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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 MAY 6, 2001
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 June 5, 2001, was 32,713,336.
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED MAY 6, 2001
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of May 6, 2001 (unaudited)
and February 4, 2001............................................ 3
Consolidated Statements of Income and Comprehensive Income
(unaudited) for the thirteen weeks ended May 6, 2001 and
April 30, 2000................................................. 4
Consolidated Statements of Cash Flows (unaudited) for
the thirteen weeks ended May 6, 2001 and April 30, 2000......... 5
Notes to Consolidated Financial Statements........................ 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 13
Item 2. Changes in Securities and Use of Proceeds......................... 13
Item 3. Defaults Upon Senior Securities................................... 13
Item 4. Submission of Matters to a Vote of Security Holders............... 13
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.
CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 6, FEBRUARY 4,
2001 2001
------------- -------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 12,616,897 $ 28,971,240
Accounts receivable 5,172,112 2,754,119
Income taxes receivable 170,720 --
Merchandise inventories 90,027,333 82,692,992
Prepaid expenses, includes $7,007,181 and
$6,663,284 of prepaid rent, respectively 9,269,341 10,187,317
Deferred taxes 2,991,765 2,991,765
------------- -------------
Total current assets 120,248,168 127,597,433
PROPERTY AND EQUIPMENT:
Land 12,156,221 12,156,221
Leasehold improvements 89,890,134 83,770,420
Furniture, fixtures and equipment 98,356,906 92,409,132
------------- -------------
200,403,261 188,335,773
Less accumulated depreciation and amortization (57,721,691) (52,553,794)
------------- -------------
Net property and equipment 142,681,570 135,781,979
OTHER ASSETS:
Goodwill, net of accumulated amortization of
$1,374,166 and $1,296,325, respectively 6,725,599 6,803,440
Deferred compensation and other assets (Note 6) 6,751,969 7,269,727
------------- -------------
Total other assets 13,477,568 14,073,167
------------- -------------
Total assets $ 276,407,306 $ 277,452,579
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,684,875 $ 31,631,805
Accrued liabilities (Note 5) 16,211,005 13,251,419
Current portion of capital lease obligations 527,287 488,472
Income taxes payable -- 2,427,165
------------- -------------
Total current liabilities 40,423,167 47,798,861
Long-term capital lease obligations 937,414 1,102,857
Deferred compensation 6,664,336 7,268,377
Other long-term liabilities 28,316 28,316
Deferred rent 7,490,097 7,210,923
Deferred taxes 912,012 912,012
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01; authorized,
5,000,000; none issued and outstanding
Common stock, par value $.01; authorized
75,937,500 shares; issued and outstanding,
32,707,664 and 32,441,435 shares, respectively 327,077 324,414
Additional paid-in capital 86,999,666 81,161,034
Retained earnings 132,625,221 131,645,785
------------- -------------
Total shareholders' equity 219,951,964 213,131,233
------------- -------------
Total liabilities and shareholders' equity $ 276,407,306 $ 277,452,579
============= =============
See accompanying notes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED
---------------------------------
MAY 6, 2001 APRIL 30, 2000
------------ --------------
Net sales $137,697,955 $112,561,439
Cost of goods sold, including buying,
distribution and occupancy costs 95,741,370 74,666,995
------------ ------------
Gross margin 41,956,585 37,894,444
Selling, general and administrative expenses 40,601,981 28,746,097
------------ ------------
Operating income 1,354,604 9,148,347
Interest income 234,832 337,685
------------ ------------
Income before income tax expense 1,589,436 9,486,032
Income tax expense (Note 4) 610,000 3,681,000
------------ ------------
Net income $ 979,436 $ 5,805,032
============ ============
Comprehensive income (Note 1) $ 979,436 $ 5,805,032
============ ============
Net income per share, basic (Note 3) $ 0.03 $ 0.18
------------ ------------
Net income per share, diluted (Note 3) $ 0.03 $ 0.18
------------ ------------
Weighted average shares outstanding, basic (Note 3) 32,518,814 31,542,983
============ ============
Weighted average shares outstanding, diluted (Note 3) 33,197,724 32,604,718
============ ============
See accompanying notes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THIRTEEN WEEKS ENDED
----------------------------------
MAY 6, 2001 APRIL 30, 2000
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 979,436 $ 5,805,032
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,127,941 4,219,299
Loss on disposal of equipment 4,179,336
Change in operating assets and liabilities:
Accounts receivable (2,417,993) (3,094,665)
Merchandise inventories (7,334,341) (8,884,343)
Prepaid expenses 917,976 (44,661)
Deferred compensation and other assets 191,372 1,447,827
Accounts payable (7,946,930) (2,781,760)
Accrued liabilities 2,959,586 (1,519,467)
Income taxes and deferred taxes (343,124) 569,603
Deferred rent 279,174 284,695
------------ ------------
Net cash used in operating activities (2,407,567) (3,998,440)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (17,116,527) (11,741,172)
------------ ------------
Net cash used in investing activities (17,116,527) (11,741,172)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 3,296,379 952,351
Principal payments under capital lease obligations (126,628) --
------------ ------------
Net cash provided by financing activities 3,169,751 952,351
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS: (16,354,343) (14,787,261)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,971,240 32,416,794
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,616,897 $ 17,629,533
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 24,874 $ --
Income taxes $ 953,124 $ 3,111,397
Supplemental disclosures of non-cash transactions: During the thirteen weeks
ended May 6, 2001 and April 30, 2000, the Company recorded an increase to
additional paid-in capital of $2,254,761 and $1,901,013, respectively, related
to tax benefits associated with the exercise of non-qualified stock options. In
addition, during each of the thirteen week periods ended May 6, 2001 and April
30, 2000, the Company recorded an increase to additional paid-in capital of
$290,155 related to the issuance of restricted stock to satisfy certain deferred
compensation liabilities.
See accompanying notes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited except for
the February 4, 2001 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 consolidated financial statements include the accounts of
Pacific Sunwear of California, Inc. and its wholly owned subsidiaries (the
"Company"). All significant intercompany transactions have been eliminated in
consolidation.
The Company's fiscal year is the 52- or 53-week period, which ends on the
Sunday closest to the end of January. "Fiscal 2001" is a 52-week period which
ends February 3, 2002. "Fiscal 2000" was a 53-week period which ended on
February 4, 2001.
In the opinion of management, all adjustments consisting only of normal
recurring entries necessary for a fair presentation have been included. The
preparation of the consolidated 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 consolidated financial statements and reported expenses during the reported
period. Actual results could differ from these estimates. The results of
operations for the thirteen weeks ended May 6, 2001 are not necessarily
indicative of the results that may be expected for the fiscal year ending
February 3, 2002. For further information, refer to the financial statements and
notes thereto as of and for the years ended February 4, 2001, January 30, 2000
and January 31, 1999.
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and marketable securities
with original maturities of three months or less.
NOTE 3 - NET INCOME PER SHARE, BASIC AND DILUTED
The following table summarizes the computation of EPS:
FIRST QUARTER ENDED: MAY 6, 2001 APRIL 30, 2000
-------------------------------------- ---------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- ---------- --------- ---------- ---------- ---------
BASIC EPS: $979,436 32,518,814 $ 0.03 $5,805,032 31,542,983 $ 0.18
DILUTED EPS:
Effect of dilutive stock options 678,910 1,061,735
$979,436 33,197,724 $ 0.03 $5,805,032 32,604,718 $ 0.18
Options to purchase 203,059 and 18,396 shares of common stock in the first
thirteen weeks of fiscal 2001 and the first thirteen weeks of fiscal 2000,
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.
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NOTE 4 - FEDERAL AND STATE INCOME TAX EXPENSE
The combined federal and state income tax expense was calculated using
estimated effective annual tax rates.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MAY 6, FEBRUARY 4,
2001 2001
----------- -----------
Accrued compensation and benefits $ 6,202,912 $ 3,816,279
Accrued gift certificates and store
merchandise credits 2,253,459 2,997,512
Sales tax payable 2,482,550 1,284,465
Reserve for store expansion/relocation
and closing costs 1,313,973 1,489,943
Accrued overage rent 182,560 512,010
Accrued freight costs 1,093,590 544,144
Other accrued liabilities 2,681,961 2,607,066
----------- -----------
$16,211,005 $13,251,419
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NOTE 6 - DEFERRED COMPENSATION AND OTHER ASSETS
Deferred compensation and other assets consist of the following:
MAY 6, FEBRUARY 4,
2001 2001
---------- ----------
Deferred compensation $6,502,118 $6,994,045
Other assets 249,851 275,682
---------- ----------
$6,751,969 $7,269,727
========== ==========
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
RESULTS OF OPERATIONS
The thirteen weeks ended May 6, 2001(first quarter) as compared to the thirteen
weeks ended April 30, 2000 (first quarter)
Net Sales
Net sales increased to $137.7 million for the first thirteen weeks of
fiscal 2001 from $112.6 million for the first thirteen weeks of fiscal 2000, an
increase of $25.1 million, or 22.3%. Of this $25.1 million increase, $21.0
million was attributable to net sales generated by 106 new stores opened in
fiscal 2000 and not yet included in the comparable store base, $3.9 million was
attributable to net sales generated by 42 new stores opened in fiscal 2001 and
not yet included in the comparable store base and $1.8 million was attributable
to other non-comparable store net sales. An additional $2.3 million increase in
net sales was attributable to a one week shift in the fiscal calendar. Fiscal
2000 was a fifty-three week period ended February 4, 2001 and fiscal 2001 will
be a fifty-two week period ending February 3, 2002. The extra week in the prior
fiscal year caused a change in the measurement period used in making
period-to-period comparisons. Offsetting these increases was a $3.4 million
decrease attributable to a 3.3% decrease in comparable store net sales in the
first thirteen weeks of fiscal 2001 compared to the comparable thirteen weeks
ended May 7, 2000. In addition, there was a $0.5 million decrease in net sales
attributable to the closing of 3 stores during fiscal 2000. Other non-comparable
store net sales consist of sales from stores that have been expanded or
relocated and not yet included in the comparable store base as well as
merchandise sold over the internet. Stores are deemed comparable stores on the
first day of the first month following the one-year anniversary of their opening
or expansion/relocation. Retail prices of the Company's merchandise remained
relatively unchanged in the first thirteen weeks of fiscal 2001 compared to the
first thirteen weeks of fiscal 2000 and had no significant impact on the net
sales increase for the first thirteen weeks of fiscal 2001.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased to
$42.0 million for the first thirteen weeks of fiscal 2001 from $37.9 million for
the first thirteen weeks of fiscal 2000, an increase of $4.1 million, or 10.8%.
As a percentage of net sales, gross margin was 30.5% for the first thirteen
weeks of fiscal 2001 compared to 33.7% for the first thirteen weeks of fiscal
2000. Of this 3.2% decrease, occupancy costs increased 1.6% as a percentage of
net sales compared to the first thirteen weeks of fiscal 2000, which was related
to lower comparable store net sales, as well as opening 42 new stores in the
first thirteen weeks of fiscal 2001. Occupancy costs as a percentage of net
sales for new stores are generally higher than for mature stores. In addition,
as a percentage of net sales, net merchandise margins decreased 1.2%, primarily
due to a higher markdown rate, and buying costs increased 0.5%. Offsetting these
increases was a 0.1% decrease in distribution costs as a percentage of net
sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $40.6 million for
the first thirteen weeks of fiscal 2001 from $28.7 million for the first
thirteen weeks of fiscal 2000, an increase of $11.9 million, or 41.5%. As a
percentage of net sales, these expenses increased to 29.5% from 25.5%. Of this
4.0% net increase as a percentage of net sales, 2.8% was due to a one-time
non-cash after tax charge of $2.5 million related to the disposal of most of the
existing materials handling equipment as part of the Company's relocation to a
new distribution facility scheduled for January 2002. The remaining net increase
of 1.2% was primarily due to an increase in store payroll and other selling
expenses, primarily as a result of lower comparable store net sales and opening
42 new stores in the first thirteen weeks of fiscal 2001. Store payroll and
selling expenses as a percentage of net sales for new stores are generally
higher than for mature stores.
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Income Tax Expense
Income tax expense was $0.6 million for the first thirteen weeks of fiscal
2001 compared to $3.7 million for the first thirteen weeks of fiscal 2000. The
effective income tax rate was 38.4% for the first thirteen weeks of fiscal 2001
as compared to 38.8% for the first thirteen weeks of fiscal 2000.
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. In
December 2000, the Company purchased an undeveloped 19-acre parcel of land in
close proximity to its current corporate office and distribution center for
$12.2 million. The Company has begun construction of a new corporate office and
distribution center on this property, which it anticipates will be ready for
occupancy in January 2002. The Company believes the new facilities will be
capable of servicing at least 1,200 stores. The Company intends to sublease its
existing corporate offices and distribution center for the remainder of the
lease.
Net cash used in operating activities for the first thirteen weeks of
fiscal 2001 was $2.4 million as compared to $4.0 million for the first thirteen
weeks of fiscal 2000. This $1.6 million decrease in cash used was primarily
attributable to an increase in accrued liabilities of $4.5 million, a $4.2
million reserve for the disposal of most of the existing materials handling
equipment in the Company's current distribution center, an increase in
depreciation and amortization of $1.9 million, a decrease of $0.9 million in
prepaid expenses and a $0.7 million decrease in accounts receivable. These were
offset by a decrease in net income of $4.8 million, an increase of inventories
net of accounts payable of $3.6 million, an increase in deferred compensation
and other assets of $1.3 million, and a decrease in accrued income taxes and
deferred income taxes of $0.9 million. Working capital at May 6, 2001 was
unchanged at $79.8 million compared to $79.8 million at February 4, 2001.
Inventories at May 6, 2001 were $90.0 million compared to $82.7 million at
February 4, 2001, an increase of $7.3 million. This increase was primarily
related to opening 42 new stores and expanding/relocating 14 stores with in
excess of 50% larger average square footage than their previous locations. The
Company's average store inventories vary throughout the year and increase in
advance of the peak selling periods of spring break, back-to-school and
Christmas.
Net cash used in investing activities was $17.1 million for property and
equipment for the first thirteen weeks of fiscal 2001 compared to $11.7 million
for property and equipment for the first thirteen weeks of fiscal 2000. Of the
$17.1 million of net cash used for investment in property and equipment in the
first thirteen weeks of fiscal 2001, $13.4 million was used for new and existing
stores, $2.6 million was used for costs related to the construction of the new
corporate offices and distribution center and $1.1 million was used for other
capital expenditures including computer hardware and software.
Net cash provided by financing activities, primarily proceeds received from
the exercise of stock options, for the first thirteen weeks of fiscal 2001 was
$3.2 million compared to $1.0 million for the first thirteen weeks of fiscal
2000.
The Company has a credit facility with a bank, which provides for a $30.0
million line of credit (the "Credit Line") to be used for cash advances,
commercial letters of credit and shipside bonds. The Credit Line expires March
31, 2004. The credit facility also provides for an additional $25.0 million line
of credit (the "Construction Facility") that can be used to finance the
construction of the Company's new corporate offices and distribution center.
Upon completion of the new facilities, the Company can, at its option, convert
any outstanding borrowings under the Construction Facility to a term loan.
Interest on each of the credit facilities is payable monthly at the bank's prime
rate (7.5% at May 6, 2001). At May 6, 2001, the Company had $14.1 million in
letters of credit outstanding and no other borrowings under the Credit Line or
Construction Facility. 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 May 6, 2001, the Company
was in compliance with all of its covenants.
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The Company plans to open approximately 83 new stores, of which
approximately 54 will be PacSun stores, approximately 13 will be PacSun Outlet
stores and approximately 16 will be d.e.m.o. stores during the remainder of
fiscal 2001. The Company also plans to expand or relocate approximately 26
existing smaller stores during the remainder of fiscal 2001. The Company
estimates that capital expenditures during the remainder of fiscal 2001 will be
approximately $73 million, of which approximately $37 million will be for
opening, expanding, and relocating stores, approximately $33 million will be to
construct a new corporate office and distribution center and install a materials
handling system and approximately $3 million will be used for other capital
expenditures, including computer hardware and software.
The Company reviews the operating performance of its stores on an ongoing
basis to determine which stores, if any, to expand, relocate or close. The
Company closed three stores in fiscal 2000 and anticipates closing approximately
three to five stores in fiscal 2001.
Management believes that the Company's working capital, credit facility and
cash flows from operating activities will be sufficient to meet the Company's
operating and capital expenditure requirements through the end of fiscal 2001.
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
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 each of fiscal 2000 and fiscal 1999,
excluding sales generated by new and relocated/expanded stores, the Christmas
and back-to-school periods together accounted for approximately 33% of the
Company's annual net sales and a higher percentage of the Company's operating
income. In fiscal 2000, excluding net sales generated by new and
relocated/expanded stores, approximately 46% of the Company's annual net sales
occurred in the first half of the fiscal year and 54% 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This report on Form 10-Q contains "forward-looking statements" within the
meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. The
Company is hereby providing cautionary statements identifying important factors
that could cause the Company's actual results to differ materially from those
projected in forward-looking statements of the Company herein. Any statements
that express, or involve discussions as to expectations, beliefs, plans,
objectives, assumptions, future events or performance (often, but not always
through the use of words or phrases such as "will result," "expects to," "will
continue," "anticipates," "plans," "intends," "estimated," "projects" and
"outlook") are not historical facts and may be forward-looking and, accordingly,
such statements involve estimates, assumptions and uncertainties which could
cause actual results to differ materially from those expressed in the
forward-looking statements. Such uncertainties include, among others, the
following factors:
MERCHANDISING/FASHION SENSITIVITY. The Company's success is largely
dependent upon its ability to gauge the fashion tastes of its customers and to
provide merchandise that satisfies customer demand in a timely manner. The
Company's failure to anticipate, identify or react appropriately in a timely
manner to changes in fashion trends could have a material adverse effect on the
Company's business, financial condition and results of operations. Misjudgments
or unanticipated fashion misjudgments could have a material adverse effect on
the Company's image with its customers.
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PRIVATE LABEL MERCHANDISE. Sales from private label merchandise accounted
for approximately 36% of net sales in each of fiscal 2000 and fiscal 1999. The
Company may increase the percentage of net sales in private label merchandise in
the future, although there can be no assurance that the Company will be able to
achieve increases in private label merchandise sales as a percentage of net
sales. Because the Company's private label merchandise generally carries higher
merchandise margins than its other merchandise, the Company's failure to
anticipate, identify and react in a timely manner to fashion trends with its
private label merchandise, particularly if the percentage of net sales derived
from private label merchandise increases, may have a material adverse affect on
the Company's business, financial condition and results of operations.
FLUCTUATIONS IN COMPARABLE STORE NET SALES RESULTS. The Company's
comparable store net sales results have fluctuated significantly in the past, on
a monthly, quarterly and annual basis, and are expected to continue to fluctuate
in the future. A variety of factors affect the Company's comparable store net
sales results, including changes in fashion trends, changes in the Company's
merchandise mix, calendar shifts of holiday periods, actions by competitors,
weather conditions and general economic conditions. The Company's comparable
store net sales results for any particular fiscal month, fiscal quarter or
fiscal year in the future may decrease. As a result of these or other factors
the Company's future comparable store net sales results are likely to have a
significant effect on the market price of the Company's common stock.
EXPANSION AND MANAGEMENT OF GROWTH. PacSun's continued growth depends to a
significant degree on its ability to open and operate stores on a profitable
basis and on management's ability to manage the Company's planned expansion.
During the remainder of fiscal 2001, the Company plans to open approximately 83
new stores, of which approximately 54 will be PacSun stores, approximately 13
will be PacSun Outlet stores and approximately 16 will be d.e.m.o. stores. The
Company's planned expansion is dependant upon a number of factors, including the
ability of the Company 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. Factors beyond the
Company's control may also affect the Company's ability to expand, including
general economic and business conditions affecting consumer spending. There can
be no assurance that the Company will achieve its planned expansion or that such
expansion will be profitable. As the Company's operations grow, there could be
increasing strain on the Company's resources, and the Company could experience
difficulties relating to a variety of operational matters, including hiring,
training and managing an increasing number of employees, having sufficient
working capital, bank line of credit and cash flow from operating activities for
the Company's future operating and capital requirements, obtaining sufficient
quantities of merchandise from its preferred vendors, obtaining sufficient
materials and contract manufacturers to produce its private brand products and
enhancing its distribution, financial and operating systems. There can be no
assurance that the Company will be able to manage its growth effectively. Any
failure to manage growth could have a material adverse effect on the Company's
business, financial condition and results of operations.
RELIANCE ON KEY PERSONNEL. The continued success of the Company is
dependant to a significant degree upon the services of its key personnel,
particularly its executive officers. The loss of the services of any member of
senior management could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's success
in the future will also be dependent upon the Company's ability to attract and
retain qualified personnel. The Company's inability to attract and retain
qualified personnel in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON SINGLE DISTRIBUTION FACILITY AND PLANNED RELOCATION. The
Company's distribution functions for all of its stores and for Internet sales
are handled from a single, leased facility in Anaheim, California. The Company
intends to construct a new corporate office and distribution center in Anaheim,
California, which it anticipates will be ready for occupancy in January 2002, to
handle distribution functions for all of its stores as well as shipments of
merchandise sold over the Internet. Any significant interruption in the
operation of the distribution facility due to natural disasters, accidents,
system failures or other unforeseen causes would have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company's new corporate office and distribution
center will be completed by January 2002, or that it will be adequate to support
the Company's future growth. The Company will incur significant costs and
expenditures to build its new facility, which could have an impact on the
Company's financial condition and results of operations. The actual cost of
completing this facility may be greater than the Company's current estimates.
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STORES IN THE D.E.M.O. FORMAT. The Company opened its first d.e.m.o. store
in April of fiscal 1998 and at the end of fiscal 2000 operated 80 d.e.m.o.
stores. There can be no assurance that the Company's d.e.m.o. stores will
achieve sales and profitability levels that justify the Company's investment in
this new retail format. Expansion of the d.e.m.o. format involves risks that
could have a material adverse effect on the Company, including (i) diversion of
management's attention from the Company's core business, (ii) difficulties with
hiring, retention and training of key personnel for the d.e.m.o. stores, (iii)
risks associated with new vendors and (iv) difficulties with locating and
obtaining favorable store sites and negotiating acceptable lease terms.
INTERNET SALES. The Company began selling merchandise over the internet in
June 1999. The Company's internet operations are subject to numerous risks,
including unanticipated operating problems, reliance on third party computer
hardware and software providers, system failures and the need to invest in
additional computer systems. There can be no assurance that the internet
operations will achieve sales and profitability levels that justify the
Company's investment therein. The internet operations also involve other risks
that could have a material adverse effect on the Company, including (i) the
failure to reach profitability within the foreseeable future, (ii) difficulties
with hiring, retention and training of key personnel to conduct the Company's
internet operations, (iii) diversion of sales from PacSun stores, (iv) rapid
technological change, (v) liability for online content and (vi) risks related to
the failure of the computer systems that operate the web site and its related
support systems, including computer viruses, telecommunication failures and
electronic break-ins and similar disruptions. In addition, the internet
operations involve risks which are beyond the Company's control that could have
a material adverse effect on the Company, including (i) price competition
involving the items the Company intends to sell, (ii) the entry of the Company's
vendors into the internet business, in direct competition with the Company,
(iii) the level of merchandise returns experienced by the Company, (iv)
governmental regulation, (v) online security breaches, (vi) credit card fraud
and (vii) competition and general economic conditions and economic conditions
specific to the internet, online commerce and the apparel industry.
VOLATILITY OF STOCK PRICE. The market price of the Company's common stock
has fluctuated substantially in the past and there can be no assurance that the
market price of the common stock will not continue to fluctuate significantly.
Future announcements or management discussions concerning the Company or its
competitors, internet sales results, d.e.m.o. sales and profitability results,
quarterly variations in operating results or comparable store net sales, changes
in earnings estimates by analysts or changes in accounting policies, among other
factors, could cause the market price of the common stock to fluctuate
substantially. In addition, stock markets have experienced extreme price and
volume volatility in recent years. This volatility has had a substantial effect
on the market prices of securities of many smaller public companies for reasons
frequently unrelated to the operating performance of the specific companies.
*************
The Company cautions that the risk factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Further, management cannot assess the impact of each such factor on the
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent the Company borrowed under its credit facility, the Company
would be exposed to market risk related to changes in interest rates. At May 6,
2001, no borrowings were outstanding under the Company's credit facility. A
discussion of the Company's accounting policies for financial instruments and
further disclosures relating to financial instruments is included in the Summary
of Significant Accounting Policies and Nature of Business in the Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
February 4, 2001. The Company is not a party with respect to derivative
financial instruments.
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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 - Not Applicable
Item 5 - Other Information - Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Business Loan Agreement, dated as of April 3, 2001, between the
Company and Bank of America N.A.
10.2 First Amendment to Business Loan Agreement, dated as of April 17,
2001, between the Company and Bank of America N.A.
10.3 Master Continuing and Unconditional Guaranty to Bank of America
N.A. from Pacific Sunwear Stores Corp. and ShopPacSun.com Corp.
(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: June 6, 2001 /s/ GREG H. WEAVER
-----------------------------------
Greg H. Weaver
Chairman of the Board
and Chief Executive Officer
Date: June 6, 2001 /s/ CARL W. WOMACK
-----------------------------------
Carl W. Womack
Senior Vice President, Chief
Financial Officer and Secretary
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Business Loan Agreement, dated as of April 3, 2001, between the
Company and Bank of America N.A.
10.2 First Amendment to Business Loan Agreement, dated as of April 17,
2001, between the Company and Bank of America N.A.
10.3 Master Continuing and Unconditional Guaranty to Bank of America
N.A. from Pacific Sunwear Stores Corp. and ShopPacSun.com Corp.