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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 AUGUST 2, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- - --- SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21296
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CALIFORNIA 95-3759463
(State of Incorporation) (I.R.S. Employer Identification No.)
5200 EAST LA PALMA AVENUE
ANAHEIM, CALIFORNIA 92807
(Address of principal executive offices) (Zip code)
(714) 693-8066
(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 Common Stock, par
value $.01 per share, at August 20, 1998 was 21,048,866.
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED AUGUST 2, 1998
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Balance Sheets as of August 2, 1998 (unaudited) and
February 1, 1998............................................. 3
Statements of Operations (unaudited) for the second
quarter and first half ended August 2, 1998 and
August 3, 1997............................................... 4
Statements of Cash Flows (unaudited) for the first half
ended August 2, 1998 and August 3, 1997...................... 5
Notes to Financial Statements.................................. 6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 12
Item 2. Changes in Securities and Use of Proceeds...................... 12
Item 3. Defaults Upon Senior Securities................................ 12
Item 4. Submission of Matters to a Vote of Security Holders............ 12
Item 5. Other Information.............................................. 13
Item 6. Exhibits and Reports on Form 8-K............................... 13
SIGNATURE PAGE................................................. 14
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
BALANCE SHEETS
ASSETS
AUGUST 2, FEBRUARY 1,
1998 1998
---- ----
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 12,961,692 $ 14,781,566
Short-term investments (Note 2) -- 12,742,666
Accounts receivable 1,607,251 1,009,839
Merchandise inventories 47,843,515 32,122,341
Prepaid expenses, includes $3,156,263 and $2,832,739 of
prepaid rent, respectively 4,960,956 4,364,537
Prepaid income tax 1,216,213 --
Deferred taxes 1,916,935 1,916,935
------------ ------------
Total current assets 70,506,562 66,937,884
PROPERTY AND EQUIPMENT:
Leasehold improvements 42,117,225 36,327,054
Furniture, fixtures and equipment 39,186,686 29,416,189
------------ ------------
81,303,911 65,743,243
Less accumulated depreciation and amortization (22,554,994) (20,342,749)
------------ ------------
Net property and equipment 58,748,917 45,400,494
OTHER ASSETS:
Goodwill, net of accumulated amortization of $599,239
and $440,297, respectively 7,764,504 7,923,446
Deposits and other assets 1,535,168 1,404,234
------------ ------------
Total other assets 9,299,672 9,327,680
------------ ------------
Total assets $138,555,151 $121,666,058
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 16,657,739 $ 8,916,915
Accrued liabilities (Note 6) 7,450,190 8,834,161
Income taxes payable -- 1,068,276
------------ ------------
Total current liabilities 24,107,929 18,819,352
DEFERRED COMPENSATION 1,912,075 1,114,374
DEFERRED RENT 4,316,826 3,746,246
DEFERRED TAXES 1,423,029 1,423,029
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01; authorized, 5,000,000; none issued
and outstanding
Common stock, par value $.01; authorized 50,625,000 shares; issued
and outstanding, 20,808,554 and 20,617,337 shares, respectively 208,086 206,173
Additional paid-in capital 65,647,847 63,271,086
Retained earnings 40,939,359 33,085,798
------------ ------------
Total shareholders' equity 106,795,292 96,563,057
------------ ------------
Total liabilities and shareholders' equity $138,555,151 $121,666,058
============ ============
See accompanying notes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SECOND QUARTER ENDED FOR THE FIRST HALF ENDED
---------------------------- ----------------------------
AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3,
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $73,203,194 $48,326,141 $134,365,444 $87,258,877
Cost of goods sold, including
buying, distribution and
occupancy costs 48,627,331 32,477,214 90,182,545 59,702,842
----------- ----------- ------------ -----------
Gross margin 24,575,863 15,848,927 44,182,899 27,556,035
Selling, general and
administrative expenses 16,594,562 11,379,171 31,742,087 21,321,703
----------- ----------- ------------ -----------
Operating income 7,981,301 4,469,756 12,440,812 6,234,332
Interest income 219,346 293,888 539,749 389,590
----------- ----------- ------------ -----------
Income before income tax 8,200,647 4,763,644 12,980,561 6,623,922
expense
Income tax expense (Note 5) 3,234,000 1,884,000 5,127,000 2,620,000
----------- ----------- ------------ -----------
Net income $ 4,966,647 $ 2,879,644 $ 7,853,561 $ 4,003,922
=========== =========== ============ ===========
Net income per share, basic
(Note 4) $ 0.24 $ 0.15 $ 0.38 $ 0.21
----------- ----------- ------------ -----------
Net income per share, diluted
(Note 4) $ 0.23 $ 0.14 $ 0.36 $ 0.20
----------- ----------- ------------ -----------
Weighted average shares
outstanding, basic (Note 4) 20,763,818 19,458,122 20,719,587 18,862,090
=========== =========== ============ ===========
Weighted average shares
outstanding, diluted (Note 4) 21,626,768 20,161,268 21,567,493 19,580,443
=========== =========== ============ ===========
See accompanying notes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE FIRST HALF ENDED
------------------------
AUGUST 2, AUGUST 3,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,853,561 $ 4,003,922
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,649,891 3,048,192
Change in:
Accounts receivable (597,412) (317,939)
Merchandise inventories (15,721,174) (11,793,785)
Prepaid expenses (596,419) (98,042)
Deposits and other assets (155,934) (283,851)
Accounts payable 7,740,824 5,711,840
Accrued liabilities (1,383,971) (78,325)
Income taxes and deferred income taxes (588,437) 404,960
Deferred rent 570,580 254,879
Deferred compensation 797,701 410,265
------------- ------------
Net cash provided by operating activities 2,569,210 1,262,116
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short term investments -- (19,718,780)
Short term investment maturities 12,742,666 --
Investment in property and equipment (17,814,372) (9,003,746)
------------- ------------
Net cash used in investing activities (5,071,706) (28,722,526)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 30,085,073
Cash paid in lieu of fractional shares due to 3-for-2
stock split (28,929) --
Proceeds from exercise of stock options 711,551 336,543
------------- ------------
Net cash provided by financing activities 682,622 30,421,616
------------- ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS: (1,819,874) 2,961,206
CASH AND CASH EQUIVALENTS, beginning of period 14,781,566 9,962,626
------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 12,961,692 $ 12,923,832
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ -- $ 2,381
Income taxes $ 5,715,437 $ 2,215,040
- - -------------------------------------------------------------------------------
Non-cash transaction: During the first half ended August 2, 1998 and August 3,
1997, the Company recorded an increase to additional paid-in capital of
$1,696,052 and $857,758, respectively, related to tax benefits associated with
the exercise of non-qualified stock options.
See accompanying notes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited except for the
February 1, 1998 balance sheet. These statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with 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 generally accepted accounting principles for complete financial
statements.
The Company's fiscal year is the 52- or 53-week period which ends on the
Sunday closest to the end of January. "Fiscal 1998" is a 52-week period which
ends January 31, 1999.
In the opinion of management, all adjustments consisting only of normal
recurring entries necessary for a fair presentation have been included. The
preparation of financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported expenses during the reported period. Actual results
could differ from these estimates. The results of operations for the second
quarter and first half ended August 2, 1998 are not necessarily indicative of
the results that may be expected for the fiscal year ending January 31, 1999.
For further information, refer to the financial statements and notes thereto as
of and for the years ended February 1, 1998, February 2, 1997 and February 4,
1996.
NOTE 2 - CASH AND CASH EQUIVALENTS; SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash on hand and marketable securities
with original maturities of three months or less.
Short-term investments consist of highly liquid investments with
original maturities between three and twelve months. Management determines the
proper classifications of investments at the time of purchase and reevaluates
such designations as of each balance sheet date. At August 2, 1998, all
securities were classified as held-to-maturity under the provisions of SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities" based on
the Company's positive intent and ability to hold the securities to maturity. In
accordance with SFAS No. 115, these securities are carried at amortized cost,
which approximates fair market value.
NOTE 3 - FOLLOW-ON OFFERING
During fiscal 1997 the Company issued an aggregate of 1,960,875 shares
of its common stock in a follow-on stock offering. The sale of shares yielded
net proceeds to the Company, after deducting expenses associated with the
offering, of $30.1 million.
NOTE 4 - NET INCOME PER SHARE, BASIC AND DILUTED
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), in the fourth quarter of fiscal 1997. SFAS 128
simplifies the computation of earnings per share ("EPS") previously required in
Accounting Principles Board (APB) Opinion No. 15, "Earnings Per Share," by
replacing primary and fully diluted EPS with basic and diluted EPS. Earnings per
share for the second quarter and first half ended August 3, 1997 have been
restated in accordance with SFAS 128.
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The following table summarizes the computation of EPS:
SECOND QUARTER ENDED: August 2, 1998 August 3, 1997
------------------------------ ------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ --------- ---------- ------ ---------
BASIC EPS:
Net Income $4,966,647 20,763,818 $0.24 $2,879,644 19,458,122 $0.15
DILUTED EPS:
Effect of dilutive stock options 862,950 703,146
Net Income $4,966,647 21,626,768 $0.23 $2,879,644 20,161,268 $0.14
FIRST HALF ENDED: August 2, 1998 August 3, 1997
------------------------------ ------------------------------
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ --------- ---------- ------ ---------
BASIC EPS:
Net Income $7,853,561 20,719,587 $0.38 $4,003,922 18,862,090 $0.21
DILUTED EPS:
Effect of dilutive stock options 847,906 718,353
Net Income $7,853,561 21,567,493 $0.36 $4,003,922 19,580,443 $0.20
Options to purchase 519 and 104,069 shares of common stock in the second
quarter of fiscal 1998 and the second quarter of fiscal 1997, respectively, and
36,832 and 56,016 in the first half of fiscal 1998 and the first half of fiscal
1997, respectively, were not included in the computation of diluted earnings per
common share because the option exercise price was greater than the average
market price of the common stock.
Stock Split - On both October 9, 1997 and June 8, 1998, the Company
effected a three-for-two stock split. Earnings per share and share outstanding
amounts have been restated to give retroactive effect to the stock splits in
these financial statements.
NOTE 5 - FEDERAL AND STATE INCOME TAX EXPENSE
The combined federal and state income tax expense was calculated using
estimated effective annual tax rates.
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
August 2, February 1,
1998 1998
---------- -----------
Accrued compensation and benefits $3,300,908 $4,185,159
Sales tax payable 1,402,500 568,931
Other accrued liabilities 932,535 901,719
Accrued employee medical plan expense 530,591 239,937
Gift certificates and store merchandise credits 513,967 778,390
Reserve for store expansion/relocation and closing costs 498,091 954,823
Accrued costs related to corporate relocation 271,598 1,205,202
---------- ----------
$7,450,190 $8,834,161
========== ==========
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NOTE 7 - ACQUISITION
In September 1997, the Company acquired from Good Vibrations, Inc. the
store assets, including inventory, leasehold improvements and lease rights
pertaining to 15 retail stores. The purchase price aggregated $10.4 million and
resulted in the Company recording goodwill of $7.3 million. Details of the
transaction and the accounting effects were disclosed in the Company's Form 10-K
for the year ended February 1, 1998. The first half of 1998 includes sales
results from these 15 retail stores.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The second quarter ended August 2, 1998 as compared to the second quarter ended
August 3, 1997
Net Sales
Net sales increased to $73.2 million for the second quarter of fiscal
1998 from $48.3 million for the second quarter of fiscal 1997, an increase of
$24.9 million, or 51.6%. Of this $24.9 million increase, $8.0 million was
attributable to net sales generated by new stores opened in fiscal 1997 not yet
included in the comparable store base, $6.4 million was attributable to net
sales generated by 38 new stores opened in fiscal 1998 not yet included in the
comparable store base, $5.3 million was attributable to a 12.6% increase in
comparable store net sales in the second quarter of fiscal 1998, $3.4 million
was attributable to the 15 Good Vibrations stores acquired in fiscal 1997 not
yet included in the comparable store base and $2.2 million was attributable to
20 stores that have been expanded or relocated to the larger format and not yet
included in the comparable store base. Partially offsetting this increase was a
$.4 million decrease in net sales attributable to the closing of four stores
during fiscal 1997. The increase in comparable store net sales was primarily
attributable to increases in comparable store net sales of juniors, shoes,
accessories merchandise and, to a lesser extent, increases in comparable store
net sales of young men's merchandise. Net sales of footwear and junior female
apparel represented approximately 29% of total net sales for the second quarter
of fiscal 1998 compared to 24% for the second quarter of fiscal 1997. Retail
prices of the Company's merchandise remained relatively unchanged in the second
quarter of fiscal 1998 compared to the second quarter of fiscal 1997 and had no
significant impact on the net sales increase for the second quarter of fiscal
1998.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $24.6 million for the second quarter of fiscal 1998 from $15.8 million for
the second quarter of fiscal 1997, an increase of $8.8 million, or 55.7%. As a
percentage of net sales, gross margin increased to 33.6% from 32.7%. Of this .9%
increase, net merchandise margins increased 1.2% as a percentage of net sales
for the second quarter of fiscal 1998 compared to the second quarter of fiscal
1997 due to an increase in initial markup and, to a lesser extent, a decrease in
markdowns as a percentage of net sales and .5% was due to a decrease in
occupancy costs as a percentage of net sales which was related to higher
comparable store net sales and higher total net sales. These increases were
offset by higher distribution costs of .8% as a percentage of net sales for the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997,
which were due to startup costs and higher occupancy costs related to the new
distribution center facility.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $16.6 million
for the second quarter of fiscal 1998 from $11.4 million for the second quarter
of fiscal 1997, an increase of $5.2 million, or 45.6%. As a percentage of net
sales, these expenses decreased to 22.7% from 23.6%. Of this .9% net decrease as
a percentage of net sales, .5% was due to a decrease in general and
administrative expenses as a percentage of net sales, .2% was attributable to a
decrease in store selling expenses as a percentage of net sales and .2% was due
to a decrease in store expansion/relocation and closing expenses as a percentage
of net sales. These decreases as a percentage of net sales were primarily a
result of leveraging these expenses over higher total net sales.
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Income Tax Expense
Income tax expense was $3.2 million in the second quarter of fiscal 1998
compared to $1.9 million for the second quarter of fiscal 1997. The effective
income tax rate was 39.4% for the second quarter of fiscal 1998 as compared to
39.5% for the second quarter of fiscal 1997.
The twenty-six weeks ended August 2, 1998 as compared to the twenty-six weeks
ended August 3, 1997
Net Sales
Net sales increased to $134.4 million for the first half of fiscal 1998
from $87.3 million for the first half of fiscal 1997, an increase of $47.1
million, or 54.0%. Of this $47.1 million increase, $18.5 million was
attributable to net sales generated by new stores opened in fiscal 1997 not yet
included in the comparable store base, $10.3 million was attributable to a 13.6%
increase in comparable store net sales in the first half of fiscal 1998, $7.9
million was attributable to net sales generated by 38 new stores opened in
fiscal 1998 not yet included in the comparable store base, $6.8 million was
attributable to the 15 Good Vibrations stores acquired in fiscal 1997 not yet
included in the comparable store base and $4.3 million was attributable to 20
stores that have been expanded or relocated to the larger format and not yet
included in the comparable store base. Partially offsetting this increase was a
$.7 million decrease in net sales attributable to the closing of four stores
during fiscal 1997. The increase in comparable store net sales was primarily
attributable to increases in comparable store net sales of juniors, shoes,
accessories merchandise and, to a lesser extent, increases in comparable store
net sales of young men's merchandise. Net sales of footwear and junior female
apparel represented approximately 29% of total net sales for the first half of
fiscal 1998 compared to 22% for the first half of fiscal 1997. Retail prices of
the Company's merchandise remained relatively unchanged in the first half of
fiscal 1998 compared to the first half of fiscal 1997 and had no significant
impact on the net sales increase for the first half of fiscal 1998.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $44.2 million for the first half of fiscal 1998 from $27.6 million for the
first half of fiscal 1997, an increase of $16.6 million, or 60.1%. As a
percentage of net sales, gross margin increased to 32.9% from 31.6%. Of this
1.3% increase, net merchandise margins increased 1.1% as a percentage of net
sales for the first half of fiscal 1998 compared to the first half of fiscal
1997 due to an increase in initial markup and, to a lesser extent, a decrease in
markdowns as a percentage of net sales and .7% was due to a decrease in
occupancy costs as a percentage of net sales which was related to higher
comparable store net sales and higher total net sales. These increases were
offset by higher distribution costs of .5% as a percentage of net sales for the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997,
which were due to startup costs and higher occupancy costs related to the new
distribution center facility.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $31.7 million
for the first half of fiscal 1998 from $21.3 million for the first half of
fiscal 1997, an increase of $10.4 million, or 48.8%. As a percentage of net
sales, these expenses decreased to 23.6% from 24.4%. Of this .8% net decrease as
a percentage of net sales, .4% was attributable to a decrease in store selling
expenses as a percentage of net sales, .3% was due to a decrease in general and
administrative expenses as a percentage of net sales and .1% was due to a
decrease in store expansion/relocation and closing expenses as a percentage of
net sales. These decreases as a percentage of net sales were primarily a result
of leveraging these expenses over higher total net sales.
Income Tax Expense
Income tax expense was $5.1 million in the first half of fiscal 1998
compared to $2.6 million for the first half of fiscal 1997. The effective income
tax rate was 39.5% for first half of fiscal 1998 compared to 39.6% for the first
half of fiscal 1997.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash
flow, short-term borrowings and equity financing. The Company's primary capital
requirements have been for the construction of new stores, remodeling,
expansion, or relocation of selected stores and financing of inventories. During
the first half of fiscal 1998, the Company also used funds for the relocation of
and capital improvements to its new corporate offices and distribution facility.
Net cash provided by operating activities for the first half of fiscal
1998 was $2.6 million compared to $1.3 million for the first half of fiscal
1997. This $1.3 million increase was primarily attributable to an increase in
net income of $3.9 million and an increase in depreciation and amortization of
$1.6 million, offset by a decrease in accounts payable net of merchandise
inventories of $1.9 million and a decrease in accrued liabilities and taxes of
$2.3 million. Working capital at August 2, 1998 was $46.4 million compared to
$48.1 million at February 1, 1998, a decrease of $1.7 million. The decrease in
working capital was primarily due to capital expenditures for the construction
of 38 new stores and nine expansions/relocations opened in the first half of
fiscal 1998, offset by higher operating cash flows. Inventories at August 2,
1998 were $47.8 million compared to $32.1 million at February 1, 1998, an
increase of $15.7 million. This increase was primarily related to opening 38 new
stores and relocating nine stores with in excess of 50% larger average square
footage than their previous locations. The increase in accounts payable of $7.7
million at August 2, 1998 compared to February 1, 1998 was primarily
attributable to the increase in inventories at August 2, 1998.
Net cash used in investing activities was $5.1 million for the first
half of fiscal 1998 compared to $28.7 million for the first half of fiscal 1997.
Net cash invested in property and equipment was $17.8 million for the first half
of fiscal 1998 compared to $9.0 million for the first half of fiscal 1997. The
increase in capital expenditures was due to an increase in the number of new
stores opened and, to a lesser extent, an increase in the number of stores
expanded/relocated in the first half of fiscal 1998 compared to the first half
of fiscal 1997, as well as capital expenditures for the new corporate offices
and distribution facilities in the first half of fiscal 1998. There were $12.4
million in short-term investment maturities in the first half of fiscal 1998
compared to $19.7 in purchases of short term investments in the first half of
fiscal 1997.
Net cash provided by financing activities for the first half of fiscal
1998 was $.7 million compared to $30.4 million for the first half of fiscal
1997. In the second quarter of fiscal 1997, the Company received $30.1 million
for 1,960,875 shares of common stock issued pursuant to a registered public
stock offering. In the first half of fiscal 1998, the Company received proceeds
of $.7 million from the exercise of stock options compared to $.3 million in the
first half of fiscal 1997. At August 2, 1998, the Company had $5.7 million in
letters of credit outstanding.
The Company has a credit facility with a bank, which expires in August
1999. The credit facility provides for a $15.0 million line of credit, which can
be used for cash advances, commercial letters of credit and shipside bonds.
Interest on cash advances under the line of credit facility is payable monthly
at the bank's prime rate (8.50% at August 2, 1998). At August 2, 1998, the
Company had $5.7 million in letters of credit outstanding and no cash advances
outstanding. The loan agreement subjects the Company to various restrictive
covenants, including maintenance of certain financial ratios and prohibits
payment of cash dividends on common stock. At August 2, 1998, the Company was in
compliance with all of its covenants.
The Company plans to open approximately 35 stores and expand or relocate
approximately six existing stores during the remainder of fiscal 1998. The
Company estimates that capital expenditures during the remainder of fiscal 1998
will be approximately $14 million.
The Company reviews the operating performance of its stores on an
ongoing basis to determine which stores, if any, to close and records closing
costs as stores are closed or identified to be closed. The Company closed no
stores in the first half of fiscal 1998. The Company anticipates closing one
store in the third quarter of fiscal 1998 and two in the fourth quarter of
fiscal 1998.
Management believes that the Company's working capital, bank line of
credit and cash flows from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements through the end of
fiscal 1999.
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INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations during the past three years. There can be no assurance
that the Company's business will not be affected by inflation in the future.
NEW ACCOUNTING PRONOUNCEMENTS
Comprehensive Income -- The Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), in
the first quarter 1998. SFAS 130 establishes standards for the reporting and
display of comprehensive income. Components of comprehensive income include net
earnings (loss), foreign currency translation adjustments and gains/losses
associated with investments available for sales. The adoption of SFAS 130
required no additional disclosure for the Company and did not have a material
effect on the Company's financial position or results of operations.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is seasonal by nature, with the Christmas and
back-to-school periods historically accounting for the largest percentage of
annual net sales. The Company's first quarter historically accounts for the
smallest percentage of annual net sales. In fiscal 1997 and fiscal 1996,
excluding net sales generated by new and relocated/expanded stores, the
Christmas and back-to-school periods together accounted for approximately 35%
and 36%, respectively, of the Company's annual net sales and a higher percentage
of the Company's operating income. In fiscal 1997, excluding net sales generated
by new and relocated/expanded stores, approximately 43% of the Company's annual
net sales occurred in the first half of the fiscal year and 57% in the second
half. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of factors, including the timing of store
openings; the amount of revenue contributed by new stores; the timing and level
of markdowns; the timing of store closings, expansions and relocations;
competitive factors; and general economic conditions.
YEAR 2000 COMPLIANCE
The Company has completed a Year 2000 review of its computer and
information systems in preparation for the year 2000.
The Company's material merchandise, financial and store computer
software systems are provided by third-party vendors and are used with minor
modifications by the Company. Many of these software vendors have provided, and
the Company believes that others will provide, updated software versions as part
of the normal periodic software upgrade process that address the year 2000
issue. Generally, this upgrade process is expected to be completed by the end of
fiscal 1998 and does not cost the Company additional amounts beyond normal
recurring annual software maintenance fees paid by it. While the Company will
incur internal staff costs as well as certain outside consulting and other
expenditures related to its year 2000 compliance efforts, the total incremental
expenses incurred are not expected to have a material impact on the Company's
financial condition or results of operations.
The Company's most significant software system includes purchase order
management, open order reporting, open-to-buy, receiving, distribution, basic
stock replenishment, inter-store transfers, inventory and price management,
general ledger and accounts payable functions. This system has been upgraded and
has been certified by the software vendor as year 2000 compliant. In addition,
the Company uses a recently installed materials handling system at its new
distribution center and the vendor of this system has advised the Company that
the system is year 2000 compliant.
With regard to vendors, the Company is currently contacting its
significant merchandise vendors regarding their state of year 2000 readiness.
None of such vendors accounted for more than 9% of the Company's net sales for
fiscal 1997. The Company also uses numerous third-party vendors to provide other
goods and services, as well as office, distribution center and other supplies to
the Company and its stores. There is no assurance that the systems of the
vendors from whom the Company receives merchandise, goods and services will be
timely converted or that any failure on their part to convert would not have an
adverse impact on the Company if a number of such vendors fail to address the
year 2000 issue on a timely basis.
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SAFE HARBOR STATEMENT
The preceding "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. These forward-looking statements
include the plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance of the Company.
The forward-looking statements and associated risks set forth herein may include
or relate to: (i) the planned opening of approximately 35 stores and expansion
or relocation of six stores during the remainder of fiscal 1998; (ii) the
anticipated closing of three stores in the second half of fiscal 1998; (iii) the
$14.0 million estimate of capital expenditures for the remainder of fiscal 1998,
(iv) sufficiency of the Company's working capital, bank line of credit and cash
flows from operating activities for the Company's future operating and capital
requirements and (v) the Company's plans to complete its Year 2000 conversion on
a timely basis and the ability of the Company's vendors to resolve their Year
2000 issues.
The forward-looking statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, the following: (i)
the ability of the Company to locate and obtain favorable store sites, negotiate
acceptable lease terms, and hire and train employees; (ii) management's ability
to manage the Company's planned expansion; (iii) the availability of merchandise
from the Company's vendors and private brand sources; (iv) the effect of
economic conditions; (v) the effect of competitive pressures from other
retailers; and (vi) any unanticipated problems or delays in the completion by
the Company of Year 2000 conversions or the failure of vendors to do so. Results
actually achieved thus may differ materially from expected results in these
statements.
PART II-OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
Item 2 - Changes in Securities and Use of Proceeds - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
a) The 1998 Annual Meeting of the Shareholders of the Company was held on May
21, 1998 and adjourned and reconvened on June 1, 1998 and June 18, 1998 (the
"1998 Annual Meeting").
b) At the 1998 Annual Meeting , Greg H. Weaver, Pearson C. Cummin III, Peter L.
Harris, Julius Jensen III and Sally Frame Kasaks were elected as Directors of
the Company until the Company's next annual meeting of shareholders and until
their successors are elected and qualified.
c) In addition to the election of directors, the shareholders voted on and
approved the following matters at the 1998 Annual Meeting convened on May
21,1998: the Pacific Sunwear of California, Inc. Incentive Compensation Plan and
the Pacific Sunwear of California, Inc. Employee Stock Purchase Plan. The 1998
Annual Meeting was adjourned and reconvened on June 1, 1998 and June 18, 1998 to
vote on an amendment to the Company's 1992 Stock Award Plan increasing the
number of shares authorized under such plan by 400,000 shares. The shareholders
voted on and approved this amendment to the Company's 1992 Stock Award Plan at
the Annual Meeting reconvened on June 18, 1998.
Voting at the 1998 Annual Meeting for the election of directors was as set forth
below. Each of the nominees identified below was elected a director.
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13
NAME VOTES CAST FOR VOTES WITHHELD
- - ---- -------------- --------------
Greg H. Weaver 10,918,311 153,626
Pearson C. Cummin III 10,918,312 153,625
Peter L. Harris 10,918,312 153,625
Julius Jensen III 10,918,311 153,626
Sally Frame Kasaks 10,918,312 153,625
With respect to the approval of the Pacific Sunwear of California, Inc. Employee
Stock Purchase Plan, 10,910,235 votes were cast for approval, 159,674 votes were
cast against, 2,028 votes abstained and there were no broker non- votes.
With respect to the approval of the Pacific Sunwear of California, Inc.
Incentive Compensation Plan, 10,988,715 votes were cast for approval, 80,001
votes were cast against, 3,221 votes abstained and there were no broker non-
votes.
With respect to the approval of the amendment to the Company's 1992 Stock Award
Plan, 6,620,790 votes were cast for approval, 6,182,693 votes were cast against,
4,573 votes abstained and there were no broker non-votes.
Item 5 - Other Information - Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
(10) The Pacific Sunwear of California, Inc. Amended and
Restated 1992 Stock Award Plan
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on form 8-K during the quarter for which
this report is filed.
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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.
Pacific Sunwear of California, Inc.
(Registrant)
Date: September 2, 1998 /s/ GREG H. WEAVER
----------------------------------------
Greg H. Weaver
Chairman of the Board
and Chief Executive Officer
Date: September 2, 1998 /s/ CARL W. WOMACK
----------------------------------------
Carl W. Womack
Senior Vice President, Chief
Financial Officer and Secretary
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
10 The Pacific Sunwear of California, Inc. Amended and
Restated 1992 Stock Award Plan
27 Financial Data Schedule