The Wet Seal, Inc. Announces Signing of Financing Agreement and Operating Results for Its Fiscal 2004 Fourth Quarter and Year Ended January 29, 2005; Company Announces Sarbanes-Oxley Compliance Outcome and Filing of Form 10-K.FOOTHILL RANCH ranch, large farm devoted chiefly to raising and breeding cattle, horses, sheep, and goats. The cattle ranch was introduced from Latin America to Texas and the plains of the W United States and Canada. , Calif. -- Specialty retailer The Wet Seal Wet Seal is a young women's clothing retailer headquartered in Foothill Ranch, California. It carries moderately priced brand name and company-designed apparel and accessories. The company was founded in Newport Beach, California by Lorne Huycke in 1962 as "Lorne's. , Inc. (Nasdaq:WTSLA) announced today that it has entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with the investors that participated in its January 2005 financing and certain other investors (the "Investors"). Under the terms of the Securities Purchase Agreement, the Company will issue convertible preferred stock Convertible Preferred Stock Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Also known as "convertible preferred shares". and warrants to acquire shares of the Company's Class A common stock, and certain of the Investors will exercise all of their outstanding Series A Warrants and a pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. portion of the outstanding Series B Warrants that were issued in the Company's January 2005 financing. Those Investors who are lenders under the Company's outstanding bridge financing Bridge Financing A method of financing, used by companies before their IPO, to obtain necessary cash for the maintenance of operations. Notes: These funds are usually supplied by the investment bank underwriting the new issue. facility have agreed to retire the facility through the application of the outstanding principal and interest owed thereunder, which is approximately $12.0 million, as partial consideration for the acquisition of the convertible preferred stock and the warrants. The remainder of the proceeds, which after transaction fees are approximately $18.0 million, will be used for general working capital purposes. In addition, on the closing date certain of the Investors will exercise a portion of their existing warrants which will result in the issuance of 3,359,997 shares of Class A common stock for an aggregate exercise price of approximately $6,410,000. At the closing, the Company will issue to the Investors 24,600 shares of its Series C Preferred Stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders. Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. (the "Preferred Stock") for an aggregate purchase price of $24,600,000. The Preferred Stock will be convertible into 8,200,000 shares of the Company's Class A common stock, reflecting an initial $3.00 per share conversion price. The Preferred Stock will not be entitled en·ti·tle tr.v. en·ti·tled, en·ti·tling, en·ti·tles 1. To give a name or title to. 2. To furnish with a right or claim to something: to any special dividend payments or mandatory redemption or voting rights Voting rights The right to vote on matters that are put to a vote of security holders. For example the right to vote for directors. voting rights The type of voting and the amount of control held by the owners of a class of stock. . The Preferred Stock will have customary weighted-average anti-dilution protection for future stock issuances below the applicable per share conversion price. The Company will also issue to the Investors new warrants (the "Warrants") to purchase up to 7,500,000 shares of Class A common stock. The Warrants will be exercisable beginning six months following the closing and will be exercisable for up to five years from the date they become exercisable. The Warrants will have an initial exercise price equal to $3.68, reflecting the closing bid price of the Class A common stock on April 28, 2005. The Warrants will have customary anti-dilution protection for stock splits and similar corporate events. Each Investor will be prohibited pro·hib·it tr.v. pro·hib·it·ed, pro·hib·it·ing, pro·hib·its 1. To forbid by authority: Smoking is prohibited in most theaters. See Synonyms at forbid. 2. from converting any Preferred Stock or exercising any Warrants if as a result it, together with its affiliates, would own beneficially at any time more than 9.99% of the then total outstanding Class A Common Stock. The Investors have agreed to waive To intentionally or voluntarily relinquish a known right or engage in conduct warranting an inference that a right has been surrendered. For example, an individual is said to waive the right to bring a tort action when he or she renounces the remedy provided by law for such all conditions to closing, other than the delivery of the securities against the payment of the purchase price. The Company intends to close the financing with the Investors on or before May 3, 2005. The proceeds from the financing will enhance the Company's balance sheet and provide additional working capital, thus facilitating its ability to purchase inventory and to continue its merchandising merchandising Element of marketing concerned especially with the sale of goods and services to customers. One aspect of merchandising is advertising, which aims to capture the interest of the segment of the population most likely to buy the product. strategy. The Company also announced today a net loss from continuing operations continuing operations Parts of a business that are expected to be maintained as an ongoing segment of an overall business operation. Income and losses from continuing operations are reported separately if any segments have been discontinued during the of $45.0 million, or $1.23 per share for the 13-week period ended January 29, 2005 as compared to a net loss from continuing operations of $13.3 million, or $0.44 per share for the same period a year ago. Operating results for the 13-week period ended January 29, 2005 included a charge of $16.4 million associated with the previously announced closing of approximately 150 Wet Seal stores. For the 52-week period ended January 29, 2005, the net loss from continuing operations was $191.3 million, or $5.68 per share, compared to a net loss from continuing operations of $38.8 million, or $1.30 per share. Operating results for the 52-week period ended January 29, 2005 included a non-cash asset impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. charge of $41.4 million, a non-cash charge Non-Cash Charge A charge off, made by a company against earnings, that does not require an initial outlay of cash. Notes: Non-cash charges are typically against the depreciation, amortization, and depletion accounts on a company's balance sheet. for the establishment of a valuation allowance for deferred tax assets of $40.4 million, and the $16.4 million charge associated with the store closures. As previously announced, the Company restated its results of operations for the 13-week period and 52-week periods ended January 30, 2004 based on changes related to accounting for landlord tenant improvement allowances and rent holidays. Net sales Net Sales The amount a seller receives from the buyer after costs associated with the sale are deducted. Notes: This amount is calculated by subtracting the following items from gross sales: merchandise returned for credit, allowances for damaged or missing goods, freight for the 13-week period ended January 29, 2005 decreased 16.7% to $119.2 million from $143.2 million for the same period a year ago. Comparable store sales from continuing operations for the 13-week period ended January 29, 2005 decreased 11.9% compared with a decline of 9.9% for the same period a year ago. For the 52-week period ended January 29, 2005, net sales, excluding the discontinued dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: Zutopia division, were $435.6 million compared to $517.9 million for the same period a year ago. Comparable store sales from continuing operations for the 52-weeks ended January 29, 2005 declined 14.2% compared to a decline of 16.4% for the same period a year ago. For the 13-week period ended January 29, 2004 the Company opened 1 Arden B. store, closed 55 Wet Seal stores and 2 Arden B. Stores. For the 52-week period ended January 29, 2005, the Company opened 6 Wet Seal stores and 2 Arden B. stores and closed 72 Wet Seal stores and 7 Arden B. stores. At January 29, 2005 the Company operated 408 Wet Seal stores and 94 Arden B. stores. The Company closed an additional 99 Wet Seal stores subsequent to year-end as part of its previously announced store closures. Financial and Operating Summary for the 13-Week Period Ended January 29, 2005 Net sales for the 13-week period ended January 29, 2005 decreased 16.7% to $119.2 million from $143.1 million for the same period a year ago. This decrease in sales was primarily due to lower comparable store sales and, to a lesser extent, fewer stores in operation during the period. Comparable store sales decreased primarily as a result of a 23.0% decrease in transaction counts in our Wet Seal division. The decline in transaction counts was somewhat offset by an increase in the average dollar purchase in both divisions. Cost of sales increased to 87.8% of sales for the 13-week period ended January 29, 2005 compared to 83.1% for the same period a year ago, primarily as a result of lower sales volume and markdowns related to store closures and inventory repositioning repositioning Laparoscopic surgery The changing of a Pt's position during a procedure to improve access or visualization of the operative field, which may be linked to complications, as it changes anatomic planes of operation. Cf Laparoscopic surgery. for continuing stores. Selling, General and Administrative (SG&A) expenses decreased 6.4% to $42.6 million, or 35.8% of sales for the 13-week period ended January 29, 2005 compared to $45.7 million, or 31.9% of sales for the same period a year ago. Store level expenses decreased $4.7 million as a result of lower comparable store sales and fewer stores in operation. This decrease in store level expenses was somewhat offset by higher professional fees related to Sarbanes-Oxley compliance, severance The act of dividing, or the state of being divided. The term severance has unique meanings in different branches of the law. Courts use the term in both civil and criminal litigation in two ways: first, when dividing a lawsuit into two or more parts, and second, when costs associated with the Company's former Chairman and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. and President of its Wet Seal division and non-cash stock compensation charges. SG&A expenses increased as a percent to sales as a result of the spending noted above and lower sales volume. The Company previously announced it would close approximately 150 Wet Seal stores as part of management's effort to return the Company to profitability. The Company closed 153 stores and completed the store closings previously announced on March 5, 2005. For the 13-week period ending January 29, 2005 the Company recognized $16.4 million in store closure costs. The store closure costs consisted of $13.2 million for estimated lease termination costs and related expenses, a $4.4 million non-cash charge for the write down of these impaired assets Impaired Asset An asset with a market value that is worth less than its book value. Notes: If the sum of all estimated future cash flows is less than the carrying value of the asset, then the asset would be considered impaired and would have to be written down to its fair to realizable value and a $1.2 million non-cash benefit for the write-off of deferred rent. As a result of continued operating losses operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. for our third and fourth quarters, it was determined that a triggering event Triggering Event A certain milestone or event that a participant in a qualified plan must experience in order to be eligible to receive a distribution from a qualified plan. occurred and the Company conducted an asset impairment review as of January 29, 2005. As a result of that review, the Company wrote off $1.0 million of impaired assets, including $0.3 million of goodwill related to the Wet Seal business. For the 13-week period ended January 29, 2005, interest expense was $2.2 million, an increase of $2.5 million from the reported interest income for the same period a year ago. Interest expense increased as a result of the Company's $8.0 million term loan outstanding for all of the fourth quarter this year versus none last year, its $10.0 million bridge facility placed during the fourth quarter this year and the Company's sale of $56.0 million in convertible notes on January 14, 2005. Interest expense included the amortization of deferred financing costs associated with the initial placement of such debt and the write-off of $0.4 million of certain deferred financing costs associated with the modification of the Company's bridge facility during the fourth quarter. In addition, lower average invested balances in marketable securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has versus last year reduced investment income. The Company discontinued recognizing income tax benefits in its results of operations until it is determined that it is more likely than not that the Company will generate sufficient taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. to realize the deferred income tax assets. The Company did recognize a tax benefit of $1.7 million for the 13-week period ending January 29, 2005, as a result of writing-off income taxes payable related to prior years. At January 29, 2005, the Company had cash and cash equivalents totaling $71.7 million, no outstanding borrowings under its senior secured credit facility, $8.0 million in long-term debt Long-Term Debt Loans and financial obligations lasting over one year. Notes: For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. , and $11.8 million, net of unamortized discount of $44.3 million, in secured convertible notes. There were $25.4 million in outstanding letters of credit, primarily associated with merchandise purchases at January 29, 2005. At January 29, 2005, there was $24.6 million available for cash advances and/or letters of credit under the terms of the senior secured credit facility and the Company was in full compliance with its financial covenants. As announced, the Company will retire its bridge loan provided by investors in the January 2005 financing. At April 29, 2005, the bridge loan and capitalized interest Capitalized interest Interest that is not immediately expensed, but rather is considered as an asset and is then amortized through the income statement over time. In the context of project financing, interest that is paid by additional borrowing. was approximately $12.0 million. At January 29, 2005, inventory at cost totaled $18.4 million compared to $29.0 million at January 31, 2004, a decline of 36.8%. The decline in inventory was primarily due to inventory liquidations in closing stores and markdowns for inventory repositioning. The Company used $72.6 million, including a $10.6 million federal tax refund Tax refund Money back from the government when too much tax has been paid or withheld from a salary. , in operating activities for the 52-week period ended January 29, 2005 as compared to a use of $17.7 million for the same period a year ago. Cash flow from investing activities Cash Flow From Investing Activities An item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets and operating subsidiaries, and changes resulting from amounts spent was $42.0 million. The Company liquidated DAMAGES, LIQUIDATED, contracts. When the parties to a contract stipulate for the payment of a certain sum, as a satisfaction fixed and agreed upon by them, for the not doing of certain things particularly mentioned in the agreement, the sum so fixed upon is called liquidated damages. (q.v. $49.5 million of short-term investments and had capital expenditures for new stores and store remodels of $7.1 million. The Company had $93.0 million from financing activities, net of transaction costs Transaction Costs Costs incurred when buying or selling securities. These include brokers' commissions and spreads (the difference between the price the dealer paid for a security and the price they can sell it). , primarily as a result of the previously announced private placement of the Company's Class A common stock ($25.6 million), placement of its tranche Tranche One of several related securities offered at the same time. Tranches from the same offering usually have different risk, reward, and/or maturity characteristics. tranche A class of bonds. B term-loan ($8.0 million), bridge facility ($10.0 million) and sale of $56.0 million of secured convertible notes and warrants. Fiscal 2005 Outlook The Company is currently not providing any go forward estimates for operating results, however the following should be noted: --The Company expects to take a charge of approximately $6.1 million for the first quarter ended April 30, 2005 representing the estimated cash required for lease buyout Buyout The purchase of a company or a controlling interest of a corporation's shares. Notes: A leveraged buyout is accomplished with borrowed money or by issuing more stock. costs and related expenses for its previously announced store closures. --The Company will continue to have significant non-cash stock compensation charges associated with stock grants to its current President and Chief Executive Officer, board of directors, employees and consultants. --As a result of the series of debt financings Debt Financing When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay and related transaction costs during fiscal 2004, the Company will incur To become subject to and liable for; to have liabilities imposed by act or operation of law. Expenses are incurred, for example, when the legal obligation to pay them arises. An individual incurs a liability when a money judgment is rendered against him or her by a court. substantial interest charges for its fiscal year ending January 31, 2006. For fiscal 2005, the Company expects to incur interest expense of approximately $12.1 million for the Company's fiscal year ending January 31, 2006. Approximately $10.8 million of projected interest expense will have no cash effect for the 52-week period ending January 31, 2006. Sarbanes-Oxley Compliance Update The Company conducted an evaluation of the effectiveness of the design and operation of its internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act See SOX. of 2002. Based on its evaluation, management concluded that certain conditions exist that constitute "material weaknesses" in its internal control over financial reporting for the fiscal year ending January 29, 2005, as defined by the Public Company Accounting Oversight
Oversight may refer to:
The conditions that led to the material weaknesses in its internal control over financial reporting are associated with 1) insufficient resources and level of technical accounting expertise within the Company's financial closing and reporting functions and 2) lack of timely preparation, review and approval of account analysis and reconciliations for certain accounts. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement mis·state tr.v. mis·stat·ed, mis·stat·ing, mis·states To state wrongly or falsely. mis·state  ment n. of
the annual or interim financial statements will not be prevented or
detected.As a result, management will be unable to conclude that the Company's internal controls over financial reporting are effective as of January 29, 2005. The material weaknesses identified above have resulted in an adverse opinion by the Company's Independent Registered Public Accounting Firm, on the effectiveness of the Company's internal control over financial reporting. However, the Company has received an unqualified opinion Unqualified opinion An independent auditor's opinion that a company's financial statements comply with accepted accounting procedures. Antithesis of qualified opinion. unqualified opinion See clean opinion. on its financial statements for the year ended January 29, 2005. With the assistance of its reconstituted audit committee, management is committed to remediating these material weaknesses as expeditiously ex·pe·di·tious adj. Acting or done with speed and efficiency. See Synonyms at fast1. ex as possible. Filing of Annual Report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. The Company previously announced it would file to extend the time required to file form 10-K by filing Form 12b-25 with the Securities and Exchange Commission. The request for extension was primarily due to the Company evaluating its accounting for landlord tenant improvement allowances and rent holidays and it completing its evaluation of internal controls under Section 404 of the Sarbanes-Oxley Act. The Company filed its 10-K today and was within the extended filing period. Headquartered in Foothill Ranch, California, The Wet Seal, Inc. is a leading specialty retailer of fashionable and contemporary apparel and accessory accessory, in criminal law, a person who, though not present at the commission of a crime, becomes a participator in the crime either before or after the fact of commission. items. The Company currently operates a total of 308 stores in 46 states, the District of Columbia District of Columbia, federal district (2000 pop. 572,059, a 5.7% decrease in population since the 1990 census), 69 sq mi (179 sq km), on the east bank of the Potomac River, coextensive with the city of Washington, D.C. (the capital of the United States). and Puerto Rico Puerto Rico (pwār`tō rē`kō), island (2005 est. pop. 3,917,000), 3,508 sq mi (9,086 sq km), West Indies, c.1,000 mi (1,610 km) SE of Miami, Fla. , including 307 Wet Seal stores and 91 Arden B. stores. The Company's products can also be purchased online at www.wetseal.com or www.ardenb.com. For more company information, visit www.wetsealinc.com. SAFE HARBOR Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and OF 1995: This news release contains forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements that relate to the Company's opening and closing of stores, profitability and growth, demand for its products or any other statements that relate to the intent, belief, plans or expectations of the Company or its management. All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on factors beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission. This news release contains results reflecting partial year data and non-fiscal data that may not be indicative of results for similar future periods or for the full year. The Company will not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
THE WET SEAL, INC.
SUMMARY STATEMENT OF OPERATIONS
(000'S OMITTED, EXCEPT SHARE DATA)
Quarter Ended Twelve Months Ended
January 29, January 31, January 29, January 31,
2005 2004 2005 2004
(As (As
Restated) Restated)
Net Sales $119,216 $143,179 $435,582 $517,870
Gross Margin 14,567 24,197 57,918 97,350
S, G & A expense 42,652 45,657 161,856 159,181
Store closure costs 16,398 - 16,398 -
Asset impairment 989 - 41,378 -
Operating loss (45,472) (21,460) (161,714) (61,831)
Interest income
(expense), net (2,189) 361 (2,111) 1,550
Loss before taxes (47,661) (21,099) (163,825) (60,281)
Provision (benefit) for
income taxes (2,618) (7,787) 27,509 (21,498)
Loss from Continuing
Operations (45,043) (13,312) (191,334) (38,783)
Loss from Discontinued
Operations (2,745) (4,363) (6,967) (8,300)
Net loss $(47,788) $(17,675) $(198,301) $(47,083)
Net loss per share,
basic:
Continuing
Operations $(1.23) $(0.44) $(5.68) $(1.30)
Discontinued
Operations $(0.08) $(0.15) $(0.21) $(0.28)
Net loss $(1.31) $(0.60) $(5.89) $(1.58)
Net loss per share,
diluted:
Continuing
Operations $(1.23) $(0.44) $(5.68) $(1.30)
Discontinued
Operations $(0.08) $(0.15) $(0.21) $(0.28)
Net loss $(1.31) $(0.60) $(5.89) $(1.58)
Weighted average shares
outstanding, basic 36,396,070 30,041,114 33,698,912 29,748,888
Weighted average shares
outstanding, diluted 36,396,070 30,041,114 33,698,912 29,748,888
THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
January 29, 2005 January 31, 2004
(As Restated)
ASSETS
Cash and cash equivalents $71,702 $13,526
Short-term investments - 30,817
Income tax receivable 547 11,195
Merchandise inventory 18,372 29,054
Deferred tax charges - 3,729
Other current assets 6,896 4,642
Current assets of discontinued
operations - 1,067
Total current assets 97,517 94,030
Property and equipment, net 53,991 115,349
Long-term investments - 19,114
Deferred financing costs 4,836 -
Deferred taxes - 25,552
Goodwill, net 5,984 6,323
Other assets 1,595 1,208
Non-current assets of discontinued
operations - 192
Total assets $163,923 $261,768
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - merchandise $10,435 $18,972
Accounts payable - other 9,941 10,157
Accrued liabilities 39,557 23,229
Income taxes payable - 1,752
Bridge loan payable 10,577 -
Current liabilities of discontinued
operations - 1,353
Total current
liabilities 70,510 55,463
Long-term debt 8,000 -
Secured convertible notes 11,811 -
Deferred rent 31,124 36,113
Other long-term liabilities 2,873 3,270
Non-current liabilities of
discontinued operations - 879
Total long-term
liabilities 53,808 40,262
Total stockholders'
equity 39,605 166,043
Total liabilities and stockholders'
equity $163,923 $261,768
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