Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 2, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21296
PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
California 95-3759463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3450 E. Miraloma Avenue, Anaheim, California 92806
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 414-4000
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K | |.
The aggregate market value of Common Stock held by non-affiliates of the
registrant on March 26, 2002 was approximately $749 million. All outstanding
shares of voting stock, except for shares held by executive officers and members
of the Board of Directors and their affiliates, are deemed to be held by
non-affiliates.
On March 26, 2002 the registrant had 32,809,602 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the 2002 Annual Meeting of Shareholders, to be filed with the
Commission no later than 120 days after the end of the registrant's fiscal year
covered by this Form 10-K.
PART I
ITEM 1. BUSINESS
Pacific Sunwear of California, Inc. and its wholly owned subsidiaries (the
"Company" or the "Registrant") is a leading specialty retailer of everyday
casual apparel, accessories and footwear designed to meet the needs of active
teens and young adults. The Company operates three nationwide, primarily
mall-based, chains of retail stores under the names "Pacific Sunwear" (also
known as "PacSun"), "Pacific Sunwear (PacSun) Outlet," and "d.e.m.o." PacSun and
PacSun Outlet stores specialize in board-sport inspired casual apparel, footwear
and related accessories catering to teenagers and young adults. d.e.m.o.
specializes in hip-hop music inspired casual apparel and related accessories
catering to teenagers and young adults. In addition, the Company operates a web
site through a wholly owned subsidiary that sells PacSun merchandise online,
provides content and community for its target customers and provides information
about the Company.
As of the year ended February 2, 2002 ("fiscal 2001"), the Company operated 549
PacSun stores, 68 PacSun Outlet stores and 101 d.e.m.o. stores for a total of
718 stores in 48 states and Puerto Rico. As of March 23, 2002, the Company
operated 564 PacSun stores, 68 PacSun Outlet stores and 103 d.e.m.o. stores for
a total of 735 stores in 48 states and Puerto Rico.
The Company, a California corporation, was incorporated in August 1982.
Store Formats
Pacific Sunwear ("PacSun") stores - The Company's original and primary store
format, located primarily in regional malls, offers a selection of board-sport
inspired casual apparel, footwear and related accessories to satisfy the casual
wardrobe needs of its customers. PacSun targets customers between the ages of 12
and 22. Within each merchandise classification, PacSun stores offer a broad
selection, with the goal of being viewed by its customers as the dominant
retailer in its niche. PacSun stores average approximately 3,300 square feet in
size. The Company currently seeks locations of approximately 4,000 square feet
for its new PacSun stores. At the end of fiscal 2001, the Company operated 549
PacSun stores.
Pacific Sunwear ("PacSun") Outlet - These stores average approximately 4,000
square feet and are located in value-oriented outlet malls, both open-air and
enclosed. This format carries a selection similar to the PacSun mall stores,
with an emphasis on value pricing. The merchandise offerings at PacSun Outlets
consist primarily of off-price branded merchandise, private brand merchandise
and a smaller selection of full-priced branded merchandise. At the end of fiscal
2001, the Company operated 68 PacSun Outlet stores.
d.e.m.o. - d.e.m.o. stores, located in regional malls, average approximately
2,400 square feet and offer a broad assortment of hip-hop music inspired casual
apparel and related accessories. d.e.m.o. targets customers between the ages of
16 and 24. d.e.m.o. stores have no merchandise overlap with PacSun or PacSun
Outlet stores, and many d.e.m.o. stores are located in the same mall as a PacSun
store. At the end of fiscal 2001, the Company operated 101 d.e.m.o. stores.
Strategy
The Company's mission is to be the leading lifestyle retailer of casual fashion
apparel, footwear and accessories for teens. The Company's target customers are
young men and women between the ages of 12 and 24. The Company believes its
customers want to stay current with or ahead of fashion trends and continually
seek newness in their everyday wear. The Company offers a complete wardrobe
selection representing fashion trends considered timely by the Company's target
customers. The key elements of the Company's strategy are as follows:
Offer Popular Name Brands Supplemented by Private Brands. In each of its store
formats, the Company offers a carefully edited selection of popular name brands
supplemented by private brands, with the goal of
2
being seen by its teenage and young adult customers as the source for wardrobe
choices appropriate to their lifestyle. The Company believes that its
merchandising strategy differentiates its stores from its competitors who may
offer 100% private labels or greater than 80% name brands or seek to serve a
wider customer base and age range. See "--Merchandising."
Promote the PacSun and d.e.m.o. Brand Images. The Company promotes the PacSun
and d.e.m.o. brands through national print advertising in major magazines that
target teens and young adults. In the past, the Company has sponsored lifestyle
events consistent with the PacSun brand image, including the Winter and Summer X
Games, and has conducted PacSun television advertising campaigns. The Company's
current promotional efforts are focused exclusively on national print
advertising, a trend that we expect to continue through the year ended February
1, 2003 ("fiscal 2002"). We expect that this will reduce our advertising
expenses as a percentage of sales from approximately 1.9% to approximately 1.2%.
Actively Manage Merchandise Trends. The Company does not attempt to dictate
fashion, but instead devotes considerable effort to identifying emerging fashion
trends and brand names. By using focus groups, listening to its customers and
store employees, monitoring sell-through trends, testing small quantities of new
merchandise in a limited number of stores, and maintaining domestic and
international sourcing relationships, the Company enhances its ability to
identify and respond to emerging fashion trends and brand names as well as
develop new private brand styles in order to capitalize on existing fashion
trends.
Maintain Strong Vendor Relationships. The Company views its vendor relationships
as important to its success, and promotes frequent personal interaction with its
vendors. The Company believes many of its vendors view PacSun stores, PacSun
Outlets and d.e.m.o. stores as important distribution channels, in many cases as
one of their largest customers, which enhance their own brand image in the eyes
of the customer.
Provide Attentive Customer Service. The Company is committed to offering
courteous, professional and nonintrusive customer service. The Company strives
to give its young customers the same level of respect that is generally given to
adult customers at other retail stores, and to provide friendly and informed
customer service for parents. Responding to the expressed preferences of its
customers, the Company trains its employees to greet each customer, to give
prompt and courteous assistance when asked, and to thank customers after
purchases are made, but to refrain from giving extensive unsolicited advice.
PacSun and PacSun Outlet stores display large assortments of name brands and
private brands, merchandised by category. d.e.m.o. merchandise is displayed by
brand together with vendor logo signage. Additionally, the stores provide a
friendly and social atmosphere for teens with appropriate background music,
while also providing a comfortable environment for parents and other adults. The
Company believes the combination of its attentive customer service and its
unique store environments is key to its success.
Store Growth Strategy. The Company intends to continue its store growth through
the opening of new stores under its three formats. During fiscal 2002, the
Company plans to open approximately 75 new stores among its three formats. The
Company also plans to expand or relocate approximately 30 existing smaller
PacSun stores during fiscal 2002. See "--Expansion."
Internet Strategy. The Company began selling merchandise over the internet in
June 1999 at www.pacsun.com. The website offers a selection of the same
merchandise carried in the PacSun stores. In addition, the website offers
content including videos, contests, advice columns and lifestyle articles. The
Company maintains a substantial database of e-mail names that it uses for
marketing purposes. The Company also advertises its website as a shopping
destination on major internet portals as well as markets its website in its
PacSun stores using in-store signage, merchandise bags and receipts. The
Company's internet strategy benefits from the Company's nationwide retail
presence of its stores and the strong brand recognition of PacSun, a loyal and
internet-savvy customer base, the participation of PacSun's key brands and the
ability to return merchandise to PacSun stores. In addition, the Company
believes that its strong financial position and proven merchandising track
record gives it competitive advantage over start-up companies that sell
merchandise solely over the internet.
3
MERCHANDISING
Merchandise
PacSun, PacSun Outlet and d.e.m.o. stores offer a broad selection of casual
apparel and related accessories for young men ("guys") and young women ("girls")
with the goal of being viewed by their customers as the dominant retailer for
their lifestyle.
The following table sets forth the Company's merchandise assortment as a
percentage of net sales for the periods shown:
Fiscal Year Ended
--------------------------
Feb. 2, Feb. 4, Jan. 30,
2002 2001 2000
------- ------- --------
Guys apparel 46% 50% 54%
Girls apparel 28 26 25
Accessories 17 16 13
Footwear 9 8 8
------- ------- --------
Total 100% 100% 100%
======= ======= ========
The Company offers many name brands best known by its target customers. PacSun
offers a wide selection of well-known board-sport inspired name brands, such as
Quiksilver, Billabong and Hurley. d.e.m.o. offers well-known name brands sought
by its target customers, such as Sean John, J. Lo and Phat Farm/Baby Phat. In
addition, the Company continuously adds and supports up-and-coming new brands in
both PacSun and d.e.m.o. Quiksilver accounted for approximately 11% of total net
sales during fiscal 2001. No other vendor accounted for more than 7% of total
net sales during fiscal 2001.
The Company supplements its name brand offerings with private brands. The
Company believes that offering high-quality private brands contributes to its
status as a key fashion resource for the casual lifestyle and differentiates the
Company from its competitors. In addition, private brands provide the Company an
opportunity to broaden its customer base by providing merchandise of comparable
quality to brand name merchandise at lower prices, to capitalize on emerging
fashion trends when branded merchandise is not available in sufficient
quantities, and to exercise a greater degree of control over the flow of its
merchandise. The Company's private brand merchandise is designed internally by a
product design group in collaboration with the Company's buying staff. The
sourcing group oversees the manufacture and delivery of the private brand
merchandise, with manufacturing done on a contract basis domestically, in Asia
and in Mexico. Private brand merchandise sales accounted for 34% and 36% of the
Company's net sales in fiscal 2001 and fiscal 2000, respectively.
Vendor and Contract Manufacturer Relationships
The Company views its vendor relationships as important to its success and
promotes frequent personal interaction with its vendors. The Company believes
many of its vendors view PacSun stores, PacSun Outlets and d.e.m.o. stores as
important distribution channels, in many cases as one of their largest
customers, which enhance their own brand image in the eyes of the customer. The
Company's vendor base currently includes more than 250 vendors. The Company
maintains strong and interactive relationships with its vendors, many of whose
philosophies of controlled distribution and merchandise development are
consistent with the Company's strategy. The Company generally purchases
merchandise from vendors who prefer distributing through specialty retailers,
small boutiques and, in some cases, better department stores, rather than
distributing their merchandise through mass-market channels.
To encourage the design and development of new merchandise, the Company
frequently shares ideas regarding fashion trends and merchandise sell-through
information with its vendors. The Company also suggests merchandise design and
fabrication to certain vendors. The Company encourages the development of new
vendor relationships by attending trade shows and through its weekly "Open-house
4
Wednesday" program, during which new vendors are encouraged to make
presentations of their merchandise to the Company's buying staff. A number of
the Company's key vendors have been introduced to the Company through this
program.
The Company has cultivated its private brand sources with a view toward
high-quality merchandise, production reliability and consistency of fit. The
Company sources its private brand merchandise both domestically and
internationally in order to benefit from the lower costs associated with foreign
manufacturing and the shorter lead times associated with domestic manufacturing.
The Company's business is dependent upon its ability to offer current season,
brand name apparel at competitive prices and in adequate quantities. Some of the
Company's vendors have limited resources, production capacities and operating
histories and some have intentionally limited the distribution of their
merchandise. The inability or unwillingness on the part of key vendors to expand
their operations to keep pace with the anticipated growth of PacSun stores,
PacSun Outlets and d.e.m.o. stores, or the loss of one or more key vendors or
private brand sources for any reason, could have a material adverse effect on
the Company's business.
Purchasing, Allocation and Distribution
The Company's merchandising department oversees the purchasing and allocation of
the Company's merchandise. The Company's buyers are responsible for reviewing
branded merchandise lines from new and existing vendors, selecting branded and
private label merchandise styles in quantities, colors and sizes to meet
inventory levels established by management and identifying emerging fashion
trends. The Company's planning and allocation department is responsible for
management of inventory levels by store and by class, allocation of merchandise
to stores and inventory replenishment based upon information generated by the
Company's merchandise management information systems. These systems provide the
planning department with current inventory levels at each store and for the
Company as a whole, as well as current selling history within each store by
merchandise classification and by style. See "--Information Systems."
All merchandise is delivered to the Company's distribution facility, where it is
inspected, received into the Company's computer system, allocated to stores,
ticketed when necessary, and boxed for distribution to the Company's stores.
Each store is typically shipped merchandise three to five times a week,
providing it with a steady flow of new merchandise. The Company uses a national
and a regional small package carrier to ship merchandise to its stores and
occasionally uses airfreight during peak selling periods.
In January 2002, the Company completed construction of and occupied its new
corporate offices and distribution center located in Anaheim, California. The
Company believes the new facilities are capable of servicing at least 1,200
stores.
5
STORES
Locations
The Company has expanded from 11 stores in California at the end of fiscal 1986
to 718 stores in 48 states and Puerto Rico at the end of fiscal 2001. The table
below sets forth the number of stores located in each state as of the end of
fiscal 2001:
STATE PacSun PacSun d.e.m.o Total
- --------------------------------------------------------------------------------
Alabama 8 2 10
- --------------------------------------------------------------------------------
Alaska 2 2
- --------------------------------------------------------------------------------
Arizona 11 2 2 15
- --------------------------------------------------------------------------------
California 62 12 19 93
- --------------------------------------------------------------------------------
Colorado 8 1 2 11
- --------------------------------------------------------------------------------
Connecticut 9 1 10
- --------------------------------------------------------------------------------
Delaware 3 1 4
- --------------------------------------------------------------------------------
Florida 43 7 11 61
- --------------------------------------------------------------------------------
Georgia 15 1 4 20
- --------------------------------------------------------------------------------
Hawaii 5 1 6
- --------------------------------------------------------------------------------
Idaho 3 3
- --------------------------------------------------------------------------------
Illinois 18 1 5 24
- --------------------------------------------------------------------------------
Indiana 14 1 3 18
- --------------------------------------------------------------------------------
Iowa 7 7
- --------------------------------------------------------------------------------
Kansas 3 3
- --------------------------------------------------------------------------------
Kentucky 6 1 7
- --------------------------------------------------------------------------------
Louisiana 7 2 9
- --------------------------------------------------------------------------------
Maine 2 2 4
- --------------------------------------------------------------------------------
Maryland 13 1 5 19
- --------------------------------------------------------------------------------
Massachusetts 17 1 3 21
- --------------------------------------------------------------------------------
Michigan 21 3 4 28
- --------------------------------------------------------------------------------
Minnesota 11 1 1 13
- --------------------------------------------------------------------------------
Mississippi 2 2
- --------------------------------------------------------------------------------
Missouri 9 1 10
- --------------------------------------------------------------------------------
Montana 3
- --------------------------------------------------------------------------------
Nebraska 3 3
- --------------------------------------------------------------------------------
Nevada 4 1 5
- --------------------------------------------------------------------------------
New Hampshire 4 1 5
- --------------------------------------------------------------------------------
New Jersey 20 2 6 28
- --------------------------------------------------------------------------------
New Mexico 2 2
- --------------------------------------------------------------------------------
New York 24 6 6 36
- --------------------------------------------------------------------------------
North Carolina 11 1 3 15
- --------------------------------------------------------------------------------
North Dakota 3 3
- --------------------------------------------------------------------------------
Ohio 29 2 5 36
- --------------------------------------------------------------------------------
Oklahoma 4 4
- --------------------------------------------------------------------------------
Oregon 5 2 7
- --------------------------------------------------------------------------------
Pennsylvania 37 4 7 48
- --------------------------------------------------------------------------------
Rhode Island 1 1
- --------------------------------------------------------------------------------
South Carolina 5 2 3 10
- --------------------------------------------------------------------------------
South Dakota 2 2
- --------------------------------------------------------------------------------
Tennessee 9 2 11
- --------------------------------------------------------------------------------
Texas 32 3 5 40
- --------------------------------------------------------------------------------
Utah 8 1 9
- --------------------------------------------------------------------------------
Vermont 2 1 3
- --------------------------------------------------------------------------------
Virginia 13 2 1 16
- --------------------------------------------------------------------------------
Washington 10 10
- --------------------------------------------------------------------------------
West Virginia 5 5
- --------------------------------------------------------------------------------
Wisconsin 10 10
- --------------------------------------------------------------------------------
Puerto Rico 4 1 1 6
- --------------------------------------------------------------------------------
Total 549 68 101 718
==================================================
Store Expansion
During fiscal 2001, the Company opened 129 net new stores, which included 87
PacSun stores, 21 PacSun Outlet stores and 21 d.e.m.o. stores. In addition, the
Company expanded or relocated 35 PacSun stores during fiscal 2001. During fiscal
2002, the Company plans to open approximately 75 net new stores, of which
approximately 58 will be PacSun stores, approximately seven will be PacSun
Outlet stores and approximately 10 will be d.e.m.o. stores. The Company also
plans to expand or relocate approximately 30 existing smaller PacSun stores
during fiscal 2002. The Company has identified regional malls in major
metropolitan areas nationwide and in Puerto Rico for potential new stores
subject to financial return and site selection criteria. As of the date of this
filing, substantially all of the leases for the approximately 75 stores the
Company expects to open in fiscal 2002 have been executed.
The Company's site selection strategy is to locate its stores primarily in
regional malls serving markets that meet its demographic criteria, including
average household income and population density. The Company
6
also considers mall sales per square foot, the performance of other retail
tenants serving teens and young adult customers, anchor tenants and occupancy
costs. The Company currently seeks PacSun store locations of approximately 4,000
square feet and d.e.m.o. store locations of approximately 2,000-2,400 square
feet primarily in high-traffic locations within regional malls. The Company
currently seeks PacSun Outlet store locations of approximately 4,000 square feet
primarily in high-traffic value-oriented outlet malls, both open-air and
enclosed.
The Company's average cost to build a new store, across all formats, including
leasehold improvements, furniture and fixtures and landlord allowances, was
approximately $239,000 and $236,000 in fiscal 2001 and fiscal 2000,
respectively. The average cost of expanding or relocating a store was
approximately $360,000 and $269,000 in fiscal 2001 and fiscal 2000,
respectively. The increase in the average cost of expanding or relocating a
store in fiscal 2001 as compared to fiscal 2000 was primarily due to receiving
fewer and lower landlord allowances in fiscal 2001. The average total cost to
build new stores and relocate or expand stores will vary in the future,
depending on various factors, including square footage, changes in store design,
local construction costs and landlord allowances. The Company's average initial
inventory for new stores opened in fiscal 2001 was as follows: approximately
$128,000 for PacSun stores, approximately $124,000 for PacSun Outlet stores and
approximately $109,000 for d.e.m.o. stores. The Company's initial inventory for
new stores will vary in the future depending on various factors, including store
concept and square footage.
The Company's continued growth depends on its ability to open and operate stores
on a profitable basis. The Company's ability to expand successfully will be
dependent upon a number of factors, including sufficient demand for the
Company's merchandise in its existing and new markets and the ability of the
Company to locate and obtain favorable store sites, negotiate acceptable lease
terms, obtain adequate merchandise supply and hire and train qualified
management and other employees.
Store Operations
Each store has a manager, co-manager, assistant manager, and approximately four
to ten part-time sales associates. Approximately seven to twelve stores are
managed by a district manager and approximately six to nine district managers
report to a regional manager. Regional, district, store managers and store
co-managers participate in a bonus program based on achieving predetermined
levels of sales and inventory shrinkage. Company stores are open during mall
shopping hours. The Company has well-established store operating policies and
procedures and an extensive four-week in-store training program for new store
managers and co-managers. The Company places great emphasis on its loss
prevention program in order to control inventory shrinkage. This program
includes the installation of electronic article surveillance systems in all
stores, education of store personnel on loss prevention, and monitoring of
returns, voids and employee sales. Since fiscal 1991, the Company has achieved
an inventory shrinkage rate of 1.3% or less of net sales in each fiscal year.
INFORMATION SYSTEMS
The Company's merchandise, financial and store computer systems are fully
integrated and operate using primarily IBM equipment. The software, which is
primarily provided by one of the largest vendors to the retail trade, is
regularly upgraded or modified as needs arise or change. The Company's
information systems provide management, buyers and planners comprehensive data
that helps them identify emerging trends and manage inventories. The systems
include purchase order management, electronic data interchange, open order
reporting, open-to-buy, receiving, distribution, merchandise allocation, basic
stock replenishment, inter-store transfers, inventory and price management.
Weekly best/worst item sales reports are used by management to enhance the
timeliness and effectiveness of purchasing and markdown decisions. Merchandise
purchases are based on planned sales and inventories and are frequently revised
to reflect changes in demand for a particular item or classification.
All of the Company's stores have a point-of-sale system operating on IBM
in-store computer hardware. The system features bar-coded ticket scanning,
automatic price look-up, dial-out check and credit authorization and automatic
nightly transmittal of data between the store and the Company's corporate
7
offices. Each of the regional and district managers uses a laptop computer and
can instantly access Company-wide information, including actual and budgeted
sales by store, district and region, transaction information and payroll data.
The Company believes its management information systems are adequate to support
its planned expansion at least through fiscal 2002.
COMPETITION
The retail apparel, footwear and accessory business is highly competitive.
PacSun stores, PacSun Outlets and d.e.m.o. stores compete on a national level
with certain leading department stores and national chains that offer the same
or similar brands and styles of merchandise. The Company's stores also compete
with a wide variety of regional and local specialty stores, such as Abercrombie
and Fitch, American Eagle Outfitters, The Gap, Old Navy and Wet Seal. Many of
the Company's competitors are larger and have significantly greater resources
than the Company. The Company believes the principal competitive factors in its
industry are fashion, merchandise assortment, quality, price, store location,
environment and customer service.
TRADEMARKS AND SERVICE MARKS
The Company is the owner in the United States of the marks "Pacific Sunwear of
California," "PacSun," "Pacific Sunwear," and "d.e.m.o." The Company also uses
and has registered, or has a pending registration on a number of other marks.
The Company has also registered many of its marks outside of the United States.
The Company believes its rights in its marks are important to its business and
the Company intends to maintain its marks and the related registrations.
EMPLOYEES
At February 2, 2002, the Company had approximately 8,100 employees, of whom
approximately 5,400 were part-time. Of the total employees, approximately 400
were employed at the Company's corporate headquarters and distribution center. A
significant number of seasonal employees are hired during peak selling periods.
None of the Company's employees is represented by a labor union, and the Company
believes that its relationships with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and titles of persons serving as executive
officers of the Company as of March 23, 2002.
EXECUTIVE OFFICERS: AGE POSITION
- ------------------- --- --------
Greg H. Weaver 48 Chairman of the Board and Chief Executive
Officer
Timothy M. Harmon 50 President and Chief Merchandising Officer
Carl W. Womack 50 Senior Vice President, Chief Financial
Officer and Secretary
Set forth below is certain information with respect to executive officers of the
Company.
Greg H. Weaver, who joined the Company in July 1987, has served as Chairman of
the Board and Chief Executive Officer since November 1997. He served as
President and Chief Executive Officer from October 1996 to November 1997 and as
a director since February 1996. Prior to October 1996, Mr. Weaver served in
various senior level executive positions. Prior to joining the Company, he was
employed for 13 years by Jaeger Sportswear Ltd. in both operational and
merchandising capacities for the U.S. and Canadian stores.
8
Timothy M. Harmon, who joined the Company in September 1991, has served as
President and Chief Merchandising Officer from November 1997. Prior to November
1997, he served in various senior level executive merchandising positions since
joining the Company in 1991. Prior to joining the Company, Mr. Harmon served in
various merchandising positions at Wideworld/MTV Sportswear, a domestic apparel
manufacturer, Chauvin International, an apparel manufacturer and Millers
Outpost, a young men's apparel retailer.
Carl W. Womack, who joined the Company in May 1986, has served as Senior Vice
President and Chief Financial Officer since October 1994. He served as Vice
President of Finance and Chief Financial Officer from May 1986 to September
1994. He has served as Secretary of the Company since November 1992. Prior to
joining the Company, Mr. Womack served in several positions in public and
private accounting. Mr. Womack is a certified public accountant.
ITEM 2. PROPERTIES
In January 2002, the Company completed construction of and moved into its new
corporate office and distribution center located in Anaheim, California. The
Company's new facilities encompass approximately 550,000 square feet and are in
close proximity to its former corporate office and distribution center. The
Company believes the new facilities are capable of servicing at least 1,200
stores.
The Company continues to lease its former facilities of approximately 267,000
square feet under a lease expiring in February 2008. In addition, the Company
continues to sublease a portion of the same building (approximately 70,000
square feet) under a sublease expiring in February 2008. The Company is
currently seeking a tenant to sublease its former facilities for the remainder
of the lease.
The majority of the Company's stores are leased with initial lease terms ranging
from approximately eight to ten years. Substantially all leases for the
Company's stores provide for percentage rent, in excess of specified minimums,
based upon net sales.
ITEM 3. LEGAL PROCEEDINGS
On September 17, 2001, a former Pacific Sunwear employee filed a putative class
action lawsuit which alleges that Pacific Sunwear has not properly paid wages to
its California-based store managers, co-managers and assistant managers. The
action, Auden v. Pacific Sunwear of California, Inc., Case No. 01CC00383, was
filed in the California Superior Court for the County of Orange. The complaint
in the action seeks both monetary and injunctive relief. Pacific Sunwear has
filed an answer in the action denying the allegations and raising affirmative
defenses. No class has been certified at this time.
The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect upon the results of operations or financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the fiscal year covered by this report.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NASDAQ National Market under the symbol
"PSUN". The following table sets forth for the quarterly periods indicated the
high and low bid prices per share of the common stock as reported by NASDAQ:
FISCAL 2001 HIGH LOW
- --------------------------------------------------------------------------------
1st Quarter $35.88 $20.00
2nd Quarter 26.05 17.86
3rd Quarter 19.03 11.45
4th Quarter 24.32 15.05
Fiscal 2000 High Low
- --------------------------------------------------------------------------------
1st Quarter $39.00 $17.75
2nd Quarter 36.88 11.63
3rd Quarter 22.75 12.56
4th Quarter 35.25 17.56
As of March 23, 2002, the number of holders of record of common stock of the
Company was approximately 300 and the number of beneficial holders of the common
stock was in excess of 5,500.
The Company has never declared or paid any dividends on its common stock and
does not intend to pay any dividends on its common stock in the foreseeable
future. In addition, the Company's current credit facility prohibits the payment
of cash dividends on its capital stock.
ITEM 6. SELECTED FINANCIAL DATA
The balance sheet and income statement data as of February 2, 2002 and February
4, 2001 and for each of the three fiscal years in the period ended February 2,
2002 are derived from audited consolidated financial statements of the Company
included herein and should be read in conjunction with such financial
statements. Such data and the selected consolidated operating data below also
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this report. The
consolidated balance sheet and consolidated income statement data as of January
30, 2000, January 31, 1999, and February 1, 1998 and for each of the two fiscal
years in the period ended January 31, 1999 are derived from audited consolidated
financial statements of the Company, which are not included herein.
10
FISCAL YEAR ENDED (1)
-----------------------------------------------------------------------------
FEB. 2, FEB. 4, JAN. 30, JAN. 31, FEB. 1,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except per share and selected operating data)
CONSOLIDATED INCOME STATEMENT DATA:
Net sales $ 684,840 $ 589,438 $ 436,808 $ 321,125 $ 227,130
Cost of goods sold (including buying,
distribution and occupancy costs) 464,660 391,816 284,187 212,859 150,219
------------ ------------ ------------ ------------ ------------
Gross margin 220,180 197,622 152,621 108,266 76,911
Selling, general and administrative expenses 175,898 133,999 96,117 70,369 51,093
------------ ------------ ------------ ------------ ------------
Operating income 44,282 63,623 56,504 37,897 25,818
Net interest income 470 1,344 916 977 1,248
------------ ------------ ------------ ------------ ------------
Income before income tax expense 44,752 64,967 57,420 38,874 27,066
Income tax expense 17,186 25,213 22,119 15,369 10,707
------------ ------------ ------------ ------------ ------------
Net income $ 27,566 $ 39,754 $ 35,301 $ 23,505 $ 16,359
============ ============ ============ ============ ============
Net income per share, diluted (2) $ 0.83 $ 1.22 $ 1.10 $ 0.73 $ 0.53
============ ============ ============ ============ ============
Weighted average shares outstanding, diluted (2) 33,106 32,548 32,190 32,233 30,644
============ ============ ============ ============ ============
SELECTED CONSOLIDATED OPERATING DATA:
Stores open at end of period 718 589 450 342 272
Stores opened during period 135 142 111 74 52
Stores acquired during period -- -- -- -- 15
Stores closed during period 6 3 3 4 4
Capital expenditures (000's) $ 89,664 $ 60,429 $ 40,219 $ 31,603 $ 21,020
Average net sales per gross square foot (3) (4) $ 321 $ 368 $ 398 $ 403 $ 408
Average net sales per store (3) (4) $ 1,031,000 $ 1,082,000 $ 1,084,000 $ 1,034,000 $ 959,000
Square footage of gross store space 2,319,149 1,764,123 1,254,373 888,507 679,357
Comparable store net sales (decrease)/
increase (4) (5) (2.5)% 3.5% 7.8% 8.6% 15.1%
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 78,900 $ 79,799 $ 67,351 $ 47,545 $ 48,119
Total assets 355,441 277,453 209,342 147,775 121,666
Long-term debt 24,597 -- -- -- --
Shareholders' equity $ 247,955 $ 213,131 $ 161,826 $ 116,697 $ 96,563
- ----------
(1) Except for the fiscal year ended February 4, 2001, which included 53
weeks, all fiscal years presented included 52 weeks. Effective February 1,
2002, the Company changed its fiscal year end from the Sunday closest to
the end of January to the Saturday closest to the end of January. As a
result, the last day of fiscal 2001 was Saturday, February 2, 2002.
(2) Adjusted to give effect to the three-for-two stock splits effected as of
June 8, 1999 and June 8, 1998.
(3) For purposes of calculating these amounts, the number of stores and the
amount of square footage reflect the number of months during the period
that new stores and closed stores were open.
(4) These amounts have been adjusted to exclude the fifty-third week in the
fiscal year ended February 4, 2001.
(5) Stores are deemed comparable stores on the first day of the first month
following the one-year anniversary of their opening. In conjunction with
the expansion or relocation of certain stores to a larger format with a
square footage increase of 15% or more, the Company excludes each such
store's net sales results from the first day of the month of its expansion
or relocation. Each of these stores is deemed a comparable store on the
first day of the first month following the one-year anniversary of its
expansion or relocation. In conjunction with the conversion of certain
PacSun stores to the d.e.m.o. format, the Company excludes each such
store's net sales results from the first day of the month of its
conversion. Each of these stores is deemed a comparable store on the first
day of the first month following the one-year anniversary of its
conversion to the d.e.m.o. format.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto of the Company included elsewhere in this
Form 10-K. The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Cautionary Note
Regarding Forward-Looking Statements and Risk Factors" in this section.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported revenues and expenses during the reported period. Actual results could
differ from these estimates. The accounting policies that the Company believes
are the most critical to aid in fully understanding and evaluating reported
financial results include the following:
Revenue Recognition - Sales are recognized upon purchase by customers at the
Company's retail store locations or through the Company's website. The Company
has recorded reserves to estimate sales returns by customers based on historical
sales return results. Actual return rates have historically been within
management's expectations and the reserves established. However, in the unlikely
event that the actual rate of sales returns by customers increased
significantly, the Company's operational results could be adversely affected.
Inventory Valuation - Merchandise inventories are stated at the lower of cost
(first-in, first-out method) or market. Cost is determined using the retail
inventory method. At any one time, inventories include items that have been
marked down to management's best estimate of their fair market value. Management
bases the decision to mark down merchandise based upon the age of the item and
its current rate of sale. To the extent that management estimates differ from
actual results, additional markdowns may have to be recorded, which could reduce
the Company's gross margins and operating results. The Company's success is
largely dependent upon its ability to gauge the fashion tastes of its customers
and provide merchandise that satisfies customer demand. Any inability to provide
appropriate merchandise in sufficient quantities in a timely manner could
increase future markdown rates.
Corporate Rent Reserve - During fiscal 2001, the Company recorded a $1.4 million
charge to reserve for rent expense associated with the Company's former
corporate offices, which remain unused after the Company's relocation to its new
corporate offices and distribution center at the end of fiscal 2001. The reserve
is approximately the amount of rent expense for one year, within which time the
Company currently believes a tenant will be identified to sublease the premises.
To the extent this time frame changes, additional charges may be recorded in the
future from $1.4 million per year up to the net remaining obligation under the
lease depending on the facts and circumstances in existence at the time. As of
February 2, 2002, the aggregate net remaining obligation under this lease was
approximately $7.5 million.
Litigation - The Company is involved from time to time in litigation incidental
to its business. Management believes that the outcome of current litigation will
not have a material adverse effect upon the results of operations or financial
condition of the Company and has made no provision for potential litigation
losses. Depending on the actual outcome of pending litigation, charges would be
recorded in the future that may have an adverse affect on the Company's
operating results.
12
RESULTS OF OPERATIONS
The following table sets forth selected income statement data of the Company
expressed as a percentage of net sales for the fiscal years indicated:
AS A PERCENTAGE OF NET SALES,
FISCAL YEAR ENDED
-----------------------------
FEB. 2, FEB. 4, JAN. 30,
2002 2001 2000
------- ------- --------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold (including buying,
distribution and occupancy costs) 67.8 66.5 65.1
----- ----- -----
Gross margin 32.2 33.5 34.9
Selling, general and administrative expenses 25.7 22.7 22.0
----- ----- -----
Operating income 6.5 10.8 12.9
Interest income, net 0.1 0.2 0.2
----- ----- -----
Income before income tax expense 6.6 11.0 13.1
Income tax expense 2.6 4.3 5.0
----- ----- -----
Net income 4.0% 6.7% 8.1%
===== ===== =====
Number of stores open at end of period 718 589 450
FISCAL 2001 COMPARED TO FISCAL 2000
Net Sales
Net sales increased to $684.8 million in fiscal 2001 from $589.4 million in
fiscal 2000, an increase of $95.4 million, or 16.2%. Of this $95.4 million
increase, $69.9 million was attributable to net sales generated by 135 new
stores opened in fiscal 2001 not yet included in the comparable store base,
$40.2 million was attributable to net sales generated by new stores opened in
fiscal 2000 not yet included in the comparable store base and $8.3 million was
attributable to other non-comparable store sales. Offsetting these increases was
a $13.0 million decrease in net sales attributable to a 2.5% decrease in
comparable store net sales in fiscal 2001 compared to the comparable fifty-two
week period ended February 3, 2001, a $6.1 million decrease in net sales
attributable to the one less week in fiscal 2001 (fiscal 2001 had fifty-two
weeks and fiscal 2000 had fifty-three weeks), a $2.5 million decrease in net
sales attributable to the closing of six stores during fiscal 2001 and three
stores during fiscal 2000 and a $1.4 million decrease due to the change in the
Company's fiscal year end from the Sunday closest to the end of January to the
Saturday closest to the end of January effective for fiscal 2001. Other
non-comparable 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. Of the 2.5% decrease in comparable store net
sales in fiscal 2001, PacSun and PacSun Outlet comparable store net sales
decreased 2.8% and d.e.m.o. comparable store net sales increased 1.6%. Stores
are deemed comparable stores on the first day of the first month following the
one-year anniversary of their opening or expansion/relocation. Average retail
prices of merchandise sold remained relatively unchanged in fiscal 2001 compared
to fiscal 2000 and had no significant impact on the net sales increase for
fiscal 2001.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased to
$220.2 million in fiscal 2001 from $197.6 million in fiscal 2000, an increase of
$22.6 million, or 11.4%. As a percentage of net sales, gross margin was 32.2%
for fiscal 2001 compared to 33.5% for fiscal 2000. Of this 1.3% decrease,
occupancy costs for fiscal 2001 increased 1.4% as a percentage of net sales
compared to fiscal 2000,
13
primarily due to the 2.5% decrease in comparable store net sales in fiscal 2001
as well as opening 135 new stores in fiscal 2001. Occupancy costs as a
percentage of net sales for new stores are generally higher than for mature
stores. Offsetting this increase was a .1% decrease in buying and distribution
costs as a percentage of net sales in fiscal 2001 compared to fiscal 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $175.9 million in
fiscal 2001 from $134.0 million in fiscal 2000, an increase of $41.9 million, or
31.3%. As a percentage of net sales, these expenses increased to 25.7% from
22.7%. Of this 3.0% net increase, 1.6% was due to an increase in store payroll
and other store selling expenses, primarily as a result of lower comparable
store net sales as well as opening 135 new stores in fiscal 2001. Store payroll
and other store selling expenses as a percentage of net sales for new stores are
generally higher than for mature stores. In addition, .6% was due to the
one-time non-cash charge of $4.2 million related to the disposal of most of the
materials handling equipment in the Company's former distribution center. Of the
remaining increase of .8%, .3% was due to an increase in general and
administrative expenses, .2% was due to an increase in store closing expenses,
.2% was due to the Company's charge to reserve for rent expense for the
Company's former corporate office and distribution center that became unused
when the Company moved into its new corporate office and distribution center at
the end of fiscal 2001 and .1% was due to an increase in advertising expenses.
Net Interest Income
Net interest income was $.5 million in fiscal 2001 compared to $1.3 million in
fiscal 2000, a decrease of $.8 million. This decrease was primarily the result
of lower average cash balances and lower interest rates during fiscal 2001 as
compared to fiscal 2000.
Income Tax Expense
Income tax expense was $17.2 million in fiscal 2001 compared to $25.2 million in
fiscal 2000. The effective income tax rate in fiscal 2001 was 38.4% compared to
38.8% in fiscal 2000.
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales
Net sales increased to $589.4 million in fiscal 2000 from $436.8 million in
fiscal 1999, an increase of $152.6 million, or 34.9%. Of this $152.6 million
increase, $79.4 million was attributable to net sales generated by 142 new
stores opened in fiscal 2000 not yet included in the comparable store base,
$40.9 million was attributable to net sales generated by new stores opened in
fiscal 1999 not yet included in the comparable store base, $14.0 million was
attributable to a 3.5% increase in comparable store net sales in fiscal 2000
compared to the comparable fifty-three week period ended February 6, 2000, $12.2
million was attributable to other non-comparable store sales and $7.8 million
was attributable to the fifty-third week in fiscal 2000 (fiscal 1999 had
fifty-two weeks). Offsetting these increases was a $1.7 million decrease in net
sales attributable to the closing of three stores during fiscal 1999 and three
stores during fiscal 2000. Other non-comparable 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. Of the 3.5%
increase in comparable store net sales in fiscal 2000, PacSun and PacSun Outlet
comparable store net sales increased 3.1% and d.e.m.o. comparable store net
sales increased 10.3%. Stores are deemed comparable stores on the first day of
the first month following the one-year anniversary of their opening or
expansion/relocation. Average retail prices of merchandise sold decreased
approximately 5.4% in fiscal 2000 compared to fiscal 1999, primarily related to
a higher markdown rate.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased to
$197.6 million in fiscal 2000 from $152.6 million in fiscal 1999, an increase of
$45.0 million, or 29.5%. As a percentage of net sales,
14
gross margin was 33.5% for fiscal 2000 compared to 34.9% for fiscal 1999. Of
this 1.4% decrease, net merchandise margins decreased .9% in fiscal 2000
compared to fiscal 1999 due to a higher markdown rate offset by a higher initial
markup rate. In addition, occupancy costs for fiscal 2000 increased .4% as a
percentage of net sales compared to fiscal 1999, which was primarily related to
opening 142 new stores in fiscal 2000. Occupancy costs as a percentage of net
sales for new stores are generally higher than for mature stores. In addition,
distribution costs increased .1% as a percentage of net sales in fiscal 2000
compared to fiscal 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $134.0 million in
fiscal 2000 from $96.1 million in fiscal 1999, an increase of $37.9 million, or
39.4%. As a percentage of net sales, these expenses increased to 22.7% from
22.0%. Of this .7% net increase, .7% was due to an increase in advertising as a
percentage of net sales which was related to the Company's increased marketing
efforts including its first ever national television advertising campaign which
commenced in February 2000 and store selling expenses increased .9% as a
percentage of net sales, primarily related to opening 142 new stores in fiscal
2000. Store payroll and selling expenses as a percentage of net sales for new
stores are generally higher than for mature stores. Offsetting these increases
was a decrease of .9% in general and administrative expenses, as a result of
leveraging these expenses over higher total net sales as well as lower bonus
expense.
Net Interest Income
Net interest income was $1.3 million in fiscal 2000 compared to $.9 million in
fiscal 1999, an increase of $.4 million. This increase was primarily the result
of higher average cash balances during fiscal 2000 as compared to fiscal 1999.
Income Tax Expense
Income tax expense was $25.2 million in fiscal 2000 compared to $22.1 million in
fiscal 1999. The effective income tax rate in fiscal 2000 was 38.8% compared to
38.5% in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash flow,
short-term and long-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, financing of inventories and, in
fiscal 2001, construction of the Company's new corporate offices and
distribution center.
Net cash provided by operating activities for fiscal 2001, fiscal 2000 and
fiscal 1999 was $55.1 million, $50.6 million and $49.6 million, respectively.
The $4.5 million increase in cash provided by operations in fiscal 2001 as
compared to fiscal 2000 was attributable to an increase in depreciation and
amortization of $7.3 million, an increase in accrued liabilities of $5.1
million, a one-time non-cash charge of $4.2 million in fiscal 2001 related to
the disposal of most of the materials handling equipment from the Company's
former distribution center and other items netting to an increase of $.1
million, offset by a decrease in net income of $12.2 million. Working capital at
the end of fiscal 2001, fiscal 2000 and fiscal 1999 was $78.9 million, $79.8
million and $67.4 million, respectively. Inventories at February 2, 2002 were
$102.5 million compared to $82.7 million at February 4, 2001, an increase of
$19.8 million or 23.9%. 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. The increase in inventories at February 2, 2002
was primarily related to opening 135 new stores and 35 expanded/relocated stores
that have in excess of 50% larger average square footage than their previous
locations. The increase in accounts payable of $5.9 million at February 2, 2002
compared to February 4, 2001 was primarily attributable to the increase in
inventories and the costs associated with the construction of the Company's new
corporate office and distribution center at February 2, 2002.
15
Net cash used in investing activities in fiscal 2001, fiscal 2000 and fiscal
1999 was $89.7 million, $60.4 million and $40.2 million, respectively, which was
used for investment in property and equipment. Of the $89.7 million of net cash
used for investment in property and equipment in fiscal 2001, $41.6 million was
used for costs related to the construction of the new corporate office and
distribution center, $37.0 million was used for 135 new stores and 35
expansions/relocations opened in fiscal 2001, $6.5 million was used for the
initial construction costs of new stores and expansions/relocations to be opened
in fiscal 2002, $2.9 million was used for other capital expenditures including
computer hardware and software and $1.7 million was used for maintenance capital
expenditures on existing stores in fiscal 2001.
Net cash provided by financing activities in fiscal 2001, fiscal 2000 and fiscal
1999 was $28.7 million, $6.4 million and $4.0 million, respectively. Of the
$28.7 million of net cash provided by financing activities in fiscal 2001, $25.0
million was due to borrowings under the Company's construction facility and $4.2
million was due to proceeds received from the exercise of stock options, offset
by $.5 million of principal payments under capital lease obligations. All prior
year amounts were primarily due to the exercise of stock options.
The Company has a credit facility of $55.0 million 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, and an additional
$25.0 million line of credit (the "Construction Facility") that was used to
finance the construction of the Company's new corporate office and distribution
center. The Credit Line expires March 31, 2004. At any time until September 30,
2002, the Company can, at its option, convert the outstanding borrowings under
the Construction Facility to a term loan due April 30, 2006. As of the date of
this filing, the Company had not converted the Construction Facility to a term
loan. Interest on each of the Credit Line and Construction Facility is payable
monthly at the bank's prime rate (4.75% at February 2, 2002) or at optional
interest rates that are primarily dependant upon the London Inter-bank Offered
Rates for the time period chosen. The Company's weighted average interest rate
on its outstanding borrowings was 4.63% at February 2, 2002. At February 2,
2002, the Company had no borrowings outstanding under the Credit Line and $25.0
million outstanding under the Construction Facility. The Company intends to
convert the outstanding borrowings under the Construction Facility to a term
loan. Upon conversion, the Company would be required to make minimum principal
payments of $416,667 in fiscal 2002 under the term loan. Accordingly, this
principal payment amount of the Construction Facility has been classified as
current portion of long-term debt. Additionally, the Company had $7.3 million in
letters of credit outstanding at February 2, 2002. The credit facility subjects
the Company to various restrictive covenants, including maintenance of certain
financial ratios, and prohibits payment of cash dividends on common stock. At
February 2, 2002, the Company was in compliance with all of the covenants.
The Company has minimum annual rental commitments under existing store leases,
the lease for its former corporate offices and distribution center and capital
leases of approximately $67.2 million in fiscal 2002 and similar amounts
thereafter. For details concerning the Company's financial commitments under
these arrangements, as well as a description of the Company's credit agreement,
please see Notes 3 and 6 to the consolidated financial statements.
The Company's average cost to build a new store, across all formats, including
leasehold improvements, furniture and fixtures and landlord allowances, was
approximately $239,000 and $236,000 in fiscal 2001 and fiscal 2000,
respectively. The average cost of expanding or relocating a store was
approximately $360,000 and $269,000 in fiscal 2001 and fiscal 2000,
respectively. The increase in the average cost of expanding or relocating a
store in fiscal 2001 as compared to fiscal 2000 was primarily due to receiving
fewer and lower landlord allowances in fiscal 2001. The average total cost to
build new stores and relocate or expand stores will vary in the future,
depending on various factors, including square footage, changes in store design,
local construction costs and landlord allowances. The Company's average initial
inventory, at cost, for new stores opened in fiscal 2001 was approximately
$128,000 for PacSun stores, approximately $124,000 for PacSun Outlet stores and
approximately $109,000 for d.e.m.o. stores. The Company's initial inventory for
new stores will vary in the future depending on various factors, including store
concept and square footage.
16
During fiscal 2002, the Company plans to open approximately 75 new stores, of
which approximately 58 will be PacSun stores, approximately seven will be PacSun
Outlet stores and approximately 10 will be d.e.m.o. stores. The Company also
plans to expand or relocate 30 existing smaller PacSun stores. In fiscal 2002,
capital expenditures are expected to be approximately $40 million, of which
approximately $36 million will be for opening approximately 75 new stores and
for approximately 30 expansions/relocations, and approximately $4 million will
be used for other capital expenditures including maintenance capital on existing
stores and 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 six stores in fiscal 2001 and anticipates closing five to ten stores in
fiscal 2002.
The Company relies primarily on internally generated cash flows to finance its
operations. In addition, to the extent necessary, the Company relies on its
credit facility to finance operations and provide additional resources for
capital expenditures. Management believes that the Company's working capital,
cash flows from operating activities and credit facility will be sufficient to
meet the Company's operating and capital expenditure requirements through the
end of fiscal 2002.
The Company's success is largely dependent upon its ability to gauge the fashion
tastes of its customers and provide merchandise that satisfies customer demand.
Any inability to provide appropriate merchandise in sufficient quantities in a
timely manner could have a material adverse effect on the Company's business,
operating results, cash flows from operations and financial condition. Any
economic downturn that affects the retail industry as a whole could also
adversely affect the Company's business, operating results, cash flows from
operations and financial condition.
A significant decrease in the Company's operating results could adversely affect
the Company's ability to maintain required financial ratios under the Company's
credit facility. Required financial ratios include total liabilities to tangible
net worth ratio, limitations on capital expenditures and achievement of certain
rolling four-quarter EBITDA requirements. If these financial ratios are not
maintained, the bank will have the option to require immediate repayment of all
amounts outstanding under the credit facility. The most likely result would
require the Company to either renegotiate certain terms of the credit agreement,
obtain a waiver from the bank, or obtain a new credit agreement with another
bank, which may contain different terms. As of February 2, 2002, the Company had
$25 million outstanding under its credit facility.
The Company leases all of its retail store locations under operating leases. The
Company also leases equipment from time to time under capital leases. Also, at
any time, the Company is contingently liable for open letters of credit with
foreign suppliers of merchandise. For details concerning the Company's financial
commitments under these arrangements, as well as a description of the Company's
credit agreement, please see Notes 3 and 6 to the consolidated financial
statements.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Derivative Instruments and Hedging Activities -- The Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," on February 5,
2001. SFAS No. 133, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The adoption of SFAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
Business Combinations, Goodwill and Other Intangible Assets -- In June 2001, the
Financial Accounting Standards Board ("FASB") issued Statement No. 141 ("SFAS
No. 141"), "Business Combinations," and Statement No. 142 ("SFAS No. 142"),
"Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the
pooling of interest method of accounting for business combinations initiated
after June 30, 2001. Effective for fiscal years beginning on or after January 1,
2002, SFAS No. 142 requires companies to cease amortizing goodwill that existed
at June 30, 2001 and, therefore, the
17
Company's amortization of existing goodwill ceased on February 2, 2002. In
addition, under SFAS No. 142, any goodwill resulting from acquisitions completed
after June 30, 2001 will not be amortized. SFAS No. 142 also includes
requirements to test goodwill and intangible assets with indefinite lives for
impairment beginning in fiscal 2002. As of the date hereof, the Company is not a
party to any agreement or understanding with respect to any prospective
acquisition and does not anticipate any impairment on its existing goodwill. In
the absence of any impairment issues, the Company expects the impact of these
statements to increase pre-tax income by approximately $.3 million per year
through 2022.
Accounting for the Impairment or Disposal of Long-Lived Assets -- In August
2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", which supersedes previous guidance on financial
accounting and reporting for the impairment or disposal of long-lived assets and
for segments of a business to be disposed of. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company does not expect the
adoption of SFAS No. 144 to have a significant impact on the Company's financial
position or results of operations. However, future impairment reviews may result
in charges against earnings if we are required to write down the value of
long-lived assets.
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 2001 and fiscal 2000,
excluding sales generated by new and relocated/expanded stores, the Christmas
and back-to-school periods together accounted for approximately 34% of the
Company's annual net sales and a higher percentage of the Company's operating
income. In fiscal 2001, excluding net sales generated by new and
relocated/expanded stores, approximately 45% of the Company's annual net sales
occurred in the first half of the fiscal year and 55% 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-K contains "forward-looking statements" within the
meaning of Section 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 changes could also have a
18
material adverse effect on the Company's image with its customers. See Item 1.
"Business - Merchandising."
PRIVATE LABEL MERCHANDISE. Sales from private label merchandise accounted for
approximately 34% and 36% of net sales in fiscal 2001 and fiscal 2000,
respectively. 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. See Item 1. "Business - Merchandising."
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 fiscal 2002, the Company plans to open approximately 75 net new stores,
of which approximately 58 will be PacSun stores, approximately seven will be
PacSun Outlet stores and approximately 10 will be d.e.m.o. stores. The Company's
planned expansion is dependent 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 dependent 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. See "Executive Officers of the
Registrant."
DEPENDENCE ON SINGLE DISTRIBUTION FACILITY. The Company's distribution functions
for all of its stores and for internet sales are handled from a single facility
in Anaheim, California. 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 adequate to support the Company's future growth.
19
STORES IN THE D.E.M.O. FORMAT. The Company opened its first d.e.m.o. store in
April 1998 and at the end of fiscal 2001 operated 101 d.e.m.o. stores. The
d.e.m.o. format involves risks that could have a material adverse effect on the
Company, including (i) failure to achieve satisfactory levels of sales, (ii)
diversion of management's attention from the Company's core business, (iii)
difficulties with hiring, retention and training of key personnel for the
d.e.m.o. stores, (iv) risks associated with new vendors and (v) 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
acceptable levels of 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. See
Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters."
ECONOMIC IMPACT OF RECENT TERRORIST ATTACKS. The majority of the Company's
stores are located in regional shopping malls. In response to the terrorist
attacks of September 11, 2001, security is being heightened in public areas. Any
further threat of terrorist attacks or actual terrorist events, particularly in
public areas, could lead to lower customer traffic in regional shopping malls.
In addition, local authorities or mall management could close regional shopping
malls in response to any immediate security concern. For example, on September
11, 2001, a substantial number of the Company's stores were closed early due to
closure of the malls in response to the terrorist attacks. Mall closures, as
well as lower customer traffic due to security concerns, could result in
decreased sales that would have a material adverse affect on the Company's
business, financial condition and results of operations.
*****
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.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent the Company borrows under its credit facility, the Company is
exposed to market risk related to changes in interest rates. At February 2,
2002, $25.0 million in borrowings were outstanding under the Company's credit
facility. Based on the weighted average interest rate of 4.63% on the Company's
credit facility during the fifty-two weeks ended February 2, 2002, if interest
rates on the credit facility were to increase by 10%, and to the extent
borrowings were outstanding, for every $1,000,000 outstanding on the Company's
credit facility, net income would be reduced by approximately $3,000 per year.
See "Summary of Significant Accounting Policies" and "Nature of Business." The
Company is not a party with respect to derivative financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in "Index to Financial
Statements."
ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Securities Exchange
Commission (the "Commission") not later than 120 days after the end of the
Registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The financial statements listed in the "Index to Consolidated
Financial Statements" at page F-1 are filed as a part of this
report.
2. Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits included or incorporated herein: See Index to Exhibits.
(b) Reports on Form 8-K.
1. On February 1, 2002, the Company filed a Form 8-K with the
Securities and Exchange Commission announcing a change in its fiscal
year end from the Sunday closest to January 31 to the Saturday
closest to January 31, effective for fiscal 2001.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on March
29, 2002 on its behalf by the undersigned, thereunto duly authorized.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
By: /s/ GREG H. WEAVER
------------------------------------
Greg H. Weaver
Chairman of the Board and
Chief Executive Officer
Each person whose signature appears below hereby authorizes Greg H. Weaver and
Carl W. Womack or either of them, as attorneys-in-fact to sign on his behalf,
individually, and in each capacity stated below and to file all amendments
and/or supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
/s/ GREG H. WEAVER Chairman of the Board and March 29, 2002
- -------------------------------- Chief Executive Officer
(Principal Executive
Officer)
/s/ CARL W. WOMACK Sr. Vice President and March 29, 2002
- -------------------------------- Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ JULIUS JENSEN III Director March 29, 2002
- --------------------------------
/s/ PEARSON C. CUMMIN III Director March 29, 2002
- --------------------------------
/s/ PETER L. HARRIS Director March 29, 2002
- --------------------------------
/s/ SALLY FRAME KASAKS Director March 29, 2002
- --------------------------------
23
PACIFIC SUNWEAR OF CALIFORNIA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 4, 2001, AND JANUARY 30, 2000:
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F - 2
Consolidated Balance Sheets as of February 2, 2002, and
February 4, 2001 F - 3
Consolidated Statements of Income and Comprehensive Income for
each of the three fiscal years in the period ended
February 2, 2002 F - 4
Consolidated Statements of Shareholders' Equity for each of three
fiscal years in the period ended February 2, 2002 F - 5
Consolidated Statements of Cash Flows for each of the three
fiscal years in the period ended February 2, 2002 F - 6
Notes to Consolidated Financial Statements F - 7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Pacific Sunwear of California, Inc.
Anaheim, California
We have audited the accompanying consolidated balance sheets of Pacific Sunwear
of California, Inc. and its wholly owned subsidiaries as of February 2, 2002,
and February 4, 2001, and the related consolidated statements of income and
comprehensive income, shareholders' equity, and cash flows for each of the three
fiscal years in the period ended February 2, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Sunwear of California, Inc.
and its wholly owned subsidiaries as of February 2, 2002, and February 4, 2001,
and the results of its operations and its cash flows for each of the three
fiscal years in the period ended February 2, 2002, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 8, 2002
F-2
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
FEBRUARY 2, FEBRUARY 4,
CURRENT ASSETS: 2002 2001
-------------- --------------
Cash and cash equivalents (Note 1) $ 23,136,386 $ 28,971,240
Accounts receivable 3,043,916 2,754,119
Merchandise inventories 102,512,329 82,692,992
Prepaid expenses, includes $8,410,338 and $6,663,284 of prepaid rent, respectively 11,855,978 10,187,317
Deferred taxes - current (Note 5) 4,281,765 2,991,765
-------------- --------------
Total current assets 144,830,374 127,597,433
PROPERTY AND EQUIPMENT (Note 1):
Land 12,156,221 12,156,221
Buildings and building improvements 28,943,697 --
Leasehold improvements 102,074,761 83,770,420
Furniture, fixtures and equipment 123,237,003 92,409,132
-------------- --------------
Total property and equipment 266,411,682 188,335,773
Less accumulated depreciation and amortization (71,412,413) (52,553,794)
-------------- --------------
Net property and equipment 194,999,269 135,781,979
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,607,689 and $1,296,325,
respectively (Note 1) 6,492,076 6,803,440
Deferred compensation and other assets (Notes 2 and 8) 7,807,317 7,269,727
Deferred taxes - noncurrent (Note 5) 1,311,488 --
-------------- --------------
Total other assets 15,610,881 14,073,167
-------------- --------------
Total assets $ 355,440,524 $ 277,452,579
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 3) $ -- $ --
Current portion of long-term debt (Note 3) 424,760 --
Current portion of capital lease obligations (Note 6) 833,656 488,472
Accounts payable 37,493,357 31,631,805
Accrued liabilities (Notes 4 and 9) 17,743,295 13,251,419
Income taxes payable (Note 5) 9,435,597 2,427,165
-------------- --------------
Total current liabilities 65,930,665 47,798,861
Long-term debt (Note 3) 24,597,496 --
Long-term capital lease obligations (Note 6) 731,480 1,102,857
Deferred compensation (Note 8) 7,438,506 7,268,377
Deferred rent 8,758,916 7,210,923
Deferred taxes (Note 5) -- 912,012
Other long-term liabilities 28,316 28,316
Commitments and contingencies (Note 6)
SHAREHOLDERS' EQUITY (Notes 7 and 8):
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,
32,770,502 and 32,441,435 shares, respectively (Note 1) 327,705 324,414
Additional paid-in capital 88,416,034 81,161,034
Retained earnings 159,211,406 131,645,785
-------------- --------------
Total shareholders' equity 247,955,145 213,131,233
-------------- --------------
Total liabilities and shareholders' equity $ 355,440,524 $ 277,452,579
============== ==============
See notes to consolidated financial statements
F-3
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 2, FEBRUARY 4, JANUARY 30,
2002 2001 2000
------------ ------------ ------------
Net sales $684,840,266 $589,438,059 $436,807,841
Cost of goods sold, including buying, distribution and occupancy costs 464,660,657 391,815,575 284,186,631
------------ ------------ ------------
Gross margin 220,179,609 197,622,484 152,621,210
Selling, general and administrative expenses 175,897,628 133,999,288 96,116,747
------------ ------------ ------------
Operating income 44,281,981 63,623,196 56,504,463
Interest income, net 469,640 1,343,925 915,894
------------ ------------ ------------
Income before income tax expense 44,751,621 64,967,121 57,420,357
Income tax expense (Note 5) 17,186,000 25,213,000 22,119,000
------------ ------------ ------------
Net income $ 27,565,621 $ 39,754,121 $ 35,301,357
Comprehensive income (Note 1) $ 27,565,621 $ 39,754,121 $ 35,301,357
============ ============ ============
Net income per share, basic (Note 1) $ 0.84 $ 1.25 $ 1.14
============ ============ ============
Net income per share, diluted (Note 1) $ 0.83 $ 1.22 $ 1.10
============ ============ ============
Weighted average shares outstanding, basic (Note 1) 32,681,194 31,895,074 31,052,399
============ ============ ============
Weighted average shares outstanding, diluted (Note 1) 33,105,799 32,548,286 32,189,616
============ ============ ============
See notes to consolidated financial statements
F-4
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------- --------- ------------ ------------ -------------
BALANCE, February 1, 1999 30,650,778 $ 306,508 $ 59,800,206 $ 56,590,307 $ 116,697,021
Exercise of stock options and shares
sold under employee stock purchase
plan and restricted stock grant
(Note 8) 812,467 8,125 3,969,466 -- 3,977,591
Cancellation of fractional shares due
to 3-for-2 stock split (Note 1) (494) (5) (10,673) -- (10,678)
Restricted stock award, vesting of
shares (Note 8) -- -- 290,355 -- 290,355
Tax benefits related to exercise of
stock options (Note 8) -- -- 5,570,018 -- 5,570,018
Net income -- -- -- 35,301,357 35,301,357
----------- --------- ------------ ------------ -------------
BALANCE, January 30, 2000 31,462,751 314,628 69,619,372 91,891,664 161,825,664
Exercise of stock options and shares
sold under employee stock purchase
plan and restricted stock grant
(Note 8) 978,684 9,786 6,435,679 -- 6,445,465
Restricted stock award, vesting of
shares (Note 8) -- -- 290,155 -- 290,155
Tax benefits related to exercise of
stock options (Note 8) -- -- 4,815,828 -- 4,815,828
Net income -- -- -- 39,754,121 39,754,121
----------- --------- ------------ ------------ -------------
BALANCE, February 4, 2001 32,441,435 324,414 81,161,034 131,645,785 213,131,233
Exercise of stock options and shares
sold under employee stock
purchase plan (Note 8) 329,067 3,291 4,257,115 -- 4,260,406
Restricted stock award, vesting of
shares (Note 8) -- -- 290,155 -- 290,155
Tax benefits related to exercise of
stock options (Note 8) -- -- 2,707,730 -- 2,707,730
Net income -- -- -- 27,565,621 27,565,621
----------- --------- ------------ ------------ -------------
BALANCE, February 2, 2002 32,770,502 $ 327,705 $ 88,416,034 $159,211,406 $ 247,955,145
=========== ========= ============ ============ =============
See notes to consolidated financial statements
F-5
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 2, FEBRUARY 4, JANUARY 30,
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,565,621 $ 39,754,121 $ 35,301,357
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 27,145,557 19,871,567 14,293,950
Loss on disposal of equipment (Note 9) 4,179,336 -- --
Change in operating assets and liabilities:
Accounts receivable (289,797) (576,014) (1,278,926)
Merchandise inventories (19,819,337) (22,690,762) (17,532,401)
Prepaid expenses (1,668,661) (3,143,889) (1,998,487)
Deferred compensation and other assets (127,311) 633,067 (128,291)
Accounts payable 5,861,552 11,518,606 6,245,293
Accrued liabilities 4,491,876 (623,114) 5,650,090
Income taxes payable and deferred taxes 6,202,662 4,473,942 7,942,471
Deferred rent 1,547,993 1,378,935 1,142,216
------------ ------------ ------------
Net cash provided by operating activities 55,089,491 50,596,459 49,637,272
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (89,663,818) (60,429,107) (40,219,129)
------------ ------------ ------------
Net cash used in investing activities (89,663,818) (60,429,107) (40,219,129)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under long-term debt obligations 24,997,977 -- --
Principal payments under capital lease obligations (518,910) (58,371) --
Cash paid in lieu of fractional shares due to 3-for-2 stock split -- -- (10,678)
Proceeds from exercise of stock options 4,260,406 6,445,465 3,977,591
------------ ------------ ------------
Net cash provided by financing activities 28,739,473 6,387,094 3,966,913
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (5,834,854) (3,445,554) 13,385,056
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of fiscal year 28,971,240 32,416,794 19,031,738
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of fiscal year $ 23,136,386 $ 28,971,240 $ 32,416,794
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, including $427,814 of capitalized interest paid $ 514,915 $ 12,330 $ --
Income taxes $ 10,983,338 $ 20,739,058 $ 14,176,529
Supplemental disclosures of non-cash transactions: During the fiscal years ended
February 2, 2002, February 4, 2001 and January 30, 2000, the Company recorded an
increase to additional paid-in capital of $2,707,730, $4,815,828 and $5,570,018,
respectively, related to tax benefits associated with the exercise of
nonqualified stock options. During the fiscal years ended February 2, 2002,
February 4, 2001 and January 30, 2000, the Company recorded an increase to
additional paid-in capital of $290,155, $290,155 and $290,355, respectively,
related to the issuance of stock to satisfy certain deferred compensation
liabilities. During the years ended February 2, 2002, and February 4, 2001, the
Company acquired property pursuant to capital lease obligations in the amount of
$492,717 and $1,649,700, respectively. Additionally, during the year ended
February 2, 2002, the Company financed the purchase of a vehicle for $24,279.
See notes to consolidated financial statements
F-6
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 4, 2001,
AND JANUARY 30, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS
Nature of Business -- Pacific Sunwear of California, Inc. and its wholly-owned
subsidiaries (the "Company") is a leading specialty retailer of everyday casual
apparel, footwear and accessories designed to meet the needs of active teens and
young adults. The Company operates three nationwide, primarily mall-based chains
of retail stores, under the names "Pacific Sunwear" (as well as "PacSun"),
"Pacific Sunwear Outlet" and "d.e.m.o." Pacific Sunwear and Pacific Sunwear
Outlet stores specialize in board-sport inspired casual apparel, footwear and
related accessories catering to teenagers and young adults. d.e.m.o. specializes
in hip-hop music inspired casual apparel and related accessories catering to
teenagers and young adults. In addition, the Company operates a website through
a wholly-owned subsidiary which sells PacSun merchandise online, provides
content and community for its target customers, and provides information about
the Company.
The Company's fiscal year is a 52- or 53-week period ending near January 31.
Fiscal 2001 was a 52-week period ended February 2, 2002. Fiscal 2000 was a
53-week period ended February 4, 2001. Fiscal 1999 was a 52-week period ended
January 30, 2000.
Principles of Consolidation --The consolidated financial statements include the
accounts of Pacific Sunwear of California, Inc. and its wholly-owned
subsidiaries, Pacific Sunwear Stores Corp. and ShopPacSun.com Corp. All
significant intercompany transactions have been eliminated in consolidation.
Basis of Presentation - The consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported revenues and expenses during the reported period. Actual results could
differ from these estimates.
Fair Value of Financial Instruments -- Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial
Instruments," requires management to disclose the estimated fair value of
certain assets and liabilities defined by SFAS No. 107 as financial instruments.
Financial instruments are generally defined by SFAS No. 107 as cash, evidence of
ownership interest in an entity, or a contractual obligation that both conveys
to one entity a right to receive cash or other financial instruments from
another entity and imposes on the other entity the obligation to deliver cash or
other financial instruments to the first entity. At February 2, 2002, management
believes that the carrying amounts of cash, receivables and payables approximate
fair value because of the short maturity of these financial instruments.
Cash and Cash Equivalents -- The Company considers all highly-liquid financial
instruments, if any, purchased with an original maturity of three months or less
to be cash equivalents.
Merchandise Inventories -- Merchandise inventories are stated at the lower of
cost (first-in, first-out method) or market. Cost is determined using the retail
inventory method.
Property and Equipment -- Leasehold improvements and furniture, fixtures and
equipment are stated at cost. Amortization of leasehold improvements is computed
on the straight-line method over the lesser of their estimated useful lives or
the life of the lease (generally 10 years). Depreciation on furniture, fixtures
and equipment is computed on the straight-line method over five years.
The Company completed construction and moved into a new corporate office and
distribution center in January 2002. The total cost of the completed facilities,
including purchased land, was $54.5 million. Of the $54.5 million total cost,
$28.9 million was buildings, $12.2 million was land, $11.6 million was a new
materials handling system and $1.8 million was furniture, fixtures and
equipment.
Intangible Assets -- Intangible assets consist of the excess of cost over net
assets acquired (goodwill) of $.8 million, which arose from the acquisition of
four stores in 1986 and have been amortized on the straight-line method over 40
years. In addition, in
F-7
fiscal 1997, the Company acquired 15 retail stores, which resulted in the
recording of $7.3 million of goodwill and $.3 million for non-competition
agreements, which have been amortized over 25 years and five years,
respectively.
The Company evaluates the recoverability of its goodwill quarterly at each
balance sheet date. The recoverability of goodwill is determined by comparing
the carrying value of the goodwill to the estimated operating income of the
related entity on a fair value, discounted cash flow basis. Any impairment is
recorded at the date of determination. During fiscal 1999, the Company closed
one of the four stores acquired in 1986 and net goodwill was reduced by
$175,985.
Long-Lived Assets - The Company accounts for the impairment and disposition of
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." In
accordance with SFAS No. 121, long-lived assets are reviewed for events or
changes in circumstances that indicate that their carrying value may not be
recoverable. As of February 2, 2002, no impairment has been indicated.
Income Taxes -- The Company accounts for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities
are determined based on the temporary differences between the financial
reporting and tax bases of assets and liabilities, applying enacted statutory
tax rates in effect for the year in which the differences are expected to
reverse.
Deferred Rent -- The Company averages any defined rental escalations over the
term of the related lease in order to provide level recognition of rent expense.
Revenue Recognition -- Sales are recognized upon purchase by customers at the
Company's retail store locations or through the Company's website.
Advertising Costs -- Costs associated with the production of advertising, such
as photography, design, creative talent, editing and other costs, are expensed
the first time the advertising takes place. Costs associated with communicating
advertising that has been produced, such as television and magazine advertising,
are expensed when the advertising takes place. Advertising costs were
$12,966,695, $10,766,093 and $4,901,099 in fiscal 2001, 2000 and 1999,
respectively.
Net Income per Share -- The Company reports earnings per share in accordance
with the provisions of SFAS No. 128, "Earnings Per Share." Basic earnings per
common share is computed using the weighted average number of shares
outstanding. Diluted earnings per common share is computed using the weighted
average number of shares outstanding adjusted for the incremental shares
attributed to outstanding options to purchase common stock. Incremental shares
of 424,605, 653,212 and 1,137,217 in fiscal 2001, 2000 and 1999, respectively,
were used in the calculation of diluted earnings per common share. Options to
purchase 1,056,790, 755,196 and 34,714 shares of common stock in fiscal 2001,
2000 and 1999, 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 during the respective period.
Stock-Based Compensation -- The Company accounts for stock-based compensation in
accordance with Accounting Principles Board ("APB") Opinion No. 25. See Note 6
for the pro-forma disclosure requirements of SFAS No. 123, "Accounting for Stock
Based Compensation." In March 2000, the Financial Accounting Standards Board
("FASB") issued Interpretation No. 44 of Accounting Principles Board Opinion No.
25, "Accounting for Certain Transactions Involving Stock Compensation," which,
among other things, addressed accounting consequences of a modification that
reduces the exercise price of a fixed stock option award (otherwise known as
repricing). The adoption of this interpretation did not impact the Company's
consolidated financial statements.
Comprehensive Income -- The Company reports comprehensive income in accordance
with the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 established 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 sale. There was no difference between net income and comprehensive income
for the years ended February 2, 2002, February 4, 2001 and January 30, 2000.
F-8
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 4, 2001,
AND JANUARY 30, 2000
Segment Information -- The Company has one reportable segment given the
similarities of economic characteristics between the operations represented by
the Company's three store formats.
Merchandise Risk -- The Company's success is largely dependent upon its ability
to gauge the fashion tastes of its customers and provide merchandise that
satisfies customer demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect on
the Company's business, operating results and financial condition.
New Accounting Pronouncements -- The Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," on February 5, 2001. SFAS
No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The adoption of SFAS No. 133 did not have a
significant impact on the financial position, results of operations, or cash
flows of the Company.
In June 2001, the FASB issued Statement No. 141 ("SFAS No. 141"), "Business
Combinations," and Statement No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest
method of accounting for business combinations initiated after June 30, 2001.
Effective for fiscal years beginning on or after January 1, 2002, SFAS No. 142
requires companies to cease amortizing goodwill that existed at June 30, 2001,
and, therefore, the Company's amortization of existing goodwill ceased on
February 2, 2002. In addition, under SFAS No. 142, any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also includes requirements to test goodwill and intangible assets with
indefinite lives for impairment beginning in fiscal 2002. As of the date hereof,
the Company is not a party to any agreement or understanding with respect to any
prospective acquisition and does not anticipate any impairment on its existing
goodwill. In the absence of any impairment issues, the Company expects the
impact of these statements to increase pre-tax income by approximately $.3
million per year through 2022.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which supersedes previous guidance on financial
accounting and reporting for the impairment or disposal of long-lived assets and
for segments of a business to be disposed of. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The Company does not expect the
adoption of SFAS No. 144 to have a significant impact on the Company's financial
position or results of operations. However, future impairment reviews may result
in charges against earnings to write down the value of long-lived assets.
2. DEFERRED COMPENSATION AND OTHER ASSETS
Deferred compensation and other assets consist of the following:
FEBRUARY 2, FEBRUARY 4,
2002 2001
---------- ----------
Deferred compensation $7,587,025 $6,994,045
Covenant not-to-compete 29,166 79,167
Security deposits 181,126 186,515
Other 10,000 10,000
---------- ----------
$7,807,317 $7,269,727
========== ==========
3. CREDIT FACILITY
The Company has a credit facility of $55.0 million 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, and an additional
$25.0 million line of credit (the "Construction Facility") that was used to
finance the construction of the Company's new corporate office and distribution
center. The Credit Line expires March 31, 2004. At any time until September 30,
2002, the Company can, at its option, convert the outstanding borrowings under
the Construction Facility to a term loan due April 30, 2006. As of the date of
this filing, the
F-9
Company had not converted the Construction Facility to a term loan. Interest on
each of the Credit Line and Construction Facility is payable monthly at the
bank's prime rate (4.75% at February 2, 2002) or at optional interest rates that
are primarily dependant upon the London Inter-bank Offered Rates for the time
period chosen. The Company's weighted average interest rate on its outstanding
borrowings was 4.63% at February 2, 2002. At February 2, 2002, the Company had
no borrowings outstanding under the Credit Line and $25.0 million outstanding
under the Construction Facility. The Company's intent is to convert the
outstanding borrowings under the Construction Facility to a term loan. Upon
conversion, the Company would be required to make minimum principal payments of
$416,667 in fiscal 2002 under the term loan. As such, that amount of the
Construction Facility has been classified as current portion of long-term debt.
Additionally, the Company had $7.3 million in letters of credit outstanding at
February 2, 2002. The credit facility subjects the Company to various
restrictive covenants, including maintenance of certain financial ratios, and
prohibits payment of cash dividends on common stock. At February 2, 2002, the
Company was in compliance with all of the covenants.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
FEBRUARY 2, FEBRUARY 4,
2002 2001
----------- -----------
Accrued compensation and benefits $ 4,620,189 $ 3,816,279
Gift certificates and store merchandise credits 4,160,125 2,997,512
Reserve for store expansion/relocation and closing costs 2,094,238 1,489,943
Sales tax payable 1,647,404 1,284,465
Reserve for corporate rent - old corporate facilities
(Note 9) 1,395,523 --
Accrued medical insurance costs 855,137 514,880
Other 2,970,679 3,148,340
----------- -----------
$17,743,295 $13,251,419
=========== ===========
5. INCOME TAXES
The components of the income tax expense are as follows:
FISCAL YEAR ENDED
--------------------------------------------
FEBRUARY 2, FEBRUARY 4, JANUARY 30,
2002 2001 2000
------------ ------------ ------------
Current income taxes:
Federal $ 18,040,306 $ 22,000,891 $ 20,095,967
State 2,659,194 3,137,109 3,208,033
------------ ------------ ------------
20,699,500 25,138,000 23,304,000
Deferred income taxes:
Federal (3,066,426) 18,715 (1,019,690)
State (447,074) 56,285 (165,310)
------------ ------------ ------------
(3,513,500) 75,000 (1,185,000)
------------ ------------ ------------
$ 17,186,000 $ 25,213,000 $ 22,119,000
============ ============ ============
F-10
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 4, 2001,
AND JANUARY 30, 2000
A reconciliation of the income tax expense to the amount of income tax expense
that would result from applying the federal statutory rate to income before
income taxes is as follows:
FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 2, FEBRUARY 4, JANUARY 30,
2002 2001 2000
------------ ------------ ------------
Provision for income taxes at statutory rate $ 15,663,000 $ 22,738,000 $ 20,097,000
State income taxes, net of federal income tax benefit 1,438,000 2,076,000 1,983,000
Other 85,000 399,000 39,000
------------ ------------ ------------
$ 17,186,000 $ 25,213,000 $ 22,119,000
============ ============ ============
At February 2, 2002, the Company's current net deferred tax asset was $4,281,765
and long-term net deferred tax asset was $1,311,488. At February 4, 2001, the
Company's current net deferred tax asset was $2,991,765 and long-term net
deferred tax liability was $912,012. The major components of the Company's
overall net deferred tax asset of $5,593,253 and $2,079,753 at February 2, 2002,
and February 4, 2001, respectively, are as follows:
FEBRUARY 2, FEBRUARY 4,
2002 2001
------------ ------------
Depreciation $ (5,096,999) $ (6,808,356)
Deferred rent 3,496,721 2,878,730
Reserve for store expansion/relocation and
closing costs 1,393,176 594,811
State income taxes 121,324 304,427
Inventory cost capitalization 1,917,499 1,716,537
Deferred compensation 2,969,588 2,901,667
Other 791,944 491,937
------------ ------------
$ 5,593,253 $ 2,079,753
============ ============
6. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases its retail stores, former corporate
offices and distribution facilities, and certain equipment under operating lease
agreements expiring at various dates through 2014. Substantially all of the
leases require the Company to pay maintenance, insurance, property taxes and
percentage rent ranging from 5% to 7% based on sales volumes over certain
minimum sales levels.
Minimum future annual rental commitments under noncancellable leases are as
follows:
Fiscal year ending:
February 1, 2003 $ 66,315,789
January 31, 2004 66,899,984
January 30, 2005 66,082,878
January 29, 2006 66,483,437
February 3, 2007 66,698,038
Thereafter 232,127,716
------------
$564,607,842
============
Rental expense, including common area maintenance, was $91,479,995, $71,174,611
and $51,698,739, of which $1,062,051, $1,084,790 and $1,111,595 was paid as
percentage rent based on sales volume for the fiscal years ended February 2,
2002, February 4, 2001 and January 30, 2000, respectively.
F-11
Capital Leases -- During each of the fiscal years ended February 2, 2002, and
February 4, 2001, the Company acquired computer equipment pursuant to capital
lease obligations. The leases bear interest at an average rate of 6.0% and 6.6%,
respectively, and require monthly principal and interest payments of $21,802 and
$50,501, respectively, through December 2003. The net book value of capital
lease assets was $1,804,265 and $1,649,700, respectively, at February 2, 2002,
and February 4, 2001. Future commitments under the capital lease obligation are
as follows:
Fiscal year ending:
February 1, 2003 $ 911,240
January 31, 2004 753,331
-----------
Total payments 1,664,571
Less interest portion (99,435)
-----------
$ 1,565,136
===========
Letters of Credit - The Company was contingently liable for $7.3 million in open
letters of credit with foreign suppliers at February 2, 2002.
Litigation - On September 17, 2001, a former Pacific Sunwear employee filed a
putative class action lawsuit which alleges that Pacific Sunwear has not
properly paid wages to its California-based store managers, co-managers, and
assistant managers. The action, Auden v. Pacific Sunwear of California, Inc.,
Case No. 01CC00383, was filed in the California Superior Court for the County of
Orange. The complaint in the action seeks both monetary and injunctive relief.
Pacific Sunwear has filed an answer in the action denying the allegations and
raising affirmative defenses. No class has been certified at this time.
The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect upon the results of operations or financial
condition of the Company.
7. COMMON STOCK
Stock Split -- During the fiscal year ended January 30, 2000, the Company
effected a three-for-two stock split. Shareholders' equity has been restated to
give retroactive recognition to the stock split in prior periods by
reclassifying the par value of the additional shares arising from the split from
additional paid-in capital to common stock. Additionally, all share and per
share amounts have been restated to give effect to the stock split.
Shareholder Rights Plan -- In December 1998, the Board of Directors approved the
adoption of a Shareholder Rights Plan ("the Rights Plan"). The Rights Plan
provides for the distribution to the Company's shareholders of one preferred
stock purchase "Right" for each outstanding share of the Company's common stock.
The Rights have an exercise price of $75 per Right, subject to subsequent
adjustment. Initially, the Rights will trade with the Company's common stock,
and will not be exercisable until the occurrence of certain takeover-related
events, as defined. The Rights Plan provides that if a person or group acquires
more than 15% of the Company's stock without prior approval of the Board of
Directors, holders of the Rights will be entitled to purchase the Company's
stock at half of market value. The Rights Plan also provides that if the Company
is acquired in a merger or other business combination after a person or group
acquires more than 15% of the Company's stock without prior approval of the
Board of Directors, holders of the Rights will be entitled to purchase the
acquirer's stock at half of market value. The Rights were distributed to holders
of the Company's common stock of record on December 29, 1998, as a dividend, and
will expire, unless earlier redeemed, on December 29, 2008.
8. STOCK OPTION AND RETIREMENT PLANS
Under the Company's stock option plans, incentive and nonqualified options have
been granted to employees and directors to purchase common stock at prices equal
to the fair value of the Company's shares at the grant dates.
At February 2, 2002, outstanding incentive and nonqualified options had exercise
prices ranging from $0.46 to $35.81 per share, with an average exercise price of
$17.96, and generally begin vesting one year after the grant date. On the
initial vesting date, 25% of the options vest and, thereafter, options generally
continue to vest at 2.08% each calendar month. The options generally expire ten
years from the date of grant or 90 days after employment or services are
terminated.
F-12
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 4, 2001,
AND JANUARY 30, 2000
At February 2, 2002, incentive and nonqualified options to purchase 3,199,123
shares were outstanding and 1,397,657 shares were available for future grant
under the Company's stock option plans. During the year ended February 2, 2002,
February 4, 2001 and January 30, 2000, the Company recognized tax benefits of
$2,707,730, $4,815,828 and $5,570,018, respectively, resulting from the exercise
of certain nonqualified stock options.
Stock option (incentive and nonqualified) activity for the three years ended
February 2, 2002, was as follows:
STOCK OPTIONS
-----------------------------------------
NUMBER OF SHARES PRICE RANGE PER SHARE
---------------- ---------------------
Balance at January 31, 1999 3,193,273 $0.11 to $25.25
Options granted (weighted average
fair value of $14.44) 858,500 16.67 to 35.63
Options canceled (127,684) 0.11 to 25.25
Options exercised (729,290) 1.98 to 24.25
---------
Balance at January 30, 2000 3,194,799 0.11 to 35.63
Options granted (weighted average
fair value of $18.49) 571,500 13.31 to 35.81
Options canceled (149,240) 4.44 to 35.81
Options exercised (863,903) 0.11 to 26.72
---------
Balance at February 4, 2001 2,753,156 0.46 to 35.81
Options granted (weighted average
fair value of $11.79) 1,092,500 12.25 to 34.19
Options canceled (344,686) 10.33 to 35.81
Options exercised (301,847) 0.46 to 29.38
---------
Balance at February 2, 2002 3,199,123 $0.46 to $35.81
=========
The following is a summary of the weighted average exercise prices for activity
during the year ended February 2, 2002:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Beginning Outstanding 2,753,156 $17.52
Options granted 1,092,500 19.22
Options exercised (301,847) 12.38
Options canceled (344,686) 23.36
----------
Ending Outstanding 3,199,123 $17.96
----------
Exercisable as of February 2, 2002 1,550,447 $15.51
==========
Additional information regarding options outstanding as of February 2, 2002, is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE
RANGE OF EXERCISE AS OF FEB 2, REMAINING WEIGHTED AVERAGE AS OF FEB 2, WEIGHTED AVERAGE
PRICES 2002 CONTRACTUAL LIFE EXERCISE PRICE 2002 EXERCISE PRICE
- ----------------- ------------ ---------------- ---------------- ------------ ----------------
$ 0.46 - $14.66 669,069 5.37 $9.25 639,329 $9.03
14.83 - 16.34 587,195 7.43 15.24 348,689 14.90
16.58 - 16.98 685,171 9.35 16.96 31,230 16.68
17.10 - 23.81 781,282 7.84 22.48 395,814 22.58
23.88 - 35.81 476,406 8.55 27.58 135,385 26.79
--------- ---------
$ 0.46 - $35.81 3,199,123 7.68 $17.96 1,550,447 $15.51
========= =========
F-13
During the year ended February 1, 1998, the Company granted a restricted stock
award of 189,841 shares with a purchase price of $0.01 per share to its Chief
Executive Officer. The 189,841 share award began vesting on March 31, 1999, with
25% of the shares vested at such time, and thereafter will vest at 25% on each
of March 31, 2000, 2001 and 2002, if, in each instance, at the time of the
vesting date, certain cumulative earnings per share growth targets have been
satisfied. The Company recorded $240,401, $240,401 and $240,440, respectively,
of deferred compensation expense associated with this award during the year
ended February 2, 2002, February 4, 2001 and January 30, 2000, respectively.
During the year ended January 30, 2000, the Company granted a restricted stock
award of 50,000 shares with a purchase price of $0.01 per share to its Chief
Executive Officer. The 50,000 share award began vesting on September 17, 2001,
with 25% of the shares vested at such time, and thereafter will vest at 25% on
each of September 17, 2002, 2003 and 2004, if, in each instance, at the time of
the vesting date, certain cumulative earnings per share growth targets have been
satisfied. The Company recorded $228,556 and $88,817 of deferred compensation
expense associated with this award during the year ended February 4, 2001 and
January 30, 2000, respectively. During fiscal 2001, the Company reversed the
previously recognized expenses of $317,373 associated with this award because
the cumulative earnings per share growth targets had not been satisfied as of
February 2, 2002.
During the year ended February 4, 2001, the Company granted a restricted stock
award of 75,000 shares with a purchase price of $0.01 per share to its Chief
Executive Officer. The 75,000 share award begins vesting on March 15, 2002, with
25% of the shares vested at such time, and thereafter will vest at 25% on each
of March 15, 2003, 2004 and 2005, if, in each instance, at the time of the
vesting date, certain cumulative earnings per share growth targets have been
satisfied. The Company recorded $37,946 of deferred compensation expense
associated with this award during the year ended February 4, 2001. During fiscal
2001, the Company reversed the previously recognized expense of $37,946
associated with this award because the cumulative earnings per share growth
targets had not been satisfied as of February 2, 2002.
The Company accounts for its stock-based awards using the intrinsic value method
in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure
of pro forma net income and earnings per share. 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. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
life, 5 years following vesting; stock volatility, 71.4% in fiscal 2002, 104.1%
in fiscal 2000, and 64.3% in fiscal 1999; risk-free interest rates, 4.4% in
fiscal 2001, 4.85% in fiscal 2000, and 6.6% in fiscal 1999; and no dividends
during the expected term. The Company's calculations are based on a
multiple-option valuation approach and forfeitures are recognized as they occur.
If the computed fair values of the fiscal 2001, 2000, and 1999 awards had been
amortized to expense over the vesting period of the awards, pro forma net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
FISCAL 2001 FISCAL 2000 FISCAL 1999
----------- ----------- -----------
Net Income
As reported $27,565,621 $39,754,121 $35,301,357
Pro forma $22,412,965 $35,122,924 $31,734,140
Net Income Per Share, Basic
As reported $0.84 $1.25 $1.14
Pro forma $0.69 $1.10 $1.02
Net Income Per Share, Diluted
As reported $0.83 $1.22 $1.10
Pro forma $0.69 $1.10 $1.00
In fiscal 1997, the Company established the Pacific Sunwear of California, Inc.
Employee Stock Purchase Plan (the "ESPP"), which provides a method for employees
of the Company whereby they may voluntarily purchase common stock at a 10%
discount from fair market value as of the beginning or the end of each
purchasing period of six months, whichever is lower. The ESPP covers
substantially all employees, except officers, who have three months of service
with the Company. The ESPP is intended to constitute an "employee stock purchase
plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as
amended, and therefore the Company does not recognize compensation expense
related to the ESPP. In fiscal 2001 and fiscal 2000, 27,220 and 39,781 shares
were issued at an average price of $19.22 and $16.88, respectively, under the
ESPP.
F-14
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOR THE FISCAL YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 4, 2001,
AND JANUARY 30, 2000
In fiscal 1995, the Company established the Pacific Sunwear of California, Inc.
Executive Deferred Compensation Plan (the "Executive Plan"). The Executive Plan
covers officers of the Company, and is funded by participant contributions and
periodic discretionary contributions from the Company (Note 8). For each of the
three fiscal years in the period ended February 2, 2002, the Company made
contributions of $174,984, $137,481 and $106,251, respectively, to the Executive
Plan.
In fiscal 1992, the Company established the Pacific Sunwear of California, Inc.
Employee Savings Plan ("the 401(k) Plan"). The 401(k) Plan is a defined
contribution plan (401(k)) covering substantially all employees who have reached
age 21 and have one year of service with the Company. The 401(k) Plan is funded
by employee contributions and periodic discretionary contributions from the
Company, which are subject to approval by the Company's Board of Directors. For
each of the three fiscal years in the period ended February 2, 2002, the Company
made contributions, net of forfeitures, of $364,176, $310,026 and $213,227,
respectively, to the 401(k) Plan.
9. CORPORATE RELOCATION-RELATED CHARGES
During the first quarter of fiscal 2001, the Company recorded a one-time
non-cash charge of $2.5 million after tax ($4.2 million pre-tax), or $.08 per
basic and diluted share, related to the disposal of most of the existing
materials handling equipment in its former distribution center as part of its
relocation to a new distribution facility in Anaheim, California during January
2002. The $4.2 million pre-tax charge is included in selling, general and
administrative expenses in the accompanying consolidated financial statements.
During fiscal 2001, the Company recorded a $1.4 million charge to reserve for
rent expense associated with the Company's former corporate offices and
distribution center, which remain unused after the Company's relocation to its
new corporate offices and distribution center at the end of fiscal 2001. The
reserve is approximately the amount of rent expense for one year, within which
time the Company currently believes a tenant will be identified to sublease the
premises. To the extent management's estimates relating to their ability to
sublease these premises during this time frame change, additional charges may be
recorded in the future. As of February 2, 2002, the aggregate net remaining
obligation under this lease was approximately $7.5 million.
F-15
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Fiscal year ended February 2, 2002:
Net sales $ 137,698,000 $ 156,509,000 $ 183,028,000 $ 207,605,000
Gross margin 41,957,000 48,178,000 60,786,000 69,259,000
Operating income 1,355,000 5,741,000 14,321,000 22,865,000
Net income 979,000 3,544,000 8,885,000 14,157,000
------------- ------------- ------------- -------------
Net income per share, basic $ 0.03 $ 0.11 $ 0.27 $ 0.43
Net income per share, diluted $ 0.03 $ 0.11 $ 0.27 $ 0.43
Wtd. avg. shares outstanding, basic (Note 1) 32,518,814 32,719,399 32,736,544 32,750,883
Wtd. avg. shares outstanding, diluted (Note 1) 33,197,724 33,101,815 32,900,753 33,121,953
Fiscal year ended February 4, 2001:
Net sales $ 112,561,000 $ 131,970,000 $ 163,733,000 $ 181,174,000
Gross margin 37,894,000 43,785,000 54,987,000 60,956,000
Operating income 9,148,000 11,883,000 20,195,000 22,397,000
Net income 5,805,000 7,371,000 12,549,000 14,030,000
------------- ------------- ------------- -------------
Net income per share, basic $ 0.18 $ 0.23 $ 0.39 $ 0.44
Net income per share, diluted $ 0.18 $ 0.23 $ 0.39 $ 0.43
Wtd. avg. shares outstanding, basic (Note 1) 31,542,983 31,760,227 32,005,598 32,244,806
Wtd. avg. shares outstanding, diluted (Note 1) 32,604,718 32,316,649 32,429,520 32,846,492
Earnings per basic and diluted shares outstanding are computed independently for
each of the quarters presented and, therefore, may not sum to the totals for the
year.
F-16
INDEX TO EXHIBITS
Exhibit Number Description of Exhibit
- --------------------------------------------------------------------------------
3.1 Third Amended and Restated Articles of Incorporation of the Company
(1)
3.2 Certificate of Amendment, dated June 7, 1999, of Third Amended and
Restated Articles of Incorporation of the Company (12)
3.3 Certificate of Determination of Preferences of Series A Junior
Participating Preferred Stock of the Company (7)
3.4 Second Amended and Restated Bylaws of the Company (1)
3.5 Amendment, dated August 18, 1998 to the Second Amended and Restated
Bylaws of the Company (6)
3.6 Amendment, dated March 15, 2000 to the Second Amended and Restated
Bylaws of the Company (11)
4.1 Specimen stock certificate (1)
10.1 Form of Indemnity Agreement between the Company and each of its
executive officers and directors (1) *
10.2 1986-87 Stock Option Plan dated as of December 11, 1986 as amended
(the "Option Plan") (1) *
10.3 Form of Incentive Stock Option under the Option Plan (1) *
10.4 Form of Nonstatutory Stock Option under the Option Plan (1) *
10.5 Amended and Restated 1992 Stock Award Plan dated June 8, 1999 (the
"Award Plan") (12) *
10.6 Form of Nonqualified Stock Option Agreement under the Award Plan (2)
*
10.7 Form of Incentive Stock Option Agreement under the Award Plan (2) *
10.8 Form of Restricted Stock Award Agreement under the Award Plan (2) *
10.9 1999 Stock Award Plan (10) *
10.10 Pacific Sunwear of California, Inc. Executive Deferred Compensation
Plan and Trust Agreement (3) *
10.11 Pacific Sunwear of California, Inc. Employee Stock Purchase Plan (4)
*
10.12 Pacific Sunwear of California, Inc. Incentive Compensation Plan (12)
*
10.13 Restricted Stock Award Agreement dated September 18, 1996 by and
between the Company and Greg H. Weaver (12) *
10.14 Restricted Stock Award Agreement dated September 17, 1999 by and
between the Company and Greg H. Weaver (11) *
10.15 Restricted Stock Award Agreement dated January 3, 2001 by and
between the Company and Greg H. Weaver (12) *
10.16 Amended and Restated Employment Agreement dated February 5, 2001
between the Company and Greg H. Weaver (12) *
10.17 Severance Agreements, dated October 27, 1997 and November 6, 1996 by
and between Pacific Sunwear of California, Inc. and Timothy M.
Harmon and Carl W. Womack, respectively (5) *
10.18 Severance Agreements, dated June 21, 1999 and August 2, 1999 by and
between Pacific Sunwear of California, Inc. and Mark A. Hoffman and
Michael J. Scandiffio, respectively (11) *
10.19 Standard Industrial Lease - Net, dated September 30, 1997 between
the Company and Bank of America National Trust and Savings
Association, as amended, and Standard Industrial Lease - Net, dated
January 12, 1998 between the Company and The Realty Associates Fund
IV, L.P., a Delaware limited partnership, as amended for the
Company's corporate headquarters and distribution center located in
Anaheim, California (5)
10.20 Standard Sublease - dated December 22, 1998 between the Company and
Bekins Moving and Storage Company, LLC (9)
10.21 Rights Agreement, dated as of December 16, 1998 between the Company
and U.S. Stock Transfer Corporation (8)
10.22 Business Loan Agreement, dated April 3, 2001, between the Company
and Bank of America N.A. (13)
10.23 First Amendment to Business Loan Agreement, dated as of April 17,
2001, between the Company and Bank of America N.A. (13)
10.24 Master Continuing and Unconditional Guaranty to Bank of America N.A.
from Pacific Sunwear Stores Corp. and ShopPacSun.com Corp. (13)
10.25 Second Amendment to Business Loan Agreement, dated as of August 1,
2001, between the Company and Bank of America N.A. (14)
23.1 Consent of Deloitte & Touche LLP
(1) Incorporated by reference from the Company's Form S-1 Registration
Statement (No. 33-57860) as filed with the Securities and Exchange
Commission on February 4, 1993.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on April 8, 1994.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on March 17, 1995.
(4) Incorporated by reference from the Company's Registration Statement on
Form S-8 as filed with the Securities and Exchange Commission on November
20, 1997.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on April 9, 1998.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on December 9, 1998.
(7) Incorporated by reference from the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on December 24, 1998.
(8) Incorporated by reference from the Company's Form 8-A Registration
Statement as filed with the Securities and Exchange Commission on December
24, 1998.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on April 8, 1999.
(10) Incorporated by reference from the Company's Form S-8 Registration
Statement as filed with the Securities and Exchange Commission on
September 3, 1999.
(11) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on April 6, 2000.
(12) Incorporated by reference from the Company's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on March 30, 2001.
(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on June 8, 2001.
(14) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on September 14,
2001.
* Management contract or compensatory plan or arrangement.