10-Q

THE UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 3, 2003

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, California	92610
(Address of principal executive offices)	(Zip code)

(949) 583-9029

(Registrant’s telephone number, including area code)

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  ¨

The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, par value $.10 per share, at June 5, 2003 were 24,983,524 and 4,604,249, respectively. There were no shares of Preferred Stock, par value $.01 per share, outstanding at June 5, 2003.

THE WET SEAL, INC.

FORM 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated condensed balance sheets (unaudited) as of May 3, 2003 and February 1, 2003	3-4
	Consolidated condensed statements of operations and comprehensive income (loss) (unaudited) for the quarters ended May 3, 2003 and May 4, 2002	5
	Consolidated condensed statements of cash flows (unaudited) for the three months ended May 3, 2003 and May 4, 2002	6
	Notes to consolidated condensed financial statements (unaudited)	7-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22-24
PART II.	OTHER INFORMATION	25-26
	SIGNATURE PAGE	27
	SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS	28-31
	EXHIBIT 10.1
	EXHIBIT 10.2
	EXHIBIT 99.1
	EXHIBIT 99.2
	EXHIBIT 99.3

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS)

	May 3, 2003			February 1, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	11,986		$	21,969
Short-term investments		49,336			39,237
Income tax receivable		8,354			11,561
Other receivables		3,515			3,906
Merchandise inventories		35,128			31,967
Prepaid expenses		14,170			11,992
Deferred tax assets		2,472			2,472
Total current assets		124,961			123,104
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements		132,840			127,792
Furniture, fixtures and equipment		88,617			86,062
Leasehold rights		2,350			2,350
		223,807			216,204
Less accumulated depreciation		(111,550	)		(106,423	)
Net equipment and leasehold improvements		112,257			109,781
LONG-TERM INVESTMENTS		31,855			33,639
OTHER ASSETS:
Deferred taxes and other assets		11,611			11,778
Goodwill		6,323			6,323
Total other assets		17,934			18,101
TOTAL ASSETS	$	287,007		$	284,625

See accompanying notes to consolidated condensed financial statements.

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	May 3, 2003		February 1, 2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	13,575	$	13,827
Accounts payable—merchandise		32,448		22,248
Accrued liabilities		23,651		22,520
Total current liabilities		69,674		58,595
LONG-TERM LIABILITIES:
Deferred rent		9,684		9,315
Other long-term liabilities		5,482		5,392
Total long-term liabilities		15,166		14,707
Total liabilities		84,840		73,302
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred Stock, $.01 par value, authorized 2,000,000 shares; none issued and outstanding		—		—
Common Stock, Class A, $.10 par value, authorized 60,000,000 shares; 24,945,980 and 24,836,386 shares issued and outstanding at May 3, 2003 and February 1, 2003, respectively		2,495		2,484
Common Stock, Class B Convertible, $.10 par value, authorized 10,000,000 shares; 4,604,249 and 4,804,249 shares issued and outstanding at May 3, 2003 and February 1, 2003, respectively		460		480
Paid-in capital		58,402		59,036
Retained earnings		140,810		149,323
Total stockholders’ equity		202,167		211,323
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	287,007	$	284,625

See accompanying notes to consolidated condensed financial statements.

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	Quarter Ended
	May 3, 2003			May 4, 2002
SALES	$	123,615		$	156,620
COST OF SALES (including buying, merchandise planning, distribution and occupancy costs)		98,890			104,076
GROSS MARGIN		24,725			52,544
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		38,223			39,592
OPERATING INCOME (LOSS)		(13,498	)		12,952
INTEREST INCOME, NET		401			1,000
INCOME (LOSS) BEFORE INCOME TAXES		(13,097	)		13,952
PROVISION (BENEFIT) FOR INCOME TAXES		(4,584	)		5,232
NET INCOME (LOSS)	$	(8,513	)	$	8,720
COMPREHENSIVE INCOME (LOSS)	$	(8,513	)	$	8,720
NET INCOME (LOSS) PER SHARE, BASIC	$	(0.29	)	$	0.29
NET INCOME (LOSS) PER SHARE, DILUTED	$	(0.29	)	$	0.28
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC		29,575,162			30,121,793
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED		29,575,162			31,594,562

See accompanying notes to consolidated condensed financial statements.

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	Three Months Ended
	May 3, 2003			May 4, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(8,513	)	$	8,720
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		6,695			5,172
Loss (gain) on disposal of equipment and leasehold improvements		166			(29	)
Changes in operating assets and liabilities:
Income tax receivable		3,207			—
Other receivables		391			967
Merchandise inventories		(3,161	)		766
Prepaid expenses		(2,178	)		(1,179	)
Other assets		167			—
Accounts payable and accrued liabilities		11,079			(4,832	)
Income taxes payable		—			(2,314	)
Deferred rent		369			(27	)
Other long-term liabilities		90			191
Net cash provided by operating activities		8,312			7,435
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(8,836	)		(20,680	)
Investment in marketable securities		(13,491	)		(1,500	)
Proceeds from sale of marketable securities		4,675			27,353
Net cash provided by (used in) investing activities		(17,652	)		5,173
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock		(854	)		—
Proceeds from issuance of stock		211			1,763
Net cash provided by (used in) financing activities		(643	)		1,763
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(9,983	)		14,371
CASH AND CASH EQUIVALENTS, beginning of period		21,969			34,345
CASH AND CASH EQUIVALENTS, end of period	$	11,986		$	48,716
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest—credit facility	$	22		$	7
Income taxes, net		—		$	7,535

See accompanying notes to consolidated condensed financial statements.

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THE WET SEAL, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1—Basis of Presentation and significant accounting policies:

Basis of Presentation

The information set forth in these consolidated condensed financial statements is unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications have been made to 2002 financial statements to conform with the 2003 presentation.

In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been included. The results of operations for the quarter ended May 3, 2003 are not necessarily indicative of the results that may be expected for the year ending January 31, 2004 (fiscal 2003). For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report of The Wet Seal, Inc. (the “Company”) for the year ended February 1, 2003.

New Accounting Pronouncements

In November 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an

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entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have a material impact on the Company’s results of operations or financial position.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. The Company believes the adoption of FIN No. 46 will have no impact on its results of operations or financial position, as the Company has no interests in variable interest entities.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset

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in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS No. 150 will have a significant impact on its results of operations, financial position or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002. The Company determined not to adopt the fair value based method of accounting for stock-based employee compensation, but did adopt the additional disclosure requirements of SFAS 148 in fiscal 2002.

Stock Based Compensation

The Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. Accordingly, no compensation expense has been recognized in the consolidated financial statements for employee incentive stock options or nonqualified stock options.

SFAS No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-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.

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The Company’s calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Quarter Ended
	May 3, 2003		May 4, 2002
Dividend Yield	0.00	%	0.00	%
Expected Stock Volatility	70.51	%	70.85	%
Risk-Free Interest Rate	2.90	%	3.02	%
Expected Life of Option following vesting (in months)	60		60

The Company’s calculations are based on a valuation approach and forfeitures are recognized as they occur. If the computed fair values of the stock option awards had been amortized to expense over the vesting period of the awards, net income (loss) (in thousands) and earnings (loss) per share would have been changed to the pro forma amounts indicated below:

	Quarter Ended
	May 3, 2003			May 4, 2002
Net Income (loss):
As reported	$	(8,513	)	$	8,720
Pro forma	$	(10,131	)	$	6,974
Net Income (loss) Per Share, Basic:
As reported	$	(0.29	)	$	0.29
Pro forma	$	(0.34	)	$	0.23
Net Income (loss) Per Share, Diluted:
As reported	$	(0.29	)	$	0.28
Pro forma	$	(0.34	)	$	0.23

The impact of outstanding nonvested 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.

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NOTE 2—Revolving Credit Arrangement:

Under an amended secured revolving line-of-credit arrangement with Bank of America, N.A., the Company may borrow up to a maximum of $50.0 million on a revolving basis through July 1, 2004. The cash borrowings under the arrangement bear interest at the bank’s prime rate or, at the Company’s option, LIBOR plus 1.5%.

The credit arrangement imposes quarterly and annual financial covenants requiring the Company to maintain certain financial ratios. In addition, the credit arrangement requires that the bank approve the payment of dividends and restricts the level of capital expenditures. At May 3, 2003, the Company was in compliance with these covenants and the Company had no borrowings outstanding under the credit arrangement. There were $12.0 million in open letters of credit related to imported inventory orders as well as standby letters of credit totaling $0.9 million as of May 3, 2003.

NOTE 3—Net Income (Loss) Per Share:

Net income (loss) per share, basic, is computed based on the weighted average number of shares of Class A and Class B common stock outstanding for the period.

Net income (loss) per share, diluted, is computed based on the weighted average number of shares of Class A and Class B common stock and potentially dilutive common stock equivalents outstanding for the period. Stock options were not included in the computation of diluted net loss per share for the quarter ended May 3, 2003, because to do so would have been antidilutive.

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A reconciliation of the numerators and denominators used in basic and diluted net income (loss) per share is as follows:

(In thousands, except share and per share data)	Quarter Ended May 3, 2003			Quarter Ended May 4, 2002
Net income (loss)	$	(8,513	)	$	8,720
Weighted average number of common shares
Basic		29,575,162			30,121,793
Effect of dilutive securities—stock options		—			1,472,769
Diluted		29,575,162			31,594,562
Net income (loss) per share
Basic	$	(0.29	)	$	0.29
Effect of dilutive securities—stock options		—			0.01
Diluted	$	(0.29	)	$	0.28

NOTE 4—Treasury Stock:

On October 1, 2002, the Company’s Board of Directors authorized the repurchase of up to 5,400,000 of the outstanding common stock of the Company’s Class A Common shares. This amount includes the remaining shares previously authorized for repurchase by the Company’s Board of Directors. All shares repurchased under this plan will be retired as authorized by the Company’s Board of Directors. During fiscal 2002, the Company repurchased 947,400 shares for $8.2 million and immediately retired these shares. An additional 124,500 shares were repurchased for $0.9 million in the first quarter of fiscal 2003 and these shares were immediately retired. As of May 3, 2003, there were 4,328,100 shares remaining that are authorized for repurchase.

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Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated condensed financial statements and the notes thereto.

We are one of the largest national mall-based specialty retailers focusing primarily on young women’s apparel and accessories, and currently operate 624 retail stores in 47 states, Washington D.C. and Puerto Rico. Of the 624 stores, 467 are Wet Seal stores, 23 are Contempo Casuals stores, 103 are Arden B. stores and 31 are Zutopia stores.

As of May 3, 2003, we operated 621 stores compared to 579 stores as of May 4, 2002, the end of the first quarter of fiscal 2002. We opened 75 stores and closed 33 stores during the period from May 4, 2002 to May 3, 2003.

Critical Accounting Policies and Estimates

Our consolidated condensed financial statements were prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.

Our accounting policies are generally straightforward, but inventory valuation requires more significant management judgments and estimates.

Merchandise inventories are stated at the lower of cost (first in, first out) or market. Cost is calculated using the retail inventory method. The retail inventory method is used to estimate the ending inventory at cost by employing a cost to retail (selling price) ratio. The ending inventory is first determined at selling price and then converted to cost. Purchases, sales, net markdowns (less mark-

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ups), charity, discounts and estimated shrink are considered in arriving at the cost to retail ratio. Inventories include items that have been marked down to management’s best estimate of their fair market value. Management’s decision to mark down merchandise is based on maintaining the freshness of our product offering. Markdowns are taken regularly to effect the rapid sale of slow moving inventory and to make room for new merchandise arriving daily to the stores.

To the extent that management’s estimates differ from actual results, additional markdowns may be required that could reduce our gross margin, operating income and the carrying value of inventories. Our success is largely dependent upon our ability to anticipate the changing fashion tastes of our customers and to respond to those changing tastes in a timely manner. If we fail to anticipate, identify or react appropriately to changing styles, trends or brand preferences of our customers, we may experience lower sales, excess inventories and more frequent and extensive markdowns, which would adversely affect our operating results.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to the consolidated financial statements and in Management’s Discussion and Analysis, respectively, included in our Annual Report for the fiscal year ended February 1, 2003.

Current Trends and Outlook

Results for the first quarter of fiscal 2003 reflected a continuation of negative comparable store sales. Despite this, we were encouraged by the month-to-month improvement in our comparable store sales trend during the quarter and by a good Easter holiday week in the third month of the quarter. However, we have been disappointed by lower sales in late April and May than our progress through the first half of April had led us to anticipate.

We continue to work through many challenges following a difficult year, and believe we have made significant progress in our efforts to reposition our merchandise. We have researched our core customers and received valuable feedback from focus groups. Based upon our analysis of this information, our team has been working diligently to develop merchandise with an exciting new fashion direction that will focus on our core customers’ needs. Although our sales have not rebounded as quickly or as strongly as we had initially expected, we are looking forward to the back-to-school season when we believe our new product offerings will reconnect us with our “core” customer. In addition, we believe that strides have been made to ensure merchandise is received on a more consistent and timely basis.

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We will continue our efforts to reduce costs, given the disappointing sales and bottom line results of the first quarter. We currently are making operating changes that should result in substantial savings, such as switching product shipments from air freight to ground freight. Other cost saving strategies are being developed and implemented to reduce selling, general and administrative expenses and buying costs.

During fiscal 2003, we anticipate opening a total of 35 new locations. We opened 20 new stores in the first quarter, and expect to open 15 more stores, divided between Wet Seal and Arden B. locations. In addition to the 5 stores closed during the first quarter, we expect to close another 9 stores during the remainder of the year. Total capital expenditures are expected to be less than $17.5 million for the fiscal year, well below the level spent in the prior two years.

Results of Operations

The quarter ended May 3, 2003 compared to the quarter ended May 4, 2002.

Sales for the quarter ended May 3, 2003 were $123.6 million, compared to sales for the prior year first quarter of $156.6 million, a decrease of $33.0 million or 21.0%. The decrease in sales was due to a comparable store sales decline of 25.5% for the quarter ended May 3, 2003, offset partially by an increase in the number of stores. In the same quarter a year ago comparable store sales had increased 8.2%. The sales pace during the first quarter of this year reflects a continuation of the challenges faced through year-end in needing to more closely correlate our inventory and fashions with our customers’ tastes. Many changes are underway with the merchandise assortment and marketing strategies, which we expect will be completed before the upcoming back to school season. We believe some improvement has already occurred, as evidenced by the month-to-month comparable store sales improvement during the quarter. We also believe a portion of the April sales improvement reflects some benefit from a later Easter holiday this year, in addition to our merchants’ ongoing efforts to improve assortments.

Cost of sales (including buying, merchandise planning, distribution and occupancy costs) was $98.9 million for the quarter ended May 3, 2003 compared to $104.1 million for the same quarter last year ended May 4, 2002, a decrease of $5.2 million or 4.9%. As a percent of sales, cost of sales was 80.0% for the first quarter ended May 3, 2003 compared to 66.5% for the same quarter last year, an increase of 13.5%. The most significant impact on the cost of sales as a percent of sales in the first quarter this year stems from the sales-driven loss of leverage for occupancy, buying costs and

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merchandise planning costs compared to the prior year first quarter. In addition, cost of sales as a percent of sales rose this year due to an increase in markdowns, a slight decrease in initial markup, and an increase in the shrink reserve. The increased markdowns resulted from lower than anticipated sales. We have also repositioned our pricing on selected items, which contributed to a slightly lower initial markup, with the intent to reduce the need for later markdowns on those items. Buying costs also increased in dollar terms over last year, reflecting the addition of key merchants to their respective staffs at both the Wet Seal and Zutopia divisions. Distribution center costs dropped in dollar terms and remained flat as a percentage of sales, reflecting gains in efficiency over the prior year.

Selling, general and administrative (SG&A) expenses were $38.2 million for the quarter ended May 3, 2003, compared to $39.6 million for the same quarter last year, a decrease of $1.4 million. The $1.4 million decrease reflects less advertising expenditures, lower merchandise delivery costs, and reductions of store payroll costs. These reductions were partially offset by the investments made since the first quarter of last year to upgrade the level of field support. The savings over last year also reflect the CEO vacancy and the elimination of a number of other executive-level administrative positions. As a percentage of sales, SG&A expenses were 30.9% for the quarter ended May 3, 2003, compared to 25.3% for the quarter ended May 4, 2002, an increase of 5.6%. This increase in SG&A expenses as a percent of sales reflects the loss of leverage due to the comparable store sales decline.

Interest income, net, was $0.4 million for the quarter ended May 3, 2003, compared to $1.0 million for the quarter ended May 4, 2002, a decrease of $0.6 million. This decrease was due to a reduction in market interest rates on the invested balances, as well as to a drop in the invested balances compared to the same period in the prior year.

The income tax provision reflected a $4.6 million benefit for the quarter ended May 3, 2003, with an effective tax rate of 35.0%. This compares to a $5.2 million charge for the quarter ended May 4, 2002, with an effective rate of 37.5%. The year-over-year drop in the effective tax rate reflects an expectation that tax exempt interest income and charitable deductions of inventory will be a higher proportion of full year net income than similar expectations at the end of the first quarter last year.

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Based on the factors noted above, the net loss for the quarter ended May 3, 2003 was $8.5 million, or $0.29 per diluted share, compared to net income of $8.7 million or $0.28 per diluted share for the quarter ended May 4, 2002, a decrease of $17.2 million. As a percentage of sales, the net loss was 6.9% in the quarter ended May 3, 2003, compared to net income as a percentage of sales of 5.6% for the quarter ended May 4, 2002.

Liquidity and Capital Resources

Working capital at May 3, 2003, was $55.3 million compared to $64.5 at February 1, 2003, a decrease of $9.2 million. This decrease in working capital was primarily due to an increase in merchandise payables and a reduction in income tax receivable, offset by an increase in merchandise inventories and prepaid expenses.

Net cash provided by operating activities for the quarter ended May 3, 2003, was $8.3 million, compared to $7.4 million in the quarter ended May 4, 2002. This is a $0.9 million increase despite a $17.2 million decrease in earnings compared to the first quarter of the prior year ended May 4, 2002. An increase in merchandise payables conserved nearly $10 million in cash compared to the first quarter ended May 4, 2002. This increase was due to the timing of processing merchandise checks. We also received nearly $8 million in income tax refunds during the quarter ended May 3, 2003 versus income tax payables totaling $7.5 million during the first quarter of the prior year.

The cash and investment balance of $93.2 million on May 3, 2003 was $1.6 million less than it was at February 1, 2003. The decline in the cash and investment balance reflects the loss for the first quarter of this year, expenditures of $8.8 million for capital improvements, and $0.9 million to repurchase the company’s stock. These outflows of cash were offset by the income tax refund received during the quarter and the increase in merchandise payables.

During the quarter ended May 3, 2003, capital improvements totaled $8.8 million, compared to $20.7 million during the quarter ended May 4, 2002. The investment of $8.8 million reflects costs for the 20 new stores and 13 store remodels completed, as well as remodels and new stores under construction for second quarter openings.

In September 1998, the Company’s Board of Directors authorized the repurchase of up to 20% of the outstanding shares of our Class A common stock. From this authorized plan, 3,077,100 shares (split adjusted) were repurchased at a cost of $20.3 million. These repurchased shares were reflected as Treasury Stock in our consolidated balance sheets, until they were retired on December 2,

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2002, as authorized by the Board of Directors. On October 1, 2002, our Board of Directors authorized the repurchase of up to 5,400,000 shares of our outstanding Class A common stock. This amount included the remaining shares previously authorized for repurchase by the Board of Directors. During fiscal 2002, the Company repurchased 947,400 shares for $8.2 million and immediately retired these shares. An additional 124,500 shares were repurchased for $0.9 million in the first quarter of fiscal 2003 and these shares were immediately retired. As of May 3, 2003, there were 4,328,100 shares remaining that are authorized for repurchase.

We have a revolving line-of-credit arrangement with Bank of America, N.A. in an aggregate principal amount of $50 million, maturing on July 1, 2004. At May 3, 2003, there were no outstanding borrowings under the credit arrangement. There were $12.0 million in open letters of credit related to imported inventory orders as well as standby letters of credit totaling $0.9 million. As of May 3, 2003, we were in compliance with all financial covenants of the credit arrangement. We invest our excess funds in short-term investment grade money market funds, investment grade municipal and commercial paper and U.S. Treasury and Agency obligations. Assets listed as long-term investments on our balance sheet consist of high credit quality municipal and corporate bonds with maturities extending no further than three years out.

We believe that our working capital and cash flows from operating activities will be sufficient to meet our operating and capital requirements in the foreseeable future.

Seasonality and Inflation

Our business is seasonal in nature with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after Christmas, and the back-to-school season, beginning the last week of July and ending the first week of September, historically accounting for a large percentage of sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of approximately 30% of our annual sales, after adjusting for sales increases related to new stores. We do not believe that inflation has had a material effect on the results of operations during the past three years. However, we cannot assure you that our business will not be affected by inflation in the future.

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Commitments and Contingencies

Our principal contractual obligations consist of minimum annual rental commitments under non-cancelable leases for our stores, our corporate office, warehouse facility, automobiles, computer equipment and copiers. At May 3, 2003, our contractual obligations under these leases were as follows (in thousands):

Contractual Obligations	Payments Due By Period
	Total		Less Than  1 Year		1–3 Years		4–5 Years		After 5 Years
Operating leases	$	466,700	$	71,700	$	188,200	$	100,000	$	106,800

Our principal commercial commitments consist of open letters of credit, related primarily to imported inventory orders, secured by our revolving line-of-credit arrangement. At May 3, 2003, our contractual commercial commitments under these letters of credit arrangements were as follows (in thousands):

Other Commercial Commitments	Total Amounts Committed		Amount of Commitment Expiration Per Period
			Less Than 1 Year		1-3 Years	4-5 Years	Over  5 Years
Lines of credit	$	12,900	$	12,900	—	—	—

We do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier.

Statement Regarding Forward-Looking Disclosure

Certain sections of this Quarterly Report on Form 10-Q, including the preceding “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events.

Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and

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projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual events and results may differ from those expressed in any forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in Exhibit 99.1 attached to this report and noted elsewhere in this report. We strongly urge you to review and consider the risk factors set forth in Exhibit 99.1.

New Accounting Pronouncements

In November 2001, the FASB issued SFAS No. 143 “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material impact on our consolidated results of operations, financial position or cash flows.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at

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the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of such interpretation did not have a material impact on our results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002. We have determined not to adopt the fair value based method of accounting for stock-based employee compensation, but did adopt the additional disclosure requirements of SFAS 148 in fiscal 2002.

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. FIN No. 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN No. 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. We believe the adoption of FIN No. 46 will have no impact on our results of operations or financial position, as we have no interests in variable interest entities.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset

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in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS No. 150 will have a significant impact on its results of operations, financial position or cash flows.

Item 3— Quantitative and Qualitative Disclosures About Market Risk

To the extent that we borrow under our credit facility, we would be exposed to market risk related to changes in interest rates. At May 3, 2003, no borrowings were outstanding under our credit facility. We are not a party to any derivative financial instruments. However, we are exposed to market risk related to changes in interest rates on our investment grade interest-bearing securities. If there are changes in interest rates, those changes would affect the investment income we earn on those investments.

Item 4— Controls and Procedures

Disclosure Controls and Internal Controls

Our disclosure controls and procedures (as defined in Rule 13a-14(c) under Exchange Act) (“Disclosure Controls”) are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our interim Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls and procedures for financial reporting (“Internal Controls”) are designed with the objective of providing reasonable assurance that:

• our transactions are properly authorized;

• assets are safeguarded against unauthorized or improper use; and

• transactions are properly recorded and reported.

These controls and procedures are designed to enable the preparation of our financial statements in conformity with U.S. generally accepted accounting principles.

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Limitations on the Effectiveness of Controls

Our management, including our interim Chief Executive Officer and our Chief Financial Officer, does not expect that our Disclosure Controls or Internal Controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. Moreover, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events.

Notwithstanding the foregoing limitations, we believe that our Disclosure Controls and Internal Controls provide reasonable assurances that the objectives of our control system are met.

Quarterly evaluation of the Company’s Disclosure Controls and Internal Controls

Within the 90-day period prior to the filing of this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our interim Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our Disclosure Controls. Based upon that evaluation, our interim Chief Executive Officer and our Chief Financial Officer concluded, subject to the limitations noted above, that:

• the design and operation of our Disclosure Controls were effective to ensure that material information related to our company which is required to be disclosed in reports filed under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and

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• our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with U.S. generally accepted accounting principles.

No significant changes were made to our Internal Controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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PART II— OTHER INFORMATION

Item 1—Legal Proceedings.

We are not party to any material legal proceedings. We anticipate that we will be subject to litigation (and arbitration) in the ordinary course of business.

Item 2—Changes in Securities. Not Applicable

Item 3—Defaults Upon Senior Securities. Not Applicable

Item 4—Submission of Matters to a Vote of Security Holders.

We held our most recent Annual Meeting on May 29, 2003. Following is a brief description of the proposal voted upon at the meeting and the tabulation of the voting therefore:

Proposal—Election of Directors.

Nominee	Number of Votes
	For	Withheld	Broker Non-Votes
1. George H. Benter, Jr.	32,659,871	630,284	0
2. Barry J. Entous	32,659,871	630,284	0
3. Stephen Gross	32,956,505	333,650	0
4. Walter F. Loeb	32,956,505	333,650	0
5. Wilfred Posluns	32,659,871	630,284	0
6. Alan Siegel	32,659,871	630,284	0
7. Irving Teitelbaum	27,456,654	5,833,501	0

Item 5—Other Information.

On May 29, 2003, we issued a press release to announce the appointment of Peter D. Whitford as the Company’s new chief executive officer, effective June 30, 2003. A copy of his employment agreement is attached hereto as Exhibit 10.2.

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Item 6(a)—Exhibits.

10.1	Audit Committee Charter
10.2	Employment Agreement, dated May 29, 2003 between the Company and Peter D. Whitford
99.1	Factors Affecting Future Financial Results.
99.2	Sarbanes-Oxley Act Section 906 Certification
99.3	Sarbanes-Oxley Act Section 906 Certification

Item 6(b)—Reports on Form 8-K.

On February 7, 2003, we filed a current report on Form 8-K reporting that we issued a press release announcing the departure of Kathy Bronstein, Vice Chairman and Chief Executive Officer of our Company. On the same date we filed a subsequent current report on Form 8-K reporting that we issued a press release reporting net sales for the four week period ended February 1, 2003.

On March 7, 2003, we filed a current report on Form 8-K reporting that we issued a press release reporting net sales for the four-week period ended March 1, 2003. We also announced that we planned to release final earnings results for fiscal 2002 on March 20, 2003 at 9:00 am PST.

On March 26, 2003, we filed a current report on Form 8-K reporting that we issued a press release to announce earnings for the fourth quarter and fiscal 2002 as well as expectations regarding earnings for the first quarter of fiscal 2003. We also announced expected comparable store sales for March and April of fiscal 2003.

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SIGNATURES

Pursuant to the requirements 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)
Date: June 5, 2003	/s/ IRVING TEITELBAUM
	Irving Teitelbaum Chairman of the Board and Interim Chief Executive Officer (Principal Executive Officer)

Date: June 5, 2003	/s/ WILLIAM B. LANGSDORF
	William B. Langsdorf Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS

I, Irving Teitelbaum, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Wet Seal, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 5, 2003	/s/ IRVING TEITELBAUM
	Irving Teitelbaum Chairman of the Board and Interim Chief Executive Officer (Principal Executive Officer)

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I, William B. Langsdorf, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Wet Seal, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 5, 2003	/s/ WILLIAM B. LANGSDORF
	William B. Langsdorf Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-10.1

EXHIBIT 10.1

THE WET SEAL, INC.

AUDIT COMMITTEE CHARTER

I. PURPOSE

The Audit Committee is established by and amongst the Board of Directors of The Wet Seal, Inc. (“the Company”) for the primary purpose of assisting the board with:

• overseeing the integrity of the Company’s financial statements,

• overseeing the Company’s compliance with legal and regulatory requirements,

• overseeing the independent auditor’s qualifications and independence,

• overseeing the performance of the company’s internal audit function and independent auditor, and

• overseeing the Company’s system of disclosure controls and system of internal controls regarding finance, accounting, legal compliance, and ethics that management and the Board have established

Consistent with this function, the Audit Committee should encourage continuous improvement of, and should foster adherence to, the Company’s policies, procedures and practices at all levels. The Audit Committee should also provide an open avenue of communication among the independent auditors, financial and senior management, the internal auditing function, and the Board of Directors.

The Audit Committee has the authority to obtain advice and assistance from outside legal, accounting, or other advisors as deemed appropriate to perform its duties and responsibilities.

The Company shall provide appropriate funding, as determined by the Audit Committee, for compensation to the independent auditor and to any advisers that the audit committee chooses to engage.

The Audit Committee will primarily fulfill its responsibilities by carrying out the activities enumerated in Section III of this Charter. The Audit Committee will report regularly to the Board of Directors regarding the execution of its duties and responsibilities.

II. COMPOSITION AND MEETINGS

The Audit Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent directors (as defined by all applicable rules and regulations), and free from any relationship (including disallowed compensatory arrangements) that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. All members of the Committee shall have a working familiarity with basic finance and accounting practices, and at least one member of the Committee shall be a “financial expert” in compliance with the criteria established by the SEC and other relevant regulations. The existence of such member(s) shall be disclosed in periodic filings as required by the SEC. Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Company or an outside consultant.

The members of the Committee shall be elected by the Board at the annual organizational meeting of the Board or until their successors shall be duly elected and qualified. Unless a Chair is elected by the full Board, the members of the Committee may designate a Chair by majority vote of the full Committee membership.

The Committee shall meet at least four times annually, or more frequently as circumstances dictate. Each regularly scheduled meeting shall conclude with an executive session of the Committee absent members of management and on such terms and conditions as the Committee may elect. As part of its job to foster open communication, the Committee

should meet periodically with management, the director of the internal auditing function and the independent auditors in separate executive sessions to discuss any matters that the Committee or each of these groups believe should be discussed privately. In addition, the Committee should meet quarterly with the independent auditors and management to discuss the annual audited financial statements and quarterly financial statements, including the Company’s disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

III. RESPONSIBILITIES AND DUTIES

To fulfill its responsibilities and duties the Audit Committee shall:

Documents/Reports/Accounting Information Review

1. Review this Charter periodically, at least annually, and recommend to the Board of Directors any necessary amendments as conditions dictate.

2. Review and discuss with management the Company’s annual financial statements, quarterly financial statements, and all internal controls reports (or summaries thereof). Review other relevant reports or financial information submitted by the Company to any governmental body, or the public, including management certifications as required by the Sarbanes-Oxley Act of 2002 (Sections 302 and 906) and relevant reports rendered by the independent auditors (or summaries thereof).

3. Recommend to the Board whether the financial statements should be included in the Annual Report on Form 10-K. Review with financial management and the independent auditors the 10-Q prior to its filing (or prior to the release of earnings).

4. Review earnings press releases with management, including a review of “pro-forma” or “adjusted” non-GAAP information.

5. Discuss with management financial information and earnings guidance provided to analysts and rating agencies. Such discussions may be on general terms (i.e., discussion of the types of information to be disclosed and the type of presentation to be made).

6. Review the regular internal reports (or summaries thereof) to management prepared by the internal auditing department and management’s response.

Independent Auditors

7. Appoint, compensate, and oversee the work performed by the independent auditor for the purpose of preparing or issuing an audit report or related work. Review the performance of the independent auditors and remove the independent auditors if circumstances warrant. The independent auditors shall report directly to the audit committee and the audit committee shall oversee the resolution of disagreements between management and the independent auditors in the event that they arise. Consider whether the auditor’s performance of permissible nonaudit services is compatible with the auditor’s independence.

8. Review with the independent auditor any problems or difficulties and management’s response; review the independent auditor’s attestation and report on management’s internal control report; and hold timely discussions with the independent auditors regarding the following:

• all critical accounting policies and practices;

• all alternative treatments of financial information within generally accepted accounting principles that have been

discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor;

• other material written communications between the independent auditor and management including, but not limited to, the management letter and schedule of unadjusted differences; and

• an analysis of the auditor’s judgment as to the quality of the Company’s accounting principles, setting forth significant reporting issues and judgments made in connection with the preparation of the financial statements.

9. At least annually, obtain and review a report by the independent auditor describing:

• the firm’s internal quality control procedures;

• any material issues raised by the most recent internal quality-control review, peer review, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; and

• all relationships between the independent auditor and the Company (to assess the auditor’s independence).

10. Review and preapprove both audit and nonaudit services to be provided by the independent auditor (other than with respect to de minimis exceptions permitted by the Sarbanes-Oxley Act of 2002). This duty may be delegated to one or more designated members of the audit committee with any such preapproval reported to the audit committee at its next regularly scheduled meeting. Approval of nonaudit services shall be disclosed to investors in periodic reports required by Section 13(a) of the Securities Exchange Act of 1934.

11. Set clear hiring policies, compliant with governing laws or regulations, for employees or former employees of the independent auditor.

Financial Reporting Processes and Accounting Policies

12. In consultation with the independent auditors and the internal auditors, review the integrity of the organization’s financial reporting processes (both internal and external), and the internal control structure (including disclosure controls).

13. Review with management major issues regarding accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control concerns.

14. Review analyses prepared by management (and the independent auditor as noted in item 8 above) setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements.

15. Review with management the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Company.

16. Review and approve all related party transactions.

17. Establish and maintain procedures for the receipt, retention, and treatment of complaints regarding accounting, internal accounting, or auditing matters.

18. Establish and maintain procedures for the confidential, anonymous submission by Company employees regarding questionable accounting or auditing matters.

Internal Audit

19. Review and advise on the selection and removal of the internal audit director, or if an outsourced function and director, the firm providing the internal audit function.

20. Review activities, organizational structure, and qualifications of the internal audit function.

21. Annually, review and recommend changes (if any) to the internal audit charter.

22. Periodically review with the internal audit director any significant difficulties, disagreements with management, or scope restrictions encountered in the course of the function’s work.

23. Establish, review and update periodically a Code of Ethical Conduct and ensure that management has established a system to enforce this Code. Ensure that the code is in compliance with all applicable rules and regulations.

24. Review management’s monitoring of the Company’s compliance with the organization’s Ethical Code, and ensure that management has the proper review system in place to ensure that the Company’s financial statements, reports and other financial information disseminated to governmental organizations, and the public satisfy legal requirements.

25. Review, with the organization’s counsel, legal compliance matters including corporate securities trading policies.

26. Review, with the organization’s counsel, any legal matter that could have a significant impact on the organization’s financial statements.

27. Discuss policies with respect to risk assessment and risk management. Such discussions should include the Company’s major financial and accounting risk exposures and the steps management has undertaken to control them.

Other Responsibilities

28. Review with the independent auditors, the internal auditing department and with management the extent to which changes or improvements in financial or accounting practices, as approved by the Audit Committee, have been implemented. This review will be conducted at an appropriate time subsequent to implementation of changes or improvements, as decided by the Committee.

29. Prepare the report that the SEC requires be included in the Company’s annual proxy statement.

30. Annually, perform a self-assessment relative to the Audit Committee’s purpose, duties and responsibilities outlined herein.

31. Perform any other activities consistent with this Charter, the Company’s by-laws and governing law, as the Committee or the Board deems necessary or appropriate.

EX-10.2

EXHIBIT 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (“Agreement”) is dated as of May 29, 2003, and is made and entered into by and between The Wet Seal, Inc., a Delaware corporation (the “Company”), and Peter D. Whitford (the “Executive”).

IN CONSIDERATION of the premises and the mutual covenants set forth below, the parties hereby agree as follows:

1. EMPLOYMENT

The Company hereby agrees to employ Executive as the Chief Executive Officer of the Company (the “CEO”) and Executive hereby accepts such employment upon the terms and conditions set forth below.

2. TERM AND PLACE OF PERFORMANCE

The term of this Agreement shall begin on June 30, 2003 (the “Effective Date”), and, unless sooner terminated as provided herein, shall end on the third (3rd) anniversary thereof (the “Initial Term”); provided, that, upon the third anniversary of the Effective Date, the term shall be automatically extended for two (2) additional years (the “Extension Period”) unless either party provides ninety (90) days advance written notice not to renew the term prior to the date that it would be automatically renewed (the Initial Term or the Extension Period, as the case may be, the “Term”). The Term may be sooner terminated by either party in accordance with the provisions of Section 5 below. The period during which Executive is an employee of the Company is referred to herein as the “Employment Period.” The principal place of employment of Executive shall be at the Company’s headquarters in Foothill Ranch, California (or at such other locations within the thirty-five (35) mile radius of its current location as it may be relocated); provided, that, Executive shall be required to travel on Company business during the Term.

3. COMPENSATION

3.1 Base Compensation. For the services to be rendered by Executive under this Agreement, Executive shall be entitled to receive, commencing as of the Effective Date, salary at the annual rate of Seven Hundred Fifty Thousand Dollars ($750,000) (“Base Compensation”) payable in accordance with the Company’s customary payroll practices. The Compensation Committee of the Board of Directors (the “Committee”) shall review Executive’s Base Compensation annually and may make adjustments in accordance with the compensation practices and guidelines of the Company; provided, that, the Base Compensation shall not be reduced without Executive’s written consent during the Term. Notwithstanding the foregoing, Executive’s Base Compensation shall increase to $775,000 per annum after the first anniversary of the Effective Date and shall increase to $810,000 per annum after the second anniversary of the Effective Date; provided, that, in either case, Executive is still then employed.

3.2 Performance Bonus. For each full fiscal year of the Company during the Term, the Committee shall establish a target earnings per share (“EPS”) projection (“Target EPS”) and a maximum EPS projection (“Maximum EPS”) for the Company for such fiscal year. For purposes hereof, EPS shall be the EPS as reported to the Company’s shareholders on a fully diluted basis. If less than Target EPS is achieved for a fiscal year, Executive shall receive no bonus; if Target EPS is achieved for a fiscal year, Executive shall receive a bonus equal to 50% of Base Compensation (the “Target Bonus”); and, in lieu of the Target Bonus, if at least Maximum EPS is achieved for a fiscal year, Executive shall receive a bonus of 125% of Base Compensation (the “Maximum Bonus”, and any such bonus payable under this Section 3.2, the “Performance Bonus”). If EPS achieved for any fiscal year exceeds Target EPS, but is less than Maximum EPS, the Performance Bonus shall be a percentage of Base Compensation between 50% and 125%, calculated on a straight line basis, as corresponds to the relative achievement of EPS between Target EPS and Maximum EPS. Notwithstanding the foregoing, for the 2003 fiscal year, (i) for purposes of the Performance Bonus, Base Compensation shall equal the Base Compensation paid to Executive during the 2003 fiscal year, not to exceed $437,500 and (ii) Target EPS and Maximum EPS shall be based solely on the sum of the EPS reported by the Company to its shareholders, on a fully diluted basis, for the third and fourth fiscal quarters of the 2003 fiscal year, with a Target EPS for such quarters equal to $0.33 and Maximum EPS equal to $0.65. The amount of the Performance Bonus for the 2003 fiscal year shall be pro-rated to reflect the portion of the 2003 fiscal year that Executive was employed by the Company based on the number of days Executive was employed by the Company during the 2003 fiscal year over the number of days in the Company’s 2003 fiscal year. For example, assuming (x) that Target EPS is achieved for the 2003 fiscal year, (y) Executive is paid $437,500 of Base Compensation during the 2003 fiscal year and (z) Executive was employed for seven (7) full months during the 2003 fiscal year, then Executive shall be eligible to be paid a Performance Bonus of $127,604 for the 2003 fiscal year. The Performance Bonus shall be paid within ninety (90) days following the date that the Committee has certified that a Performance Bonus is payable with respect to such fiscal year provided Executive is employed by the Company on the date bonuses are customarily paid. Commencing with the 2004 fiscal year, payment of the Performance Bonus shall be contingent upon the Company attaining shareholder approval of such bonus arrangement such that if paid, the Performance Bonus shall constitute qualified performance-based compensation for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). The Company shall use its best efforts to attain shareholder approval of such Performance Bonus.

3.3 Automobile. During the Employment Period, the Company shall provide Executive with the use of, and provide general maintenance for, a 2002 Mercedes-Benz Silver CL-Class automobile (or an automobile of comparable value at the discretion of the Company). The Company shall also pay for appropriate automobile insurance, as it shall determine, in its discretion, with respect to such automobile.

3.4 Vacation. During the Employment Period, Executive shall be entitled to four (4) weeks of paid vacation per year to be used and accrued in accordance with the Company’s policy as it may be established from time to time. In addition, Executive shall receive other paid time-off in accordance with the Company’s policies for senior executives as they may exist from time to time.

3.5 Welfare, Pension and Incentive Benefit Plans. During the Employment Period,

Executive shall be entitled to participate in such employee benefit plans and insurance programs offered by the Company to its employees generally, or which it may adopt from time to time for its employees generally, in accordance with the eligibility requirements for participation therein.

3.6 SERP. The Company and Executive agree to use good faith efforts to establish a non-qualified supplemental executive retirement plan for Executive as soon as administratively possible following the Effective Date.

3.7 Stock Options.

(a) On the Effective Date or as soon as administratively practicable thereafter, the Company shall grant Executive stock options to acquire 300,000 shares of the Company’s Class A common stock, $0.10 par value per share (the “Option”) under such terms and conditions as provided for under the Company’s Amended and Restated 1996 Long-Term Incentive Plan (the “Stock Option Plan”) which are not inconsistent with clause (ii) below. To the maximum extent permitted under the Code, the Options are intended to qualify as “incentive stock options” under Section 422 of the Code.

(b) The Option described in clause (i) above shall be granted subject to the following terms and conditions: (A) the Option shall be granted under the Company’s Stock Option Plan; (B) the exercise price per share of each Option shall be equal to the greater of the 30-day trailing average price of the common stock from the date of grant or the closing price on the date of grant; (C) the Option shall be vested as to 33 ¹/3% of the shares subject to the Option on the first anniversary of the date of grant and as to an additional 33 ¹/3% of the shares subject to the Option on the second and third anniversaries of the date of grant; provided, that, the Option shall cease to vest upon the termination of Executive’s employment; (D) the Option shall be exercisable for the ten year period following the date of grant; provided, that, upon the termination of Executive’s employment, the Option shall remain exercisable only for the period as provided in the Stock Option Plan or the Stock Option Agreement (as defined below), depending on the circumstances of such termination; and (E) each Option shall be evidenced by, and subject to, a stock option agreement whose terms and conditions are consistent with the terms hereof (the “Stock Option Agreement”).

(c) During the Employment Period, Executive shall be eligible to be granted performance shares and additional options consistent with grants made to other senior executives, in all cases, as determined by the Committee in its sole discretion.

3.8 Sign-on Bonus. On or following the Effective Date and after the submission by Executive of an accounting of the fair market value of the compensatory stock options Executive forfeited as a result of his resignation from his immediately prior employer, Executive shall receive a sign-on bonus in an amount equal to such forfeited amount, not to exceed $200,000.

4. POSITION AND DUTIES

4.1 Position and Duties. Executive shall serve as the Chief Executive Officer of the Company and shall report to the Board of Directors of the Company (the “Board”). Executive shall have those powers and duties customarily associated with the office of Chief Executive Officer and as provided for in the By-Laws of the Company, at all times, subject to the direction and control of the Company’s Board and such other powers and duties as may be assigned by the Board.

4.2 Devotion of Time and Effort. Executive shall use Executive’s good faith, best efforts and judgment (a) in performing Executive’s duties required hereunder and (b) to act in the best interests of the Company. Executive shall devote all of his business time, attention and energies to the business of the Company to satisfy Executive’s required responsibilities and duties hereunder.

5. TERMINATION

5.1 Due to Death or Disability. If Executive dies during the Employment Period, Executive’s employment shall terminate as of the date of his death. The Company may terminate Executive if he becomes “disabled,” as defined below, upon written notice to Executive. Such termination shall not be a breach of this Agreement. For purposes of this Agreement, the term “Disability” shall mean a physical or mental incapacity as a result of which Executive becomes unable to continue the proper performance of Executive’s duties hereunder for ninety (90) consecutive days or one-hundred twenty (120) non-consecutive days in any three hundred sixty-five (365) day period, or, if this provision is inconsistent with any applicable law, for such period or periods as permitted by law.

5.2 By the Company Without “Cause”. The Company may terminate this Agreement without Cause (as hereinafter defined) at any time following the Effective Date upon written notice to Executive. Such termination shall not be a breach of this Agreement.

5.3 By the Company For Cause. The Company may terminate Executive’s employment for Cause at any time by providing Executive written notice of its intent to terminate him for Cause which sets forth in reasonable detail the Company’s basis for such termination. Such termination shall not be a breach of this Agreement. For purposes of this Agreement, Cause shall mean:

(a) Executive’s continued failure to perform his duties with the Company (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive which identifies the manner in which the Board believes that Executive has not performed his duties;

(b) Executive’s indictment (or equivalent under applicable law) with respect to, conviction of, or plea of guilty or nolo contendere to, a felony or any other comparable crime under applicable law or Executive’s incarceration with respect to any crime;

(c) Executive’s commission of any act of theft, embezzlement or misappropriation against the Company or any other act which in the reasonable opinion of the Board would prevent him from effectively performing his duties hereunder;

(d) Executive’s misconduct, gross neglect or malfeasance in the performance of the services contemplated hereunder where such conduct causes or has the likelihood of causing economic or reputational harm to the Company;

(e) Executive’s material breach of this Agreement or Executive’s willful misconduct or unethical behavior related to Executive’s duties hereunder or insubordination by Executive;

(f) Executive’s breach of any written or otherwise known Company policy or standard of conduct including, without limitation, sexual or other harassment by Executive or Executive’s use of illegal drugs or abuse of alcohol or legally prescribed drugs; and/or

(g) Breach of a representation made by Executive hereunder, including, without limitation, the representations in Section 15 of this Agreement.

If the Board has reasonable belief that Executive has committed any of the acts described above, it may suspend Executive (with or without pay) while it investigates whether it has or could have Cause to terminate Executive. The Company may terminate Executive for Cause prior to the completion of its investigation; provided, that, if it is ultimately determined that Executive has not committed an act which would constitute Cause, Executive, at the option of the Board, shall be reinstated effective as of the date of suspension or shall be treated as if he were terminated without Cause.

5.4 By Executive For Good Reason. Executive may terminate this Agreement for Good Reason (as defined below) within thirty (30) days after the occurrence of an event giving rise to such Good Reason event by providing thirty (30) days written notice to the Company describing the claimed event or circumstance and setting forth Executive’s intention to terminate his employment with the Company; provided, that, the Company has not substantially cured such event within such notice period.. For purposes of this Agreement, “Good Reason” shall mean the Company’s material breach of any of its material obligations hereunder. Such termination shall not be a breach of this Agreement.

5.5 By Executive Without Good Reason. Executive may terminate this Agreement without Good Reason by providing at least one-hundred twenty (120) days written notice to the Company. Such termination shall not be a breach of this Agreement.

5.6 Expiration of the Employment Period. Executive’s employment shall automatically terminate upon expiration of the Term unless the parties agree to extend the Term or continue the employment relationship “at will.” Notwithstanding the foregoing, if either party provides the notice to the other not to renew the Initial Term, the Employment Period shall terminate on expiration of the Initial Term. Such termination shall not be a breach of this Agreement.

5.7 Termination Payment.

(a) Amount. In the event that Executive’s employment is terminated pursuant to Sections 5.1 through 5.6, Executive shall continue to render services to the Company

pursuant to this Agreement until his date of death or the date of termination (“Termination Date”) and shall continue to receive compensation and payment for any unreimbursed expenses incurred and other accrued employee benefits as provided in this Agreement, through the Termination Date. If requested by the Board of Directors, effective on the Termination Date, Executive shall resign all directorships and officerships he then holds with the Company and its affiliates. Subject to Section 5.7(c) below, in the event Executive’s employment is terminated pursuant to Section 5.2 or 5.4, Executive shall be entitled to receive, as severance for such termination: (i) continued payment of his Base Compensation for the remainder of the Initial Term, or, if such event occurs during the Extension Period, for the remainder of the Extension Period (the “Severance Period”) and (ii) at the time the Company pays annual bonuses, a prorated portion of his Performance Bonus for the fiscal year of termination; provided, that, at the time such bonuses are determined with respect to such fiscal year, the Committee concludes that Executive would have been entitled to a Performance Bonus pursuant to Section 3.2 hereof had he remained employed by the Company until the date that such fiscal year’s bonus, if any, would be payable. Except as provided in this Section 5.7, from and after the Termination Date, Executive shall not be entitled to any other payments in connection with his employment and/or the termination thereof, and shall have no further right to receive compensation or other consideration from the Company or have any other remedy whatsoever against the Company as a result of the termination of this Agreement, the Employment Period or the termination of Executive’s employment. Executive shall have a duty of mitigation and shall be subject to right of offset with respect to any compensation received by Executive on or after the termination of his employment.

(b) Benefits. In the event Executive’s employment is terminated pursuant to Section 5.2 or 5.4 and Executive timely elects to continue healthcare coverage through COBRA, subject to subpart (c) below, the Company shall pay that portion of the COBRA premium equal to the difference between the COBRA premium and Executive’s monthly contribution towards healthcare benefits that was in effect as of the Termination Date. The Company shall make such payments during the Severance Period so long as Executive continues to timely pay Executive’s portion of the COBRA premium and is eligible to continue COBRA benefits (the “Severance Benefits”).

(c) Release. To be eligible to receive severance and Severance Benefits under this Section 5.7, Executive must execute and deliver (and not revoke, if a revocation period is required by law) a release of all claims against the Company and any of its parents, subsidiaries, affiliates, shareholders, members, partners, investors, officers, directors, agents and employees in a form acceptable to the Company.

6. NON-SOLICITATION

Executive acknowledges that by virtue of Executive’s position as CEO of the Company, and Executive’s employment hereunder, he will have advantageous familiarity with, and knowledge about, the Company and will be instrumental in establishing and maintaining goodwill between the Company and its customers, which goodwill is the property of the Company. Therefore, Executive agrees that during Executive’s employment and for a twelve (12) month period commencing from the Termination Date, Executive will not on behalf of himself, or any other person or entity, solicit, take away, hire, employ or endeavor to employ any of the employees of the Company who hold the position of Vice President or above.

7. CONFIDENTIALITY/TRADE SECRETS

7.1 Executive specifically agrees that Executive will not at any time, whether during or subsequent to the Employment Period, in any fashion, form or manner, except in furtherance of Executive’s duties at the Company or with the specific written consent of the Company, either directly or indirectly use, divulge, disclose or communicate to any person in any manner whatsoever, any confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Company (the “Proprietary Information”), including (i) all information, formulae, compilations, software programs (including object codes and source codes), devices, methods, techniques, drawings, plans, experimental and research work, inventions, patterns, processes and know-how, whether or not patentable, and whether or not at a commercial stage related to the Company or any subsidiary thereof, (ii) buying habits or practices of any of its customers, (iii) the Company’s marketing methods and related data, (iv) the Company’s costs or sources of materials, (v) the prices it obtains or has obtained or at which it sells or has sold its products or services, (vi) lists or other written records used in the Company’s business, (vii) compensation paid to employees and other terms of employment, or (viii) any other confidential information of, about or concerning the business of the Company, its manner of operation, or other confidential data of any kind, nature, or description (excluding any information that is or becomes publicly known or available for use through no fault of Executive or as directed by court order). The parties hereto stipulate that as between them, Proprietary Information constitutes trade secrets that derive independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value or cause economic harm to the Company from its disclosure or use and that Proprietary Information is the subject of efforts which are reasonable under the circumstances to maintain its secrecy and of which this Section 7.1 is an example, and that any breach of this Section 7.1 shall be a material breach of this Agreement. All Proprietary Information shall be and remain the Company’s sole property.

7.2 Executive agrees to keep confidential and not use or divulge except in furtherance of Executive’s duties at the Company, any confidential or propriety information of any customer of the Company to which Executive may obtain access during the Employment Period. Executive acknowledges and agrees that a breach of this Section 7.2 shall be a material breach of this Agreement.

8. INVENTIONS

8.1 Executive agrees to disclose promptly to the Company any and all concepts, designs, inventions, discoveries and improvements related to the Company’s business (collectively, “Inventions”) that Executive may conceive, discover or make from the beginning of Executive’s employment with the Company until the termination thereof; whether such is made solely or jointly with others, whether or not patentable, of which the conception or making involves the use of the Company’s time, facilities, equipment, personnel, supplies or trade secret information.

8.2 Executive agrees to assign, and does hereby assign, to the Company (or its nominee) Executive’s right, title and interest in and to any and all Inventions that Executive may conceive, discover or make, either solely or jointly with others, whether or not patentable, from the beginning of Executive’s employment with the Company until the termination thereof.

8.3 Executive agrees to sign at the request of the Company any instrument necessary

for the filing and prosecution of patent applications in the United States and elsewhere, including divisional, continuation, revival, renewal or reissue applications, covering any Inventions and all instruments necessary to vest title to such Inventions in the Company (or its nominee). Executive further agrees to cooperate and assist the Company in preparing, filing and prosecuting any and all such patent applications and in pursuing or defending any litigation upon Inventions covered hereby. The Company shall bear all expenses involved in the prosecution of such patent applications it desires to have filed. Executive agrees to sign at the request of the Company any and all instruments necessary to vest title in the Company (or its nominee) to any specific patent application prepared by the Company and covering Inventions which Executive has agreed to assign to the Company (or its nominee) pursuant to Section 8.2 above.

8.4 The provisions of Sections 8.2 and 8.3 do not apply to any invention which qualifies fully under the provisions of Section 2870 of the California Labor Code, which provides in substance that provisions in an employment agreement providing that an employee shall assign or offer to assign rights in an invention to his or her employer do not apply to an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and which was developed entirely in the employee’s own time, except for those inventions that either (a) relate, at the time of conception or reduction to practice of the invention: (1) to the business of the employer or (2) to the employer’s actual or demonstrably anticipated research or development, or (b) result from any work performed by the employee for the employer.

9. SHOP RIGHTS

The Company shall also have a perpetual, royalty-free, non-exclusive right to use in its business, and to make, use, license and sell products, processes and/or services derived from any inventions, discoveries, designs, improvements, concepts, ideas, works of authorship, whether or not patentable, including processes, methods, formulae, techniques or know-how related thereto, that are not within the scope of “Inventions” as defined above, but which are conceived or made by Executive during regular working hours or with the Company’s facilities, equipment, personnel, supplies or trade secret information.

10. INJUNCTIVE RELIEF

Executive acknowledges that any violation of any provision of Sections 6 through 9 and 13 hereof by Executive will cause irreparable damage to the Company, that such damages will be incapable of precise measurement and that, as a result, the Company will not have an adequate remedy at law to redress the harm which such violations will cause. Therefore, in the event of any violation or threatened violation of any provision of Sections 6 through 9 and 13 by Executive, in addition to any other rights at law or in equity, Executive agrees that the Company will be entitled to injunctive relief including, but not limited to, temporary and/or permanent restraining orders to restrain any violation or threatened violation of such Sections by Executive.

11. BLUE PENCIL

It is the desire and intent of the parties that the provisions of Section 6 through 9 hereof shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any portion of Sections 6 through 9 hereof shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended either to conform to such restrictions as the court or arbitrator may allow, or to delete therefrom or reform the portion thus adjudicated to be invalid and unenforceable, such deletion or reformation to apply only with respect to the operation of such Section in the particular jurisdiction in which such adjudication is made. It is expressly agreed that any court or arbitrator shall have the authority to modify any provision of Sections 6 through 9 if necessary to render it enforceable, in such manner as to preserve as much as possible the parties’ original intentions, as expressed therein, with respect to the scope thereof.

12. COPYRIGHT

Executive agrees that any work prepared for the Company that is eligible for copyright protection under any U.S. or foreign law shall be a work made for hire and ownership of all copyrights (including all renewals and extensions therein) shall vest in the Company. In the event any such work is deemed not to be a work made for hire for any reason, Executive hereby irrevocably grants, transfers and assigns all right, title and interest in such work and all copyrights in such work and all renewals and extensions thereof to the Company, and agrees to provide all assistance reasonably requested by the Company in the establishment, preservation and enforcement of its copyright in such work, such assistance to be provided at the Company’s expense, but without any additional compensation to Executive. Executive agrees to and does hereby irrevocably waive all moral rights with respect to the work developed or produced hereunder, including any and all rights of identification of authorship and any and all rights of approval, restriction or limitation on use or subsequent modifications.

13. EXECUTIVE’S DUTIES ON TERMINATION

In the event of termination of Executive’s employment pursuant to Section 5 hereof, Executive agrees to deliver promptly to the Company all Proprietary Information which is or has been in Executive’s possession or under Executive’s control. Upon termination of Executive’s employment by the Company for any reason whatsoever and at any earlier time the Company so requests, Executive will deliver to the custody of the person designated by the Company all originals and copies of such documents and other property of the Company in Executive’s possession, under Executive’s control or to which Executive may have access. Executive acknowledges and agrees that he will not defame or publicly criticize the services, business, integrity, veracity or personal or professional reputation of the Company or any of its officers, directors, partners, employees, affiliates, or agents thereof in either a professional or personal manner either during the Employment Period or thereafter.

14. INDEMNIFICATION

The Company shall indemnify, defend and hold Executive harmless from and against any and all causes of action, claims, demands, liabilities, damages, costs and expenses of any nature whatsoever (collectively, “Damages”) directly or indirectly arising out of or related to Executive’s discharging Executive’s duties hereunder on behalf of the Company and/or its respective subsidiaries and affiliates to the fullest extent permitted by law.

15. EXECUTIVE’S REPRESENTATIONS

Executive hereby represents and warrants to the Company, and Executive acknowledges that the Company has relied on such representations and warranties in employing Executive and entering into this Agreement, that (a) he has the right to enter into this Agreement, (b) the provisions of this Agreement and the performance hereof by Executive do not violate any other contracts or agreements to which he is a party and that would adversely affect his ability to perform his obligations hereunder, and (c) he will not enter into any agreement, either oral or written, that would adversely affect his ability to perform his obligations hereunder. If it is determined that Executive is in breach or has breached any of the representations set forth herein, the Company shall have the right to terminate Executive’s employment for Cause.

16. ARBITRATION; LEGAL FEES

Subject to Section 10 hereof, any controversy, dispute or claim arising out of or relating to this Agreement or breach thereof shall first be attempted to be settled through good faith negotiation. If the dispute cannot be settled through negotiation, the parties agree to attempt in good faith to settle the dispute by mediation administered by JAMS for resolution in Orange County, California. If the parties are unsuccessful at resolving the dispute through mediation, the parties agree to binding arbitration for resolution in Orange County, California, administered by JAMS pursuant to its Employment Arbitration Rules & Procedure and subject to JAMS Policy on Employment Arbitration Minimum Standards of Procedural Fairness. Judgment on the award may be entered in any court having jurisdiction. Each party shall pay all its own expenses relating to any such dispute, mediation and/or arbitration, including, but not limited to, its own legal fees and expenses regardless of outcome. Joint expenses relating to such dispute, mediation or arbitration shall be borne equally among the parties.

/s/ PDW

P.D.W.

17. GENERAL PROVISIONS

17.1 Assignment, Binding Effect. Neither the Company nor Executive may assign, delegate or otherwise transfer this Agreement or any of their respective rights or obligations hereunder without the prior written consent of the other party, except that the Company may assign this Agreement to its successors (including any purchaser of its assets), and affiliates, parent or subsidiary corporations. This Agreement shall be binding upon and inure to the benefit of any permitted successors or assigns of the parties and the heirs, executors, administrators and/or personal representatives of Executive.

17.2 Notices. All notices, requests, demands or other communications that are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered, when transmitted if transmitted by telecopy, electronic or digital transmission method with electronic confirmation of receipt, the day after it is sent, if sent for next-day delivery to a domestic address by recognized overnight delivery service (e.g. FedEx); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to:

If to the Company

Vice President, Human Resources

The Wet Seal, Inc.

26972 Burbank

Foothill Ranch, CA 92610

Facsimile No.: (949) 699-4722

If to Executive

Peter D. Whitford

[Insert Address]

17.3 Governing Law. This Agreement is governed by, and is to be construed and enforced in accordance with, the laws of California without regard to principles of conflicts of laws.

17.4 Amendment. No provisions of this Agreement may be amended, modified or waived unless such amendment or modification is agreed to in writing signed by Executive and by a duly authorized officer selected at such time by the Board, and such waiver is set forth in writing and signed by the party to be charged.

17.5 Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter. Any prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and canceled as of the date hereof.

17.6 Withholding. All payments hereunder shall be subject to any required withholding of federal, state and local taxes pursuant to any applicable law or regulation.

17.7 Severability. The paragraphs and provisions of this Agreement are severable. If any paragraph or provision is found to be unenforceable, the remaining paragraphs and provisions will remain in full force and effect.

17.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

[SIGNATURE PAGE FOLLOWS]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the date first written above.

THE WET SEAL, INC.
By:	/s/ IRVING TEITELBAUM
Title:	Chairman of the Board

/s/ PETER D. WHITFORD

Peter D. Whitford

EX-99.1

EXHIBIT 99.1

Factors Affecting Future Financial Results

Statement Regarding Forward-Looking Disclosure and Risk Factors

Certain sections of this Quarterly Report on Form 10-Q may contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events.

Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements, include, but are not limited to those discussed below and elsewhere in this Form 10-Q.

We may be unable to sustain comparable store sales growth.

Growth in our business depends, in part, on our ability to sustain comparable store sales growth. We use the term “comparable store sales” to refer to sales in stores that were open for at least 14 full fiscal months. A variety of factors affect comparable store sales results, including changes in fashion trends, changes in our merchandise mix, calendar shifts of holiday periods, actions of competitors, weather conditions and general economic conditions. Our comparable store sales results have fluctuated significantly in the past, and we cannot assure you that comparable store sales will not

continue to decline in the future.

Our profitability depends on our ability to anticipate and react to new trends.

Our profitability depends largely on our ability to anticipate the changing fashion tastes of our customers and to respond to those changing tastes in a timely manner. The fashion tastes of our customers change frequently, and if we fail to anticipate, identify or react appropriately to changing styles, trends or brand preferences of our customers, we may experience lower sales, excess inventories and more frequent markdowns, which could have a material adverse effect on our business. In addition, if we misjudge fashion trends, our image with our customers may be significantly impaired, and our customers might cease to purchase additional merchandise from us in the future. This is particularly acute, because we rely on a limited demographic for a large percentage of our sales.

Our sales and profitability also depend upon the continued demand by our customers for fashionable, casual apparel. Demand for our merchandise could be negatively affected by shifts in consumer discretionary spending to other goods such as electronic equipment, computers and music, for example. If the demand for apparel and related merchandise were to decline, our financial results would be adversely affected by any resulting decline in sales.

We compete with other retailers for sales and locations.

The women’s retail apparel industry is highly competitive, with fashion, quality, price, location, in-store environment and service being the principal competitive factors. We compete for sales with specialty apparel retailers, department stores and certain other apparel retailers, including Charlotte Russe, Gadzooks, Pacific Sunwear, Forever 21, Express, bebe, Rampage and Limited Too. We also compete for favorable site locations and lease terms in shopping malls. Many of our competitors are large national chains, which have substantially greater financial, marketing and other resources than we do. While we believe we compete effectively for sales and for favorable site locations and lease terms, competition for prime locations within malls, in particular, and within other locations is intense and we cannot assure you that we will be able to obtain new locations on terms favorable to us, if at all.

Because of the importance of our brand names, we may lose market share to our competitors if we fail to adequately protect our intellectual property rights.

We believe that our trademarks and other proprietary rights are important to our success. We have registered trademarks for Wet Seal, Contempo Casuals and Zutopia, and have applied for a registration for Arden B. Even though we take actions to establish and protect our trademarks and other proprietary rights, we cannot assure you that others will imitate our products or infringe on our intellectual property rights. In addition, we cannot assure you that others will not resist or seek to block the sale of our products as volatile of their trademarks and proprietary rights. If we are required to stop using any of our registered or non-registered marks, our sales could decline and our business and results of operations could be adversely affected.

Our business is affected by local, regional and national economic conditions.

Our business is sensitive to consumer spending patterns and preferences. Various economic conditions affect the level of spending on the merchandise we offer, including general business conditions, interest rates, taxation, and the availability of consumer credit and consumer confidence in future economic conditions. Our growth, sales and profitability may be adversely affected by unfavorable occurrences in these economic conditions on a local, regional or national level. We are especially affected by economic conditions in California, where approximately 14% of our stores are located.

Most of our stores are located in regional shopping malls. We derive sales, in part, from the high volume of traffic in these malls. The inability of mall “anchor” tenants and other area attractions to generate consumer traffic around our stores, or the decline in popularity of malls as shopping destinations would reduce our sales volume.

Our success depends upon the performance of our senior management and our ability to attract and retain key management personnel.

Our company’s success depends to a significant extent upon the performance of our senior management, particularly personnel engaged in merchandising and store operations. Our success also depends, in part, on our ability to identify, hire and retain additional key management personnel. Competition for qualified personnel in the retail apparel industry can be intense, and we cannot assure you that we will be able to identify, hire or retain the key personnel necessary to grow and operate our business as currently contemplated.

Increases in Federal and state minimum wage laws could increase our expenses.

Statutory increases in Federal and state minimum wages could adversely effect our profitability by increasing our expenses. Recently, Alaska, Connecticut, Hawaii, Maine, Oregon, and Washington each increased their state minimum wages above the Federal minimum as of the end of the fiscal year ended February 1, 2003. We operated a total of 36 stores in those states as of May 4, 2003. The recent state increases and any other future Federal or state increases could raise minimum wages above the current wages of some of our employees, and competitive factors could require us to make corresponding increases in employee wage rates. Increases in our wage rates increases our expenses, which could adversely affect our results of operations.

We must increase our regional and demographic scope to continue the growth of our business.

We rely on a relatively narrow demographic and a concentration of stores in particular geographic regions for a significant percentage of our sales. We believe we need to increase our demographic and geographic scope to continue our growth. As our operations grow, there will be increasing strains on our resources, and we could experience difficulties enhancing our distribution, financial and operating systems. There can be no assurance that we will be able to expand, that any expansion will be profitable or that we will be able to manage our expansion effectively.

Our company has historically expanded by opening new stores, remodeling existing stores and acquiring other store locations or businesses that complement and enhance our operations. From time to time we have created new retail concepts such as Arden B. There can be no assurance that these new fashion businesses will gain consumer acceptance or ultimately be successful. Our ability to open stores and the performance of newly opened stores depends upon several factors, including among others, our ability to:

• locate and obtain favorable store sites;

• negotiate acceptable lease terms;

• obtain adequate supplies of merchandise; and

• hire and train qualified management level and other employees.

Our ability to complement and enhance our operations through acquisitions depends on our ability to integrate the new business, its management, systems and relationships into our company. This type of integration is often very difficult and may not be successful. Although we are not currently planning any acquisitions, our inability to integrate future acquisitions into our corporate

structure could adversely effect our results of operations.

Our business is seasonal in nature.

The retail apparel industry is highly seasonal. We generate our highest levels of sales during the Christmas season, which begins the week of Thanksgiving and ends the first Saturday after Christmas, and the “back to school” season, which begins the last week of July and ends the first week of September. Our profitability depends, to a significant degree, on the sales generated during these peak periods. Any decrease in sales or margins during these periods, whether as a result of economic conditions, poor weather or other factors beyond our control, could have a material adverse effect on our company.

We depend upon key vendors to supply us with merchandise for our stores.

Our business depends on our ability to purchase current season apparel in sufficient quantities at competitive prices. The inability or failure of our key vendors to supply us with adequate quantities of desired merchandise, the loss of one or more key vendors or a material change in our current purchase terms could adversely affect our business. We have no long-term purchase contracts or other contractual assurances of continued supply, pricing or access to new products. We cannot assure you that we will be able to acquire desired merchandise in sufficient quantities or on terms acceptable to us in the future.

We depend upon a single distribution facility.

Our distribution functions for all of our stores are handled from a single, leased facility in Foothill Ranch, California. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores, which could cause our sales to decline.

We do not authenticate the license rights of our suppliers.

We purchase merchandise from a number of vendors who hold manufacturing and distribution rights under the terms of license agreements. We generally rely upon each vendor’s representation concerning those manufacturing and distribution rights and do not independently verify whether each vendor legally holds adequate rights to the licensed properties they are manufacturing or distributing. If we acquire unlicensed merchandise, we could be obligated to remove it from our stores, incur costs associated with destruction of the merchandise if the vendor is unwilling or unable

to reimburse us, and be subject to liability under various civil and criminal causes of action. The occurrence of any of these events could adversely effect our financial condition and results of operations.

We experience business risks as a result of the catalog and internet business.

We compete with catalog and internet businesses that handle similar lines of merchandise. These competitors have certain advantages, including the inapplicability of sales tax and the absence of retail real estate and related costs. As a result, increased catalog and internet sales by our competitors could result in increased price competition and decreased margins.

We operate internet sites where customers can purchase our merchandise on-line at www.wetseal.com and www.ardenb.com. These internet addresses are provided for informational purposes only and are not intended to be usable as hyperlinks. The information at these internet addresses are not a part of this filing. Our internet operations are subject to numerous risks, including:

• reliance on third party computer and hardware providers;

• diversion of sales from our retail stores; and

• online security breaches and/or credit card fraud.

Our inability to effectively address these factors could affect the profitability of our internet business, and we cannot assure you that we will be able to compete successfully through our internet business.

We are subject to risks associated with our international operations.

A significant portion of our products are manufactured outside the United States. As a result of our international operations, we are subject to additional risks. For example, we cannot predict whether any of the foreign countries in which our products are currently manufactured or any of the countries in which we may manufacture our products in the future will be subject to future or increased import restrictions by the U.S. government, including the likelihood, type or effect of any trade restrictions. Trade restrictions, including increased tariffs or quotas, against apparel, footwear or other items sold by us could affect the importation of such merchandise generally and could increase the cost or reduce the supply of merchandise available to us and adversely affect our business, financial condition, results of operations and liquidity. Furthermore, our merchandise flow may be adversely affected by the financial or political instability in any of the countries in which our goods are manufactured or by significant fluctuations in the

value of the U.S. dollar against foreign currencies or restrictions on the transfer of funds. If our merchandise flow is negatively impacted as a result of any of the risks associated with our international operations, our sales could decline.

EX-99.2

EXHIBIT 99.2

SARBANES-OXLEY ACT SECTION 906 CERTIFICATIONS

In connection with this quarterly report on Form 10-Q of The Wet Seal, Inc. for the period ended May 3, 2003, I, Irving Teitelbaum, Chairman of the Board and Interim Chief Executive Officer of The Wet Seal, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. This Form 10-Q for the period ended May 3, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this Form 10-Q for the period ended May 3, 2003 fairly presents, in all material respects, the financial condition and results of operations of The Wet Seal, Inc.

Date: June 5, 2003	/s/ IRVING TEITELBAUM
	Irving Teitelbaum Chairman of the Board and Interim Chief Executive Officer (Principal Executive Officer)

EX-99.3

EXHIBIT 99.3

In connection with this quarterly report on Form 10-Q of The Wet Seal, Inc. for the period ended May 3, 2003, I, William B. Langsdorf, Chief Financial Officer of The Wet Seal, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

1. This Form 10-Q for the period ended May 3, 2003 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in this Form 10-Q for the period ended May 3, 2003 fairly presents, in all material respects, the financial condition and results of operations of The Wet Seal, Inc.

Date: June 5, 2003	/s/ WILLIAM B. LANGSDORF
	William B. Langsdorf Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)