit Option 1, we will also deduct from the policy's face amount (a) the surrender amount you request that exceeds the amount eligible for surrender without penalty; plus (b) the pro rata surrender penalty on the surrender amount that exceeds the amount eligible for surrender without penalty. If the new face amount would be less than our published minimum for this plan, then the partial surrender will not be allowed. In any policy year, the maximum amount that you may request and receive by partial surrender is: 1) the accumulation value; minus 2) any existing policy loans; minus 3) the sum of 3 monthly deductions; minus 4) the greater of $25 or the full surrender penalty. If you ask for an amount larger than the maximum described above, we will treat it as a request for full surrender of the policy. PAGE 18 During any required premium payment period, the sum of all surrender penalty free withdrawals and partial surrenders may not exceed the sum of all gross premiums paid, less the sum of all required premiums since the Policy Date. (See number 2 of the Premiums provision.) SURRENDER PENALTY FREE WITHDRAWAL -- At any time after the first policy year, you may make a withdrawal without incurring a pro rata surrender penalty. Such a withdrawal is subject to the limits outlined below. The minimum amount of a surrender penalty free withdrawal is $100. When you request a partial surrender in the second or later policy year, we will calculate the amount eligible for withdrawal without penalty. This amount will be the lesser of: (a) 10% of the policy's accumulation value as of the last monthly policy date, minus the sum of all surrender penalty free withdrawals since the last policy anniversary; or, (b) the maximum amount available as a partial surrender described on page 18. During any required premium payment period, the sum of all surrender penalty free withdrawals and partial surrenders may not exceed the sum of all gross premiums paid less the sum of all required premiums since the Policy Date. (See number 2 of the Premiums provision.) Whenever you request a partial surrender after the first policy year, we will process the amount that is eligible as a surrender penalty free withdrawal. The remainder of any amount you request will be processed as a partial surrender. We will deduct the full partial surrender amount you request from the policy's accumulation value. We will not deduct that portion of your request that we treat as a surrender penalty free withdrawal from the policy's face amount. OPTION TO CHANGE DECREASING THE FACE AMOUNT -- You may request a decrease in THE FACE AMOUNT the face amount of this policy if all the following conditions are met: 1. You must make a written request to us. 2. At the request date, this policy must be in force and the Insured must be living. 3. The amount of the reduction in face amount must be at least $25,000. 4. The new face amount may not be less than our published minimum face amount for this plan. 5. The decrease of the face amount of this policy may cause a change in the monthly deduction rates to be charged. 6. A surrender penalty will result from the decrease in the face amount if the decrease is made during the 10 year surrender penalty period of the base policy or any layer. 7. If you request an increase in the face amount of this policy, and then at a later time you request a decrease in the face amount of this policy, we will apply the decrease in the following order. We will first apply the decrease to the newest layer. We will then successively apply the decrease in reverse order to any previous increases; we will begin with the next most recent layer. If the amount of the decrease is greater than the total of all previous increases, we will then apply the remaining decrease to a portion of the original face amount of this policy. PAGE 19 We will issue new Policy Data pages showing the new face amount. After the decrease, the monthly deduction rates and any future surrender penalties will be based on the new total face amount of this policy. If the face amount of this policy is decreased during any Required Premium Period, we will recalculate the required premium per year for the remainder of the Required Premium Period based on the new face amount. INCREASING THE FACE AMOUNT -- You may request an increase in the face amount of this policy. The following conditions will apply: 1. You must make a written request to us. 2. At the request date, this policy must be in force and the Insured must be living. 3. At the request date, the Insured must not be older than age 80. 4. The amount of the increase in face amount must be at least $25,000. 5. You must submit satisfactory evidence that the Insured is still insurable by our standards. 6. The amount of the increase will be contestable and subject to the suicide limitation for two years after the effective date of the increase. 7. The death benefit option for the layer must be the same as the base policy. 8. If the base policy has a Waiver Provision attached, the layer must also. The new coverage will be issued as a separate layer on this policy. It will have a Layer Required Premium Per Year, beginning on the layer date. It will also have its own surrender penalty period for 10 years, beginning on the layer date. The monthly deductions and values for that layer will be based on: the face amount of the layer; the Insured's sex; the Insured's smoker or nonsmoker status; the Insured's class of risk as of the layer date; and the Insured's layer issue age. We will issue new Policy Data pages showing the new face amount. After the increase, the monthly deduction rates for the increase layer will be based on the new total face amount of this policy. Any future surrender penalties for that layer will be based on the face amount of that layer. NONFORFEITURE If you do not pay the minimum cumulative required premiums OPTIONS during the required premium period as described under number 2 in the Premiums provisions, your policy will enter the grace period. After the required premium period if you stop paying premiums your coverage will continue until the cash value minus any loan is insufficient to pay the monthly deduction due. At that time, your policy will enter the grace period (see Grace Period provision). At the end of the grace period, if there is any remaining net cash value, we will apply the net cash value to one of the Nonforfeiture Options described in this section. The Nonforfeiture Options will be effective no later than 60 days after the date on which the premium was due. You may choose Option 1, Paid - Up Life Insurance, or Option 2, Extended Term Insurance, or Option 3, Full Surrender, any time within the 60 day grace period. If you do not choose an option in writing, Option 1, Paid-Up Life Insurance, will automatically take effect. If you choose Option 3, Full Surrender, the surrender value within 60 days from the date the premium was due will not be less than the surrender value as of the date the premium was due, less any loans, partial surrenders (including pro rata surrender penalties) and surrender penalty free withdrawals made after the date the premium was due. PAGE 20 OPTION 1. PAID-UP LIFE INSURANCE -- Subject to the conditions of this option, this policy may be continued as single premium Paid-Up Life Insurance. The following conditions will apply: (a) If the policy has net reached the end of the grace period as described above and you wish to continue it as Paid-Up Life Insurance, the policy must be in force on the date you request the change. (b) When you exercise this option, this policy will be continued as Paid-Up Life Insurance. (c) The amount of Paid-Up Life Insurance is calculated by using the net cash value divided by the net single premium, times $1,000, for the Insured's sex, the Insured's smoker or nonsmoker status, and the Insured's attained age. The net single premiums are shown in the tables on pages 23 and 24. If the difference between the amount of Paid-Up Life Insurance and the net single premium (net cash value of the original policy) for the Paid-Up Life Insurance is greater than the difference under this policy between the death benefit and the accumulation value on the date this option is exercised, then the amount of the Paid-Up Life Insurance elected under this option will be reduced accordingly. Any excess net cash value remaining after the purchase of Paid-Up Life Insurance will be refunded to you. (d) The effective date of the Paid-Up Life Insurance will be the date the premium was due before entering the grace period. (e) The net single premiums used for the single premium Paid-Up Life Insurance will be those in effect as of the date this option was exercised. However, they will not exceed the rates which are shown in the Tables of Maximum Net Single Premiums for Paid-Up Life Insurance per $1,000 on pages 23 and 24. (f) There is a Table of Paid-Up Life Insurance per $1,000 of Net Cash Value following the Table of Maximum Net Single Premiums for Paid-Up Life Insurance per $1,000. (g) The Paid-Up Life Insurance will have cash values. The cash value of the Paid-Up Life Insurance is equal to the net single premium for the face amount of the Paid-Up Life Insurance based on the Insured's sex, the Insured's smoker or nonsmoker status, and the Insured's attained age, less any loans made after the effective date of the Paid-Up Life Insurance. (h) When you exercise this option, all riders will terminate. PAGE 21 OPTION 2. EXTENDED TERM INSURANCE -- Unless the class of risk shown on the Policy Data for the base policy and all subsequent layers is "Rated," you may continue this policy as non-participating extended term insurance. These conditions will apply: (a) The policy must be in force when you request the change. (b) You will surrender all rights under this policy except the right to reinstate, in exchange for the extended term policy. (c) We will calculate the face amount of the extended term policy in this way: this policy's face amount (including the face amount of all layers) less any loans as of the date of your request equals the extended term face amount. (d) We will calculate the length of the coverage period of the extended term policy by applying the net cash value of this policy as a net single premium for the extended term coverage. (e) We will issue and date the extended term policy as of the date you surrender this policy. (f) When you exercise this option, all riders will terminate. OPTION 3. FULL SURRENDER -- You may surrender this policy and all layers for the net cash value. There is a Table of Surrender Penalties shown in the Policy Data. We will use the factors in the table to determine the surrender penalty we will apply. To calculate the full surrender penalty for the base policy, find the factor for the current policy year. Multiply this factor by the number of thousands of face amount of the base policy. This is the full surrender penalty for the base policy. There is no surrender penalty for the base policy after 10 policy years. If you request an increase in the face amount of this policy, the new layer will have its own separate 10 year surrender penalty period. To calculate the full surrender penalty for that layer, find the factor for the current layer year. Multiply this factor by the number of thousands of face amount of that layer. This is the full surrender penalty for that layer. There is no surrender penalty for that layer after 10 layer years. If you request a full surrender within 30 days of a policy anniversary, the surrender value will not be less than the surrender value on that anniversary, including any premium qualification credit, less any loans, partial surrenders (including pro rata surrender penalties), and surrender penalty free withdrawals made after the last policy anniversary. PAGE 22
TABLE OF MAXIMUM NET SINGLE PREMIUMS FOR PAID-UP LIFE INSURANCE PER $1,000 - --------------------------------------------------------------------------------------------------------------- Insured's Insured's Insured's Insured's Attained Attained Attained Attained Age Male Female Age Male Female Age Male Female Age Male Female - --------------------------------------------------------------------------------------------------------------- NONSMOKER 0 79.53 68.09 25 184.09 145.75 50 374.41 332.00 75 716.38 669.87 1 78.86 68.12 26 169.39 150.66 51 386.37 342.52 76 729.10 684.91 2 81.03 70.03 27 174.94 155.74 52 398.61 353.31 77 741.45 699.68 3 83.36 72.08 28 180.74 161.01 53 411.10 364.36 78 753.44 714.20 4 85.80 74.23 29 186.80 166.48 54 423.84 375.65 79 765.15 728.51 5 88.37 76.49 30 193.11 172.14 55 436.80 387.20 80 776.61 742.60 6 91.08 78.85 31 199.68 178.01 56 449.97 399.00 81 787.80 756.45 7 93.95 81.34 32 206.51 184.10 57 463.34 411.08 82 798.67 769.97 8 96.99 83.93 33 213.59 190.40 58 476.91 423.46 83 809.14 783.07 9 100.18 86.65 34 220.92 196.93 59 490 68 436.18 84 819.12 795.64 10 103 52 89.49 35 228.52 203.68 60 504 62 449.24 85 828.55 807.65 11 107.01 92.45 36 236.37 210.66 61 518.73 462.64 86 837.44 819.08 12 110.61 95.52 37 244.49 217.87 62 532.96 476.35 87 845.84 829.99 13 114.28 98.69 38 252.86 225.29 63 547.30 490.31 88 853.83 840.41 14 117.98 101.97 39 261.50 232.93 64 561.70 504.47 89 861.56 850.46 15 121.69 105.33 40 270.40 240.78 65 576.10 518.77 90 869.16 860.23 16 125.43 108.80 41 279.56 248.85 66 590.49 533.19 91 876.80 869.86 17 129.20 112 37 42 288.99 257.13 67 604 87 547.75 92 884.67 879.53 18 133.03 118.05 43 298.69 265.62 68 619.21 562.48 93 893.02 889.43 19 136.97 119.86 44 308.66 274.35 69 633.54 577.43 94 902.18 899.83 20 141.03 123.79 45 318.92 283.31 70 647.83 592.62 95 912.35 910.95 21 145.23 127.86 46 329.45 292.53 71 662.04 608.02 96 923.66 922.94 22 149.62 132.09 47 340.26 302.01 72 675.91 623.55 97 935.99 935.69 23 154.22 136.48 48 351.35 311.74 73 689.74 639.12 98 948.88 948.81 24 159.04 141.04 49 362.74 321.73 74 703.26 654.59 99 961.53 961.53
PAGE 23
TABLE OF MAXIMUM NET SINGLE PREMIUMS FOR PAID-UP LIFE INSURANCE PER $1,000 - --------------------------------------------------------------------------------------------------------- Insured's Insured's Insured's Insured's Attained Attained Attained Attained Age Male Female Age Male Female Age Male Female Age Male Female - --------------------------------------------------------------------------------------------------------- SMOKER 0 95.14 75.97 25 201.50 165.79 50 441.26 366.62 75 752.28 689.34 1 95.17 76.34 26 207.86 171.35 51 453.69 377.22 76 762.47 703.06 2 98.01 78.59 27 214.55 177.10 52 466.26 388.02 77 772.22 716.46 3 101.04 80.99 28 221.52 183.06 53 478.96 399.02 78 781.59 729.58 4 104.20 83.51 29 228.81 189.23 54 491.75 410.19 79 790.69 742.49 5 107.52 86.15 30 236.39 195.61 55 504.58 421.54 80 799.57 755.19 6 111.02 88.90 31 244.26 202.20 56 517.46 433.07 81 808.23 767.69 7 114.70 91.79 32 252.41 209.01 57 530.37 444.81 82 816.65 779.91 8 118.59 94.81 33 260.85 216.05 58 543.32 456.81 83 824.75 791.77 9 122.66 97.98 34 269.57 223.34 59 556.32 469.11 84 832.43 803.20 10 126.92 101.27 35 278.56 230.84 60 569.38 481.73 85 839.68 814.00 11 131.37 104.72 36 287.83 238.60 61 582.47 494.68 86 846.54 824.36 12 135.96 108.29 37 297.37 246.57 62 595.55 507.89 87 853.11 834.15 13 140.66 111.98 38 307.16 254.73 63 608.58 521.32 88 859.56 843.65 14 145.44 115.80 39 317.19 283.09 64 621.48 534.83 89 865.86 852.77 15 150.29 119.73 40 327.46 271.62 65 634.21 548.40 90 872.18 861.87 16 154.90 123.69 41 337.95 280.33 66 646.76 561.98 91 878.73 870.92 17 159.53 127.78 42 348.64 289.17 67 659.15 575.64 92 885.77 880.10 18 164.19 131.99 43 359.54 298.18 68 671.38 589.40 93 893.61 889.64 19 168.97 138.32 44 370.64 307.37 69 683.50 603.37 94 902.39 899.83 20 173.86 140.81 45 381.94 316.74 70 695.52 617.56 95 912.35 910.95 21 178.92 145.45 46 393.41 326.30 71 707.40 631.97 96 923.66 922.94 22 184.17 150.28 47 405.08 336.07 72 719.10 646.49 97 935.99 935.69 23 189.68 155.25 48 416.95 346.04 73 730.53 660.97 98 948.88 948.81 24 195.45 160.43 49 429.01 356.23 74 741.60 675.29 99 961.53 961.53
PAGE 24
TABLE OF PAID-UP LIFE INSURANCE PER $1,000 OF NET CASH VALUE - -------------------------------------------------------------------------------------------------------------------------- Insured's Insured's Insured's Insured's Attained Attained Attained Attained Age Male Female Age Male Female Age Male Female Age Male Female - -------------------------------------------------------------------------------------------------------------------------- NONSMOKER 0 12,573.87 14,686.44 25 6,094.22 6,861.06 50 2,670.87 3,012.05 75 1,395.91 1,492.83 1 12,680.70 14,679.98 26 5,903.54 6,637.46 51 2,588.19 2,919.54 76 1,371.55 1,460.05 2 12,341.11 14,279.59 27 5,716.25 6,420.96 52 2,508.72 2,830.38 77 1,348.71 1,429.22 3 11,996.16 13,873.47 28 5,532.81 6,210.79 53 2,432.50 2,744.54 78 1,327.25 1,400.17 4 11,655.01 13,471.64 29 5,353.32 6,006.73 54 2,359.38 2,662.05 79 1,306.93 1,372.66 5 11,316.06 13,073.60 30 5,178.40 5,809.23 55 2,289.38 2,582.64 80 1,287.65 1,346.62 6 10,979.36 12,682.31 31 5,008.01 5,617.66 56 2,222.37 2,506.27 81 1,269.36 1,321.96 7 10,643.96 12,294.07 32 4,842.38 5,431.83 57 2,158.24 2,432.62 82 1,252.08 1,298.75 8 10,310.34 11,914.69 33 4,681.87 5,252.10 58 2,096.83 2,361.50 83 1,235.88 1,277.03 9 9,982.03 11,540.68 34 4,526.53 5,077.95 59 2,037.99 2,292.63 84 1,220.82 1,256.85 10 9,659.97 11,174.43 35 4,375.98 4,909.66 60 1,981.69 2,225.98 85 1,206.93 1,238.16 11 9,344.92 10,816.66 36 4,230.66 4,746.99 61 1,927.79 2,161.51 86 1,194.12 1,220.88 12 9,040.77 10,469.01 37 4,090.15 4,589.89 62 1,876.31 2,0S9.30 87 1,182.26 1,204.83 13 8,750.44 10,132.74 38 3,954.76 4,438.72 63 1,827.15 2,039.53 88 1,171.19 1,189.90 14 8,476.01 9,806.81 39 3,824.09 4,293.14 64 1,780.31 1,982.28 89 1,160.69 1,175.83 15 8,217.60 9,493.97 40 3,698.22 4,153.17 65 1,735.81 1,927.84 90 1,150.54 1,162.48 16 7,972.57 9,191.18 41 3,577.05 4,018.49 66 1,693.51 1,875.66 91 1,140.51 1,149.61 17 7,739.94 8,899.17 42 3,460.33 3,889.08 67 1,653.25 1,825.65 92 1,130.36 1,136.97 18 7,517.10 8,616.98 43 3,347.95 3,764.78 68 1,614.96 1,777.84 93 1,119.80 1,124.32 19 7,300.87 8,343.07 44 3,239.81 3,644.98 89 1,578.43 1,731.81 94 1,108.43 1,111.32 20 7,090.69 8,078.20 45 3,135.58 3,529.70 70 1,543.61 1,687.42 95 1,096.07 1,097.76 21 6,885.63 7,821.05 46 3,035.36 3,418.45 71 1,510.48 1,644.68 96 1,082.65 1,083.49 22 6,683.60 7,570.60 47 2,938.93 3,311.15 72 1,479.49 1,603.72 97 1,068.39 1,068.73 23 6,484.24 7,327.08 48 2,846.16 3,207.80 73 1,449.82 1,564.65 98 1,053.87 1,053.95 24 6,287.73 7,090.19 49 2,756.80 3,108.20 74 1,421.95 1,527.67 99 1,040.01 1,040.01
PAGE 25
TABLE OF PAID-UP LIFE INSURANCE PER $1,000 OF NET CASH VALUE - -------------------------------------------------------------------------------------------------------------------------- Insured's Insured's Insured's Insured's Attained Attained Attained Attained Age Male Female Age Male Female Age Male Female Age Male Female - -------------------------------------------------------------------------------------------------------------------------- SMOKER 0 10,510.83 13,163.09 25 4,962.78 6,031.73 50 2,266.24 2,727.62 75 1,329.29 1,450.66 1 10,507.51 13,099.29 26 4,810.93 5,836.01 51 2,204.15 2,650.97 76 1,311.53 1,422.35 2 10,203.04 12,724.27 27 4,660.92 5,646.53 52 2,144.73 2,577.19 77 1,294.97 1,395.75 3 9,897.07 12,347.20 28 4,514.27 5,462.69 53 2,087.86 2,506.14 78 1,279.44 1,370.65 4 9,596.93 11,974.61 29 4,370.44 5,284.57 54 2,033.55 2,437.89 79 1,264.72 1,346.87 5 9,300.60 11,607.66 30 4,230.30 5,112.21 55 1,981.85 2,372.25 80 1,250.67 1,324.17 6 9,007.39 11,248.59 31 4,094.00 4,945.60 56 1,932.52 2,309.10 81 1,237.27 1,302.61 7 8,718.40 10,894.43 32 3,961.81 4,784.46 57 1,885.48 2,248.15 82 1,224.51 1,282.20 8 8,432.41 10,547.41 33 3,833.62 4,628.56 58 1,840.54 2.189.09 83 1,212.49 1,262.99 9 8,152.62 10,206.16 34 3,709.61 4,477.48 59 1,797.53 2,131.70 84 1,201.30 1,245.02 10 7,878.98 9,874.59 35 3,589.89 4,332.00 60 1,756.30 2.075.85 85 1,190.93 1,228.50 11 7,612.09 9,549.27 36 3,474.27 4,191.11 61 1,716.83 2.021.51 86 1,181.28 1,213.06 12 7,355.10 9,234.46 37 3,362.81 4,055.64 62 1,679.12 1,968.93 87 1,172.18 1,198.83 13 7,109.34 8,930.17 38 3,255.63 3,925.73 63 1,643.17 1,918.21 88 1,163.39 1,185.33 14 6,875.69 8,635.58 39 3,152.68 3,800.98 64 1,609.06 1.869.75 89 1,154.92 1,172.65 15 6,653.80 8,352.13 40 3,053.81 3,681.61 65 1,578.76 1,823.49 90 1,146.55 1,160.2X 16 6,455.78 8,084.73 41 2,959.02 3,567.22 66 1,546.17 1,779.42 91 1,138.01 1,148.21 17 6,268.41 7,825.95 42 2,868.29 3,458.17 67 1,517.11 1,737.20 92 1,128.96 1,136.23 18 6,090.50 7,576.33 43 2,781.33 3,353.68 68 1,489.47 1,696.64 93 1,119.06 1,124.05 19 5,918.21 7,335.68 44 2,698.04 3,253.41 69 1,463.06 1.657.36 94 1,108.17 1,111.32 20 5,751.75 7,101.77 45 2,618.21 3,157.16 70 1,437.77 1,619.28 95 1,096.07 1,097.76 21 5,589.09 6.87S.21 46 2,541.88 3,064.66 71 1,413.63 1,582.35 96 1,082.65 1,083.49 22 5,429.77 6,655.13 47 2,468.65 2,975.57 72 1,390.63 1,546.81 97 1,068.39 1,068.73 23 5,272.04 6,441.22 48 2,398.37 2,889.84 73 1,368.87 1,512.93 98 1,053.87 1,053.95 24 5,116.40 6.233.25 49 2,330.95 2,807.18 74 1,348.44 1,480.85 99 1,040.01 1,040.01
PAGE 26 PAYMENT OF CASH We may delay paying you the partial or full surrender values VALUE AND LOANS of this policy for up to 6 months after we receive your written request for the surrender. We may delay making a loan to you for up to 6 months after we receive your written request for the loan. We will not delay any loan made to pay premiums due us on any policy. POLICY STATEMENTS We will send you a statement at least once a year without AND ILLUSTRATIONS charge showing: the face amount; accumulation value; cash value; loans; partial surrenders; surrender penalty free withdrawals; premium qualification credits; premiums paid; and charges as of the statement date. Upon written request at any time, we will send you an illustration of your policy's benefits and values. There will be no charge for the first such illustration in each policy year. We reserve the right to charge a $25.00 administrative fee for any illustration after the first in any policy year. BASIS OF The guaranteed cash values of the policy are not less than COMPUTATION the minimum values required by the jurisdiction in which the application for this policy was signed. The guaranteed cash values are equal to the accumulation value based on the guaranteed monthly deductions and the guaranteed minimum interest rate shown in the Policy Data, less any surrender penalty. Cash values will always meet or exceed minimum values on the statutory nonforfeiture basis. The basis for the extended term values is the Commissioners 1980 Extended Term Mortality Tables for males and females, age nearest birthday. The basis for all other values is the Commissioners 1980 Standard Ordinary Smoker or Nonsmoker Ultimate Mortality Tables for males or females, age nearest birthday. Deaths are assumed to occur at the end of the policy year. As required, we have filed the method we used to compute minimum cash values and nonforfeiture benefits with the supervisory official of the jurisdiction in which the application for this policy was signed. GENERAL PROVISIONS INCONTESTABILITY OF THE POLICY -- This policy will be incontestable after it has been in force during the Insured's lifetime for two years from the date of issue. This provision does not apply to any rider providing benefits specifically for disability or death by accident. If you request an increase in the face amount of this policy, this incontestability provision will start anew with respect to the increase, beginning on the layer date. The new incontestability period will be applicable only to the face amount of that layer. AMOUNT WE PAY IS LIMITED IN THE EVENT OF SUICIDE -- If the Insured dies by suicide, while sane or insane, within two years from the date of issue, we will be liable only for the amount of premiums paid, less any partial surrenders, surrender penalty free withdrawals, loans and loan interest due. PAGE 27 If you request an increase in the face amount of this policy, this suicide provision will start anew with respect to the increase, beginning on the layer date. The new suicide period will be applicable only to the face amount of that layer. MISSTATEMENT OF AGE OR SEX IN THE APPLICATION -- If there is a misstatement of the Insured's age or sex in the application, we will adjust the excess of the death benefit over the accumulation value to that which would be purchased by the most recent monthly deduction at the correct age or sex. There will be no adjustment beyond age 100. THE POLICY IS OUR CONTRACT WITH YOU -- We have issued this policy in consideration of the application and your initial premium payment. A copy of the application is attached and is part of this policy. The policy, including the application and any endorsements and riders, forms our contract with you. All statements made by or for the Insured will be considered representations and not warranties. We will not use any statement made by or for the Insured to deny a claim unless the statement is in the application and the application is attached to this policy when we issue or deliver it. WHO CAN MAKE CHANGES IN THE POLICY -- Only our President or a Vice President together with our Secretary have the authority to make any change in this policy. Any change must be in writing. TERMINATION OF INSURANCE -- This policy will terminate at the earliest of: 1. the date we receive your written request to surrender or terminate; 2. the Maturity Date; or 3. the date of lapse. NO DIVIDENDS ARE PAYABLE -- This is nonparticipating insurance. It does not participate in our profits or surplus. We do not distribute past surplus or recover past losses by changing the monthly deduction rates. SETTLEMENT When the Insured dies while the policy is in force, we will PROVISIONS pay the death benefit in a lump sum unless you or the Beneficiary choose a settlement option. You may choose a settlement option while the Insured is living. The Beneficiary may choose a settlement option after the Insured has died. The Beneficiary's right to choose will be subject to any settlement agreement in effect at the Insured's death. You may also choose one of these options as a method of receiving the surrender or maturity proceeds, if any are available under this policy. When we receive a satisfactory written request, we will pay the benefit according to one of these options: OPTION A: INSTALMENTS FOR A GUARANTEED PERIOD -- We will pay equal instalments for a guaranteed period of from one to thirty years. Each instalment will consist of part benefit and part interest. We will pay the instalments monthly, quarterly, semi-annually or annually, as requested. See Table A on the last page. PAGE 28 OPTION B: INSTALMENTS FOR LIFE WITH A GUARANTEED PERIOD -- We will pay equal monthly instalments as long as the payee is living, but we will not make payments for less than the guaranteed period the payee chooses. The guaranteed period may be either 10 years or 20 years. We will pay the instalments monthly. See Table 8 on the last page. OPTION C: BENEFIT DEPOSITED WITH INTEREST -- We will hold the benefit on deposit. It will earn interest at the annual interest rate we are paying as of the date of death, surrender or maturity. We will not pay less than 2 1/2% annual interest. We will pay the earned interest monthly, quarterly, semi-annually or annually, as requested. The payee may withdraw part or all of the benefit and earned interest at any time. OPTION D: INSTALMENTS OF A SELECTED AMOUNT -- We will pay instalments of a selected amount until we have paid the entire benefit and accumulated interest. OPTION E: ANNUITY -- We will use the benefit as a single premium to buy an annuity. The annuity may be payable to one or two payees. It may be payable for life with or without a guaranteed period, as requested. The annuity payment will not be less than what our current annuity contracts are then paying. The payee may arrange any other method of settlement as long as we agree to it. The payee must be an individual receiving payment in his or her own right. There must be at least $10,000 available for any option and the amount of each instalment to each payee must be at least $100. If the benefit amount is not enough to meet these requirements, we will pay the benefit in a lump sum. We will pay the first instalment under any option on the date of death, maturity or surrender, whichever applies. Any unpaid balance we hold under Options A, B or D will earn interest at the rate we are paying at the time of settlement. We will not pay less than 3% annual interest. Any benefit we hold will be combined with our general assets. If the payee does not live to receive all guaranteed payments under Options A, B, D or E or any amount deposited under Option C, plus any accumulated interest, we will pay the remaining benefit as scheduled to the payee's estate. The payee may name and change a successor payee for any amount we would otherwise pay the payee's estate. PAGE 29
TABLE A INSTALMENTS FOR EACH $1,000 PAYABLE UNDER OPTION A - ---------------------------------------------------------------------------------------------------------------------------- Multiply the Monthly Instalment by 11.83895 for Annual, by 5.96322 for Semi-Annual, or by 2.99263 for Quarterly Instalments - ---------------------------------------------------------------------------------------------------------------------------- Guaranteed Monthly Guaranteed Monthly Guaranteed Monthly Period (Yrs.) Instalment Period (Yrs.) Instalment Period (Yrs.) Instalment - ---------------------------------------------------------------------------------------------------------------------------- 1 $84.47 11 $8.88 21 $5.32 2 42.86 12 8.24 22 5.15 3 28.99 13 7.71 23 4.99 4 22.06 14 7.26 24 4.84 5 17.91 15 6.87 25 4.71 6 15.14 16 6.53 26 4.59 7 13.16 17 6.23 27 4.48 8 11.68 18 5.96 28 4.37 9 10.53 19 5.73 29 4.27 10 9.61 20 5.51 30 4.18 - ----------------------------------------------------------------------------------------------------------------------------
TABLE B MONTHLY INSTALMENT FOR EACH $1,000 PAYABLE UNDER OPTION B - ---------------------------------------------------------------------------------------------------------------------------- MALE PAYEE - ---------------------------------------------------------------------------------------------------------------------------- Guaranteed Period Guaranteed Period Guaranteed Period Guaranteed Period Guaranteed Period Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. - ---------------------------------------------------------------------------------------------------------------------------- 11 $2.90 $2.89 26 $3.20 $3.19 41 $3.77 $3.71 56 $4.92 $4.59 71 $7.27 $5.42 12 2.91 2.91 27 3.22 3.21 42 3.82 3.76 57 5.03 4.66 72 7.48 5.45 13 2.93 2.92 28 3.25 3.24 43 3.88 3.81 58 5.15 4.73 73 7.68 5.46 14 2.94 2.S4 29 3.28 3.27 44 3.94 3.86 59 5.27 4.80 74 7.88 5.48 15 2.96 2.96 30 3.31 3.30 45 4.00 3.91 60 5.40 4.87 75 8.08 5.49 16 2.98 2.97 31 3.34 3.33 46 4.07 3.97 61 5.53 4.94 76 8.27 5.50 17 3.00 2.99 32 3.38 3.36 47 4.14 4.02 62 5.68 5.00 77 8.46 5.50 18 3.01 3.01 33 3.41 3.39 48 4.21 4.08 63 5.83 5.07 78 8.63 5.51 19 3.03 3.03 34 3.45 3.43 49 4.28 4.14 64 5.98 5.13 79 8.79 5.51 20 3.05 3.05 35 3.49 3.46 50 4.36 4.20 65 6.15 5.18 80 8.94 5.51 21 3.08 3.07 36 3.53 3.50 51 4.44 4.26 66 6.32 5.24 81 9.07 5.51 22 3.10 3.09 37 3.57 3.54 52 4.53 4.32 67 6.50 5.28 82 9.18 5.51 23 3.12 3.11 38 3.62 3.58 53 4.62 4.39 68 6.68 5.33 83 9.28 5.51 24 3.14 3.14 39 3.67 3.62 54 4.71 4.46 69 6.88 5.36 84 9.36 5.51 25 3.17 3.16 40 3.72 3.67 55 4.81 4.52 70 7.07 5.40 85 9.42 5.51 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- FEMALE PAYEE - ---------------------------------------------------------------------------------------------------------------------------- Guaranteed Period Guaranteed Period Guaranteed Period Guaranteed Period Guaranteed Period Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. Age 10 Yrs. 20 Yrs. - ---------------------------------------------------------------------------------------------------------------------------- 11 $2.83 $2.83 26 $3.08 $3.07 41 $3.54 $3.52 56 $4.51 $4,35 71 $6.73 x.xx 12 2.84 2.84 27 3.10 3.10 42 3.59 3.56 57 4.61 4.42 72 6.94 x.xx 13 2.86 2.85 28 3.12 3.12 43 3.63 3.60 58 4.71 4.50 73 7.16 x.xx 14 2.87 2.87 29 3.15 3.14 44 3.68 3.65 59 4.82 4.57 74 7.38 x.xx 15 2.88 2.88 30 3.17 3.17 45 3.73 3.69 60 4.94 4.65 75 7.60 5.47 16 2.90 2.90 31 3.20 3.19 46 3.78 3.74 61 5.06 4.72 76 7.82 5.48 17 2.91 2.91 32 3.23 3.22 47 3.84 3.79 62 5.19 4.80 77 8.04 5.49 18 2.93 2.93 33 3.26 3.25 48 3.90 3.85 63 5.33 4.88 78 8.25 5.50 19 2.95 2.94 34 3.29 3.28 49 3.96 3.90 64 5.47 4.95 79 8.45 5.51 20 2.96 2.96 35 3.32 3.31 50 4.03 3.96 65 5.63 5.02 80 8.64 5.51 21 2.98 2.98 36 3.35 3.34 51 4.10 4.02 66 5.79 5.09 81 8.82 5.51 22 3.00 2.99 37 3.39 3.37 52 4.17 4.08 67 5.96 5.15 82 8.97 5.51 23 3.02 3.01 38 3.42 3.41 52 4.25 4.14 68 6.14 5.21 83 9.11 5.51 24 3.04 3.03 39 3.46 3.44 54 4.33 4.21 69 6.33 5.27 84 9.23 5.51 25 3.06 3.05 40 3.50 3.48 55 4.42 4.28 70 6.53 5.32 85 9.32 5.51 - ---------------------------------------------------------------------------------------------------------------------------- Ages younger than 11 are the same as shown for age 11, and ages older than 85 are the same as shown for age 85. - ----------------------------------------------------------------------------------------------------------------------------
PAGE 30 TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY EXTRA SURRENDER PENALTY FREE WITHDRAWAL ENDORSEMENT Transamerica Occidental Life Insurance Company has issued this endorsement as part of the policy to which it is attached. Wherever the term "Surrender Penalty Free Withdrawal" appears in the policy to which this endorsement is attached, it is also meant to include the term "Extra Surrender Penalty Free Withdrawal". There is only one exception; that is in the section of the policy titled "Surrender Penalty Free Withdrawal", "(a)". That calculation of the eligible amount for surrender without penalty will NOT include "Extra Surrender Penalty Free Withdrawals". DEFINITIONS In this endorsement Extra Withdrawal means Extra Surrender Penalty Free Withdrawal. We means Transamerica Occidental Life Insurance Company. Withdrawal means Surrender Penalty Free Withdrawal. You means the Owner. This Extra Withdrawal may be taken in addition to the Withdrawal in the policy to which this endorsement is attached. If requested at the same time, the Extra Withdrawal will be processed first. Then, the Withdrawal will be processed based on the remaining accumulation value. At any time after the first policy year, you may make an Extra Withdrawal without a partial surrender penalty; the limits are outlined below. Your Extra Withdrawals may only be taken if we receive written proof that the insured requires medical care for one of these conditions: heart attack; stroke; cancer (malignant tumor); renal failure; or major organ transplant. This proof will consist of a doctor's certification acceptable to us. We may request additional medical information from the doctor submitting the certification or any doctor we deem qualified. While a request is pending, we reserve the right to obtain a second medical opinion; we also reserve the right to have the Insured examined at our expense. The minimum amount of an Extra Withdrawal is $100. When you request an Extra Withdrawal, we will calculate the maximum amount eligible for surrender without a Company imposed penalty, as follows: 1) 10% of the policy's current accumulation value as of the request date; less 2) the sum of all Extra Withdrawals since the last policy anniversary. The total amount available from all Withdrawals, Extra Withdrawals and partial surrenders shall not exceed: 1) the current accumulation value as of the request date; less 2) any existing policy loans; less 3) the sum of three monthly deductions; less 4) the greater of $25 or the full surrender penalty. PAGE 1 During any required premium period, the total amount available from all Withdrawals, Extra Withdrawals and partial surrenders also may not exceed: 1) the sum of all gross premiums paid; less 2) the sum of all required premiums since the policy date. (See # 2 of the Premiums provision in the policy.) We will process an Extra Withdrawal for the eligible amount The remainder, if any, of the amount you request will be processed first as a Withdrawal; any excess over that amount will be processed as a partial surrender. We will deduct the amount withdrawn from the policy's accumulation value. Signed for Transamerica Occidental Life Insurance Company at Los Angeles, California on the date of issue of this policy. /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] Executive Vice President, General Counsel President and CEO And Corporate Secretary PAGE 2 TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY ENDORSEMENT TO MODIFY GRACE PERIOD Transamerica Occidental Life Insurance Company has issued this endorsement as part of the policy to which it is attached. While this policy is in force and subject to the terms of this endorsement, certain death benefits of this policy including any layers, Supplemental Adjustable Life Insurance Riders, Full Death Benefit Rider, and the benefits of any Waiver Provision will continue. DEFINITIONS In this endorsement: GRACE PERIOD is the 60-day period starting on a monthly policy date or policy anniversary, as described in the policy. NET DEPOSITS mean the total premiums paid, less the sum of any premium refunds, partial surrenders, and surrender penalty free withdrawals since the policy date. In calculating the Net Deposits, premium paid in a policy year prior to the policy year in which it is due will reflect a time value of money at 4 percent per annum. SELECT MONTHLY PREMIUM is the amount payable each month during the Select Period to maintain this endorsement. This amount is shown in the Policy Data. This amount may be paid cumulatively in advance. SELECT PERIOD is the period this endorsement is in effect. This period is shown in the Policy Data. WE means Transamerica Occidental Life Insurance Company. YOU means the Owner. HOW IT WORKS If the Accumulation Value is insufficient to allow the policy to remain in force, it will not enter a grace period and certain death benefits will continue to be available during the Select Period provided that at all times during the Select Period: (i) there is no outstanding loan; and (ii) Net Deposits equal or exceed cumulative Select Monthly Premiums due since the Policy Date; and (iii) the Death Benefit Option in effect is Option 1 and has always been Option 1. During the period of such continuation, the death benefit will consist of the death benefits under the Base Policy, including any layers, Supplemental Adjustable Life Insurance Riders and Full Death Benefit Rider. The benefits of any Waiver Provision will be continued until the end of the Select Period subject to the same conditions. Any riders other than those specified above will be terminated when the death benefit continuation period begins. Any conversion privileges contained within such other riders must be exercised at that time or forfeited. If any of the three conditions listed above are not met, the policy and all riders shall enter the 60-day Grace Period as specified in the policy and the policy may lapse. During the Select Period while the Base Policy is in force, this endorsement can be placed back in force after it terminates, by payment of premiums to meet the Net Deposits requirement in (ii) above, provided that all other requirements above are met as well. We will continue to deduct the monthly deductions from the Accumulation Value as they come due; interest will accrue on the Accumulation Value while the policy remains in force under the terms of this endorsement. WAIVER PROVISION If the policy contains a Waiver Provision benefit and a disability claim is approved while this endorsement is effective, the Select Monthly Premium will be waived. The Select Monthly Premium will be waived for the same length of time that the policy is on waiver. The Select Period will not be extended. PAGE 1 POLICY CHANGES If a requested increase or decrease in the face amount of the policy is processed during the Select Period, the Select Monthly Premium will be adjusted from that point forward. The Select Period will not be adjusted. AUTOMATIC TERMINATION This endorsement will automatically terminate upon the first of the following to occur: 1. the cumulative Net Deposits to date are less than cumulative Select Monthly Premiums due since the Policy Date; or, 2. the Select Period has ended; or, 3. the Death Benefit Option on the policy has been changed from Option 1 to another option; or, 4. the policy terminates for any reason. Signed for Transamerica Occidental Life Insurance Company at Los Angeles, California, and effective on the date of issue of the policy to which this endorsement is attached. /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] Executive Vice President, General Counsel President and CEO And Corporate Secretary PAGE 2 AUTOMATIC PREMIUM LOAN ENDORSEMENT (FOR POLICIES CONTAINING A REQUIRED ANNUAL PREMIUM) Transamerica Occidental Life Insurance Company has issued this endorsement as a part of the policy to which it is attached. When the Automatic Premium Loan provision is made effective by the owner in the application at the time of issue, any portion of the required annual premium which remains unpaid at the end of a grace period will be paid by automatic premium loan. These rules will apply: (1) We will process an automatic premium loan if there is enough net cash value to pay both the required annual premium due and interest due on the automatic premium loan. If there is not enough net cash value to pay both the required annual premium due AND the interest on the automatic premium loan, we will not make an automatic premium loan. The policy will then lapse subject to the nonforfeiture provision. (2) The Automatic Premium Loan will also be subject to all sections of this policy that pertain to policy loans. (3) If the Automatic Premium Loan provision is made ineffective by the owner in the application at the time of issue, this provision may be requested by the owner. The request must be in the form of a written notice filed at our Home Office. This provision may also be cancelled by written notice by the owner filed in our Home Office. The Automatic Premium Loan Provision will terminate at the end of the required annual premium period. Signed for the Company at Los Angeles, California, on the date of issue of the policy. /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] Executive Vice President, General Counsel President and CEO And Corporate Secretary ACCELERATED DEATH BENEFIT OPTION ENDORSEMENT Transamerica Occidental Life Insurance Company has issued this endorsement as a part of policy number 60041022 ("the policy"). NOTICE: Benefits advanced under this option may be taxable. As with all tax matters, the Owner should consult a personal tax advisor to assess the impact of this benefit on the Owner and the policy. While the policy is in force, we will pay an Accelerated Death Benefit to you, upon your request, subject to all the provisions and limitations of this endorsement. DEFINITIONS In this endorsement: ACCELERATED DEATH BENEFIT is the amount we pay under this option. ADMINISTRATIVE FEE is the $250.00 that will be charged at the time each Accelerated Death Benefit is paid. EFFECTIVE DATE is the date we approve your written request to exercise this option. IMMEDIATE FAMILY MEMBERS are members of either the Insured's or Owner's family who may be described as follows: spouse (includes common law spouse), children, stepchildren, parents, grandparents, grandchildren, brothers and sisters and their spouses (includes common law spouse). INSURED means only the Insured covered under the policy and not any other individuals covered for additional riders or benefits. PHYSICIAN is an individual, other than the Insured, the Owner, or Immediate Family Member, who is a doctor of medicine or osteopathy, licensed in the jurisdiction in which the advice is given or diagnosis is made and who is acting within the scope of that license. POLICY BASIC DEATH BENEFIT means the death benefit provided by the policy, any policy layer, any Supplemental Adjustable Life Insurance Rider and any level term rider on the life of the Insured. It does not include any death benefit provided by any other riders or benefits attached to the policy. POLICY CHARGES means any monthly deductions, any surrender charges or surrender penalties, or any other charges specified in the policy. TERMINAL ILLNESS is a medical condition, resulting from bodily injury or disease, or both, and: -- which has been diagnosed by a Physician after the issue date of the policy; and, -- for which the diagnosis is supported by clinical, radiological, laboratory or other evidence of the medical condition which is satisfactory to us; and, -- which is not curable by any means available to the medical profession; and, -- which a Physician certifies is expected to result in death within 12 months of diagnosis and the certification is within 30 days of the Accelerated Death Benefit request. "YOU" AND "YOUR" mean the Owner. LIMITATIONS 1. The availability of this option is subject to all the terms of the policy, including contestability and suicide. 2. No benefit will be paid if Terminal Illness results from intentionally self-inflicted injury(ies) at any time. 3. At each request to exercise this option, there must be at least 2 years remaining from the Effective Date to the expiry or maturity date of each portion of the Policy Basic Death Benefit. 4. The Owner may not exercise this option: a) if required by law to use the Accelerated Death Benefit to meet the claims of creditors, whether in bankruptcy or otherwise, or b) if required by a government agency to use the Accelerated Death Benefit in order to apply for, obtain, or otherwise keep a government benefit or entitlement, or c) until there is only one surviving Joint Insured if the policy is a Joint and Last Survivor Policy. 5. This option is not available if the maximum Accelerated Death Benefit has been paid. 6. The face amount of the policy on which this option is exercised must be at least $50,000 at the time of the first written request. PAGE 1 AMOUNT OF THE ACCELERATED DEATH BENEFIT 1. The Owner can request an Accelerated Death Benefit payment in any amount subject to the following minimum and maximum. The minimum Accelerated Death Benefit allowed will be $10,000. The maximum Accelerated Death Benefit allowed for all policies combined covering the Insured issued by the Company will be the lesser of $250,000 or 75% of the combined Policy Basic Death Benefit for those policies as of the first Accelerated Death Benefit payment. If the first Accelerated Death Benefit payment is less than the maximum, then no more than the remaining balance of the maximum can be paid out later as an Accelerated Death Benefit. 2. If there is an outstanding loan on the policy, the Accelerated Death Benefit payment may be reduced to repay a prorata portion of the policy loan. 3. At the time we pay the Accelerated Death Benefit, if the policy is in the grace period, we will deduct any unpaid premium in accordance with the grace period provision in the policy. 4. The $250.00 Administrative Fee will be deducted from each Accelerated Death Benefit payment. PREMIUM Premium billing and premium payment requirements will continue, subject to the adjustments described below. EFFECT OF THE ACCELERATED DEATH BENEFIT PAYMENT ON THE POLICY After an Accelerated Death Benefit is paid, the policy and any riders and benefits will remain in force subject to the following adjustments: 1. The Policy Basic Death Benefit after payment of an Accelerated Death Benefit will equal the amount of the Policy Basic Death Benefit before the payment of the Accelerated Death Benefit minus the result of multiplying (a) by (b), where: (a) is the Accelerated Death Benefit; and (b) is 1 (one) plus an interest rate that is the greater of, (i) the federal interest rate under Internal Revenue Code (IRC) section 846(c)(2), or (ii) the policy loan effective interest rate. 2. The Policy Basic Death Benefit, and, if applicable, the policy's face amount, accumulation value, cash value, policy loan, and required premium will be adjusted as of the Effective Date. The adjustments to the Policy Basic Death Benefit will be made in the following order: (1) level term rider(s) on the Insured, if any, beginning with the most recent rider; (2) policy layer(s), if any, beginning with the most recent layer; and, (3) remaining portions of the Policy Basic Death Benefit New Policy Charges and premiums will be based on the rates in effect for the policy's resulting face amount. 3. We will provide new policy data pages showing the reduced coverage amount resulting from the Accelerated Death Benefit payment. EXERCISING THE OPTION We must receive a written request to exercise this option at the Home Office or our designated Administrative Office within 30 days after the certification of diagnosis of the Terminal Illness, or as soon as reasonably possible. The request should include the name of the Insured, the policy number and, must be signed and dated by the Owner. If the policy has an irrevocable beneficiary, that person(s) must also sign the request. If the policy is assigned, we must receive a completed and signed release of assignment. If the policy was issued in a community property state, we may require your spouse to sign the request PROOF OF TERMINAL ILLNESS We must receive written proof of the Insured's Terminal Illness before we make an Accelerated Death Benefit payment. This proof will consist of a Physician's certification acceptable to us. We may request additional medical information from the Physician submitting the certification or any Physician we consider qualified. PHYSICAL EXAMINATION While a claim is pending, we reserve the right to obtain a second medical opinion and to have the Insured examined at our expense. TIME OF PAYMENT OF CLAIMS After we receive satisfactory written proof of Terminal Illness, we will pay the Accelerated Death Benefit due. PAGE 2 PAYMENT OF CLAIMS If approved, the Accelerated Death Benefit will be paid in a lump sum to the Owner. If the Insured dies before payment is made, we will pay the entire death benefit of the policy to the Beneficiary in accordance with the policy provisions. LEGAL ACTIONS No legal action may be brought to recover the payment requested under this option within 60 days after written proof of Terminal Illness has been given to us. No such action may be brought after 3 years from the time written proof of the Insured's Terminal Illness has been given to us. LIVING BENEFIT RIDER If the policy contains a Living Benefit Rider and there is a simultaneous request to exercise the Living Benefit and the Accelerated Death Benefit Option, the Living Benefit request will be processed first; the Accelerated Death Benefit Option request will be processed second and will be based on the adjusted policy values resulting after payment of the Living Benefit. TAX QUALIFICATION Any amount payable under this option is intended to qualify for federal income tax exclusion (to the maximum extent possible). To that end, the provisions of this endorsement and the policy to which it is attached are to be interpreted to ensure or maintain such tax qualification, notwithstanding any other provisions to the contrary. The Company reserves the right to amend this endorsement and the policy to which it is attached to reflect any clarifications that may be needed or are appropriate to maintain such qualification, or to conform this endorsement and the policy to which it is attached to any applicable changes in the tax qualification requirements. You will be sent a copy of any such amendment. Signed for the Company at Los Angeles, California, on the date of issue of the policy unless a different date is shown here. /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] Executive Vice President, General Counsel President and CEO And Corporate Secretary PAGE 3 TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY DEATH BENEFIT FACTORS ENDORSEMENT Transamerica Occidental Life Insurance Company has issued this endorsement as part of the policy to which it is attached. You do not pay any premium for this endorsement. The Death Benefit Factors Tables, as they appear in the policy to which this endorsement is attached, are amended as follows: DEATH BENEFIT FACTORS
Insured's Policy Years Insured's Policy Years Attained 1 - 10 Attained 11+ Age MALE FEMALE Age MALE FEMALE 16 8.49 9.71 26 5.91 6.64 17 8.22 9.41 27 5.72 6.43 18 7.98 9.10 28 5.54 6.22 19 7.75 8.81 29 5.36 6.01 20 7.52 8.53 30 5.18 5.81 21 7.30 8.25 31 5.01 5.62 22 7.08 7.99 32 4.85 5.44 23 6.85 7.72 33 4.69 5.26 24 6.63 7.47 34 4.53 5.08 25 6.41 7.22 35 4.38 4.91 26 6.20 6.98 36 4.24 4.75 27 6.00 6.75 37 4.10 4.59 28 5.80 6.52 38 3.96 4.44 29 5.61 6.31 39 3.83 4.30 30 5.43 6.10 40 3.70 4.16 31 5.25 5.90 41 3.58 4.02 32 5.08 5.70 42 3.47 3.89 33 4.91 5.52 43 3.35 3.77 34 4.75 5.34 44 3.24 3.65 35 4.59 5.17 45 3.14 3.53 36 4.44 5.00 46 3.04 3.42 37 4.30 4.84 47 2.94 3.32 38 4.16 4.68 48 2.85 3.21 39 4.03 4.54 49 2.76 3.11 40 3.90 4.39 50 2.68 3.02 41 3.78 4.25 51 2.59 2.92 42 3.66 4.12 52 2.51 2.84 43 3.55 3.99 53 2.44 2.75 44 3.44 3.87 54 2.36 2.67
Signed for the Company at Los Angeles, California on the date of issue of this policy. /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] Executive Vice President, General Counsel President and CEO And Corporate Secretary Transamerica Occidental Life Insurance Company 1150 South Olive Street Los Angeles, CA 90015 Policy Form TRUL+-CVC Individual Life Insurance Life Insurance Minimum Premium Requirement Shown in the Policy Data Flexible Premiums Payable Thereafter During Life of Insured Prior to Age 100 Subject to the Limitations Described in the Premiums Provision Death Benefit Payable at Death of Insured Before Age 115 Net Cash Value Payable at Policy Anniversary Nearest Age 115 Nonparticipating - No Annual Dividends EX-23.1 8 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-37556, No. 33-93896 and No. 333-31813 of The Wet Seal, Inc. on Form S-8 of our report dated March 12, 1999, appearing in the Annual Report on Form 10-K of The Wet Seal, Inc. for the year ended January 30, 1999. Deloitte & Touche LLP Costa Mesa, California April 26, 1999 EX-27.1 9 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET SEAL, INC. BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-29-2000 FEB-01-1998 JAN-30-1999 31,590,000 59,916,000 3,665,000 0 28,002,000 86,991,000 117,483,000 57,110,000 197,490,000 65,135,000 0 0 0 1,362,000 118,916,000 197,490,000 485,389,000 485,389,000 336,527,000 110,554,000 0 0 (3,894,000) 42,202,000 16,248,000 25,954,000 0 0 0 25,954,000 1.98 1.91
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