SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
FORM 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 3, 2002
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-21296
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CALIFORNIA (State of Incorporation) |
95-3759463 (I.R.S Employer Identification No.) |
|
3450 East Miraloma Avenue Anaheim, California (Address of principal executive offices) |
92806 (Zip code) |
(714) 414-4000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
Yes[x] No[ ] |
The number of shares outstanding of the registrants Common Stock, par value $.01 per share, at September 6, 2002, was 32,865,221.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended August 3, 2002
Index
PART I. | FINANCIAL INFORMATION |
Page | ||
Item 1. | Condensed Consolidated Financial Statements: | |||
Condensed Consolidated Balance Sheets as of August 3, 2002 and February 2, 2002 | 3 | |||
Condensed Consolidated Statements of Income and Comprehensive Income for the second quarter and first half ended August 3, 2002 and August 5, 2001 | 4 | |||
Condensed Consolidated Statements of Cash Flows for the first half ended August 3, 2002 and August 5, 2001. | 5 | |||
Notes to Condensed Consolidated Financial Statements | 6-9 | |||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 10-18 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 | ||
PART II | OTHER INFORMATION | |||
Item 1. | Legal Proceedings | 20 | ||
Item 2. | Changes in Securities and Use of Proceeds | 20 | ||
Item 3. | Defaults Upon Senior Securities | 20 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 20 | ||
Item 5. | Other Information | 21 | ||
Item 6. | Exhibits and Reports on Form 8-K | 21 | ||
SIGNATURE PAGE AND CERTIFICATIONS | 22 |
2
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share amounts)
ASSETS
August 3, | February 2, | |||||||||||
2002 | 2002 | |||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents (Note 2) |
$ | 4,171 | $ | 23,136 | ||||||||
Accounts receivable |
5,190 | 3,044 | ||||||||||
Merchandise inventories |
153,205 | 102,512 | ||||||||||
Prepaid expenses, includes $9,137 and $8,410
of prepaid rent, respectively |
14,154 | 11,856 | ||||||||||
Deferred taxes |
4,282 | 4,282 | ||||||||||
Total current assets |
181,002 | 144,830 | ||||||||||
PROPERTY AND EQUIPMENT: |
||||||||||||
Land |
12,156 | 12,156 | ||||||||||
Buildings and building improvements |
26,475 | 26,475 | ||||||||||
Leasehold improvements |
108,380 | 102,075 | ||||||||||
Furniture, fixtures and equipment |
136,383 | 125,706 | ||||||||||
Total property and equipment |
283,394 | 266,412 | ||||||||||
Less accumulated depreciation and amortization |
(83,794 | ) | (71,412 | ) | ||||||||
Net property and equipment |
199,600 | 195,000 | ||||||||||
OTHER ASSETS: |
||||||||||||
Goodwill (Note 3) |
6,492 | 6,492 | ||||||||||
Deferred compensation and other assets (Note 4) |
9,676 | 7,807 | ||||||||||
Deferred taxes noncurrent |
1,311 | 1,311 | ||||||||||
Total other assets |
17,479 | 15,610 | ||||||||||
Total assets |
$ | 398,081 | $ | 355,440 | ||||||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Line of credit (Note 5) |
$ | 11,700 | $ | | ||||||||
Current portion of long-term debt (Note 5) |
25,791 | 425 | ||||||||||
Current portion of capital lease obligations |
834 | 834 | ||||||||||
Accounts payable |
55,964 | 37,493 | ||||||||||
Accrued liabilities (Notes 6 and 9) |
21,388 | 17,743 | ||||||||||
Income taxes payable |
2,321 | 9,436 | ||||||||||
Total current liabilities |
117,998 | 65,931 | ||||||||||
Long-term debt (Note 5) |
1,640 | 24,597 | ||||||||||
Long-term capital lease obligations |
287 | 731 | ||||||||||
Deferred compensation |
7,711 | 7,439 | ||||||||||
Deferred rent |
9,636 | 8,759 | ||||||||||
Other long-term liabilities |
28 | 28 | ||||||||||
SHAREHOLDERS EQUITY: |
||||||||||||
Preferred stock, par value $.01; authorized, 5,000,000;
none issued and outstanding |
| | ||||||||||
Common stock, par value $.01; authorized 75,937,500 shares;
issued and outstanding, 32,859,931 and 32,770,502 shares,
respectively |
329 | 328 | ||||||||||
Additional paid-in capital |
90,676 | 88,416 | ||||||||||
Retained earnings |
169,776 | 159,211 | ||||||||||
Total shareholders equity |
260,781 | 247,955 | ||||||||||
Total liabilities and shareholders equity |
$ | 398,081 | $ | 355,440 | ||||||||
See accompanying notes
3
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(in thousands, except share and per share amounts)
For the Second Quarter Ended | For the First Half Ended | |||||||||||||||
August 3, | August 5, | August 3, | August 5, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Net sales |
$ | 190,854 | $ | 156,509 | $ | 352,564 | $ | 294,207 | ||||||||
Cost of goods sold, including
buying, distribution and
occupancy costs |
130,249 | 108,331 | 242,792 | 204,072 | ||||||||||||
Gross margin |
60,605 | 48,178 | 109,772 | 90,135 | ||||||||||||
Selling, general and
administrative expenses (Note
9) |
48,454 | 42,437 | 92,168 | 83,039 | ||||||||||||
Operating income |
12,151 | 5,741 | 17,604 | 7,096 | ||||||||||||
Interest expense/(income), net |
306 | (12 | ) | 453 | (247 | ) | ||||||||||
Income before income tax
expense |
11,845 | 5,753 | 17,151 | 7,343 | ||||||||||||
Income tax expense (Note 7) |
4,549 | 2,209 | 6,586 | 2,819 | ||||||||||||
Net income |
$ | 7,296 | $ | 3,544 | $ | 10,565 | $ | 4,524 | ||||||||
Comprehensive income (Note 1) |
$ | 7,296 | $ | 3,544 | $ | 10,565 | $ | 4,524 | ||||||||
Net income per share, basic
(Note 8) |
$ | 0.22 | $ | 0.11 | $ | 0.32 | $ | 0.14 | ||||||||
Net income per share, diluted
(Note 8) |
$ | 0.22 | $ | 0.11 | $ | 0.32 | $ | 0.14 | ||||||||
Weighted average shares
outstanding, basic (Note 8) |
32,838,249 | 32,719,399 | 32,818,170 | 32,619,110 | ||||||||||||
Weighted average shares
outstanding, diluted (Note 8) |
33,229,773 | 33,101,815 | 33,315,937 | 33,135,948 | ||||||||||||
See accompanying notes
4
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the First Half Ended | ||||||||||||
August 3, | August 5, | |||||||||||
2002 | 2001 | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 10,565 | $ | 4,524 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
16,057 | 12,752 | ||||||||||
Loss on disposal of equipment (Note 9) |
2,110 | 5,285 | ||||||||||
Change in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(2,146 | ) | (2,861 | ) | ||||||||
Merchandise inventories |
(50,693 | ) | (41,581 | ) | ||||||||
Prepaid expenses |
(1,494 | ) | 694 | |||||||||
Deferred compensation and other assets |
278 | (457 | ) | |||||||||
Accounts payable |
18,471 | 8,632 | ||||||||||
Accrued liabilities |
3,645 | 1,975 | ||||||||||
Income taxes and deferred taxes |
(6,466 | ) | 1,645 | |||||||||
Deferred rent |
877 | 590 | ||||||||||
Net cash used in operating activities |
(8,796 | ) | (8,802 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Investment in property and equipment |
(22,742 | ) | (39,963 | ) | ||||||||
Net cash used in investing activities |
(22,742 | ) | (39,963 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Net borrowings under credit facility |
11,700 | 20,075 | ||||||||||
Proceeds from exercise of stock options |
1,321 | 3,686 | ||||||||||
Principal payments under capital lease obligations |
(444 | ) | (255 | ) | ||||||||
Payments under long-term debt obligations |
(4 | ) | | |||||||||
Net cash provided by financing activities |
12,573 | 23,506 | ||||||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS: |
(18,965 | ) | (25,259 | ) | ||||||||
CASH AND CASH EQUIVALENTS, beginning of period |
23,136 | 28,971 | ||||||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 4,171 | $ | 3,712 | ||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 565 | $ | 39 | ||||||||
Income taxes |
$ | 13,052 | $ | 1,174 |
Supplemental disclosures of non-cash transactions (in thousands): During the first half ended August 3, 2002 and August 5, 2001, the Company recorded an increase to additional paid-in capital of $649 and $2,485, respectively, related to tax benefits associated with the exercise of non-qualified stock options. Also, during each of the first halves ended August 3, 2002 and August 5, 2001, the Company recorded an increase to additional paid-in capital of $291 and $290, respectively, related to the issuance of restricted stock to satisfy certain deferred compensation liabilities. In addition, during the first half ended August 3, 2002, the Company purchased a prepaid three-year computer maintenance agreement under a long-term debt obligation for $2,413.
See accompanying notes
5
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands unless otherwise indicated)
NOTE 1 Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its wholly owned subsidiaries (the Company). All significant intercompany transactions have been eliminated in consolidation.
The Companys fiscal year is the 52- or 53-week period, which ends on the Saturday closest to January 31. Fiscal 2002 is a 52-week period that ends February 1, 2003. Fiscal 2001 was a 52-week period that ended on February 2, 2002.
In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of the condensed consolidated financial statements in conformity with GAAP necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and reported expenses during the reported period. Actual results could differ from these estimates. The results of operations for the second quarter and first half ended August 3, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2003. For further information, refer to the financial statements and notes thereto as of and for the years ended February 2, 2002, February 4, 2001 and January 30, 2000.
Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE 2 Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and marketable securities with original maturities of three months or less.
NOTE 3 Goodwill and Identified Intangible Assets
On February 3, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated the amortization of goodwill and other intangible assets with indefinite useful lives. Upon adoption of SFAS No. 142, the Company performed an impairment test of its goodwill and intangible assets and determined that no impairment existed. Under SFAS No. 142, goodwill and intangible assets will be tested for impairment at least annually and more frequently if an event occurs which indicates the goodwill or intangible assets may be impaired.
On February 3, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded 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. Upon adoption of SFAS No. 144, the Company performed an impairment test of its long-lived assets and determined that no impairment existed. Under SFAS No. 144, long-lived assets, including amortizing intangible assets, will be tested for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Included in other assets is a covenant not to compete with a carrying value of $4, net of accumulated amortization of $246, at August 3, 2002. The covenant not to compete will be completely amortized during fiscal 2002.
6
SFAS No. 142 also requires disclosure of the after-tax impact to reported net income and earnings per share of the adoption of the statement for all periods presented. The following table recognizes the after-tax impact to the Companys operational results of the adoption of SFAS No. 142 as if the standard had been in effect for all periods presented:
August 3, | August 5, | ||||||||
2002 | 2001 | ||||||||
For the First Half Ended: |
|||||||||
Reported net income |
$ | 10,565 | $ | 4,524 | |||||
Add back goodwill amortization |
| 96 | |||||||
Adjusted net income |
$ | 10,565 | $ | 4,620 | |||||
Basic earnings per share: |
|||||||||
Reported net income |
$ | 0.32 | $ | 0.14 | |||||
Add back goodwill amortization |
0.00 | 0.00 | |||||||
Adjusted net income |
$ | 0.32 | $ | 0.14 | |||||
Diluted earnings per share: |
|||||||||
Reported net income |
$ | 0.32 | $ | 0.14 | |||||
Add back goodwill amortization |
0.00 | 0.00 | |||||||
Adjusted net income |
$ | 0.32 | $ | 0.14 | |||||
NOTE 4 Deferred Compensation and Other Assets
Deferred compensation and other assets consist of the following:
August 3, | February 2, | |||||||
2002 | 2002 | |||||||
Deferred compensation |
$ | 7,950 | $ | 7,587 | ||||
Long-term computer maintenance contract |
1,542 | | ||||||
Other assets |
184 | 220 | ||||||
$ | 9,676 | $ | 7,807 | |||||
NOTE 5 Credit Facility
The Company amended its credit facility with a bank on August 19, 2002. The credit facility expires March 31, 2004. The amended credit facility provides for a $45.0 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) which was used to finance the construction of the Companys new corporate office and distribution center. Interest on each of the Credit Line and Construction Facility is payable monthly at the banks prime rate (4.75% at August 3, 2002) or at optional interest rates that are primarily dependant upon the London Inter-bank Offered Rates for the time period chosen. The Companys weighted average interest rate on its outstanding borrowings was 3.77% at August 3, 2002. At August 3, 2002, the Company had $11.7 million outstanding under the Credit Line and $25.0 million outstanding under the Construction Facility. Additionally, the Company had $9.3 million in letters of credit outstanding at August 3, 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 August 3, 2002, the Company was in compliance with all of the covenants.
The Company intends to repay the $25.0 million outstanding under the Construction Facility prior to September 30, 2002 using cash flows generated from operations. Accordingly, the entire balance of the Construction Facility has been included in the current portion of long-term debt at August 3, 2002.
7
NOTE 6 Accrued Liabilities
Accrued liabilities consist of the following:
August 3, | February 2, | |||||||
2002 | 2002 | |||||||
Accrued compensation and benefits |
$ | 6,369 | $ | 4,620 | ||||
Sales tax payable |
3,557 | 1,647 | ||||||
Accrued gift certificates and store merchandise credits |
2,677 | 4,160 | ||||||
Reserve for store expansion/relocation and closing costs |
1,799 | 2,094 | ||||||
Reserve for corporate rent old corporate facilities
(Note 9) |
1,396 | 1,396 | ||||||
Accrued medical insurance costs |
1,352 | 855 | ||||||
Other accrued liabilities |
4,238 | 2,971 | ||||||
$ | 21,388 | $ | 17,743 | |||||
NOTE 7 Federal and State Income Tax Expense
The combined federal and state income tax expense was calculated using estimated effective annual tax rates.
NOTE 8 Net Income per Share, Basic and Diluted
The following table summarizes the computation of EPS (all amounts in thousands except share and per share amounts):
August 3, 2002 | August 5, 2001 | |||||||||||||||||||||||
Net | Per Share | Net | Per Share | |||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
Second Quarter Ended: |
||||||||||||||||||||||||
Basic EPS: |
$ | 7,296 | 32,838,249 | $ | 0.22 | $ | 3,544 | 32,719,399 | $ | 0.11 | ||||||||||||||
Effect of dilutive stock options |
391,524 | 382,416 | ||||||||||||||||||||||
Diluted EPS: |
$ | 7,296 | 33,229,773 | $ | 0.22 | $ | 3,544 | 33,101,815 | $ | 0.11 |
August 3, 2002 | August 5, 2001 | |||||||||||||||||||||||
Net | Per Share | Net | Per Share | |||||||||||||||||||||
Income | Shares | Amount | Income | Shares | Amount | |||||||||||||||||||
First Half Ended: |
||||||||||||||||||||||||
Basic EPS: |
$ | 10,565 | 32,818,170 | $ | 0.32 | $ | 4,524 | 32,619,110 | $ | 0.14 | ||||||||||||||
Effect of dilutive stock options |
497,767 | 516,838 | ||||||||||||||||||||||
Diluted EPS: |
$ | 10,565 | 33,315,937 | $ | 0.32 | $ | 4,524 | 33,135,948 | $ | 0.14 |
Options to purchase 1,695,773 and 1,033,198 shares of common stock in the second quarter of fiscal 2002 and fiscal 2001, respectively, and 950,904 and 443,326 shares of common stock in the first half of fiscal 2002 and fiscal 2001, 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.
NOTE 9 Corporate Relocation-Related Charges
During the first quarter of fiscal 2001, the Company recorded a 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 materials handling equipment in the Companys former distribution center as part of its relocation to its new distribution facility in Anaheim, California at the end of fiscal 2001. The $4.2 million pre-tax charge is included in selling, general and administrative expenses.
8
During the second half of fiscal 2001, the Company recorded a $1.4 million charge to reserve for rent expense associated with the Companys former corporate offices, which remain unused after the Companys relocation to its new corporate offices and distribution center at the end of fiscal 2001. The current reserve of $1.4 million 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 managements estimates relating to the Companys ability to sublease these premises within one year changes, additional charges may be recorded in the future up to the net remaining obligation under the lease depending on the facts and circumstances in existence at the time. As of August 3, 2002, the aggregate net remaining obligation under this lease is approximately $6.9 million.
NOTE 10 Subsequent Event
On August 30, 2002, the Company repaid the outstanding balance of $25.0 million related to the Construction Facility using available cash generated from operations (see Note 5).
9
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
Critical Accounting Policies
The preparation of condensed 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 Companys retail store locations or through the Companys 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 managements expectations and the reserves established. However, in the unlikely event that the actual rate of sales returns by customers increased significantly, the Companys 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 managements 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 Companys gross margins and operating results. The Companys 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 the second half of fiscal 2001, the Company recorded a $1.4 million charge to reserve for rent expense associated with the Companys former corporate offices, which remain unused after the Companys relocation to its new corporate offices and distribution center at the end of fiscal 2001. The current reserve of $1.4 million 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 managements estimates relating to the Companys ability to sublease these premises within one year changes, additional charges may be recorded in the future up to the net remaining obligation under the lease depending on the facts and circumstances in existence at the time. As of August 3, 2002, the aggregate net remaining obligation under this lease was approximately $6.9 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, from time to time, may make provisions for potential litigation losses. Depending on the actual outcome of pending litigation, charges in excess of any provisions would be recorded in the future that may have an adverse affect on the Companys operating results.
10
Results of Operations
The following table sets forth, for the periods indicated, the percentage of the Companys net sales represented by certain income statement data. The discussion that follows should be read in conjunction with the table below:
Second Quarter Ended | First Half Ended | |||||||||||||||
Aug 3, | Aug 5, | Aug 3, | Aug 5, | |||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold, including
buying, distribution and
occupancy costs |
68.2 | 69.2 | 68.9 | 69.4 | ||||||||||||
Gross margin |
31.8 | 30.8 | 31.1 | 30.6 | ||||||||||||
Selling, general and
administrative expenses |
25.4 | 27.1 | 26.1 | 28.2 | ||||||||||||
Operating income |
6.4 | 3.7 | 5.0 | 2.4 | ||||||||||||
Interest expense/(income), net |
0.2 | 0.0 | 0.1 | (0.1 | ) | |||||||||||
Income before income tax expense |
6.2 | 3.7 | 4.9 | 2.5 | ||||||||||||
Income tax expense |
2.4 | 1.4 | 1.9 | 1.0 | ||||||||||||
Net income |
3.8 | % | 2.3 | % | 3.0 | % | 1.5 | % | ||||||||
The thirteen weeks ended August 3, 2002 (second quarter) as compared to the thirteen weeks ended August 5, 2001 (second quarter)
Net Sales
Net sales increased to $190.9 million for the second quarter of fiscal 2002 from $156.5 million for the second quarter of fiscal 2001, an increase of $34.4 million, or 22.0%. Of this $34.4 million increase, $13.5 million was attributable to net sales generated by 67 new stores opened in fiscal 2001 and not yet included in the comparable store base, $10.3 million was attributable to net sales generated by 67 new stores opened in fiscal 2002 and not yet included in the comparable store base, $10.3 million was attributable to a 7.3% increase in comparable store net sales in the second quarter of fiscal 2002 as compared to the second quarter of fiscal 2001, and $2.0 million was attributable to other non-comparable store net sales. Offsetting these increases was a $1.7 million decrease attributable to the closing of eight and six stores during fiscal 2002 and fiscal 2001, respectively. Other non-comparable store net sales consist primarily 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 7.3% increase in comparable store net sales in the second quarter of fiscal 2002, PacSun and PacSun Outlet comparable store net sales increased 7.4% and d.e.m.o. comparable store net sales increased 6.0%. Stores are deemed comparable stores on the first day of the first month following the one-year anniversary of their opening or expansion/relocation. Retail prices of the Companys merchandise remained relatively unchanged in the second quarter of fiscal 2002 compared to the second quarter of fiscal 2001 and had no significant impact on the net sales increase for the second quarter of fiscal 2002.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased to $60.6 million for the second quarter of fiscal 2002 from $48.2 million for the second quarter of fiscal 2001, an increase of $12.4 million, or 25.7%. As a percentage of net sales, gross margin was 31.8% for the second quarter of fiscal 2002 compared to 30.8% for the second quarter of fiscal 2001. Of this 1.0% increase, .4% was due to an increase in net merchandise margins as a percentage of net sales due to a higher initial markup partially offset by a higher markdown rate, .3% was due to a decrease in buying costs as a percentage of net sales primarily due to a decrease in salaries and travel expenses as a percentage of net sales in the second quarter of fiscal 2002 as compared to the second quarter of fiscal 2001 and .3% was due to a decrease in distribution costs as a percentage of net sales primarily due to a decrease in freight and payroll expenses as a percentage of net sales.
11
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $48.4 million for the second quarter of fiscal 2002 from $42.4 million for the second quarter of fiscal 2001, an increase of $6.0 million, or 14.2%. These expenses decreased to 25.4% as a percentage of net sales in the second quarter of fiscal 2002 from 27.1% in the second quarter of fiscal 2001. Of this 1.7% net decrease as a percentage of net sales, 1.7% was attributable to decreased advertising expenses as a percentage of net sales primarily due to the elimination of television advertising in fiscal 2002, .5% was attributable to a decrease in store payroll expenses as a percentage of net sales and .2% was due to moving the timing of a physical inventory to the first quarter of fiscal 2002 from the second quarter of fiscal 2001. Offsetting these decreases was a .7% increase in store closing expenses as a percentage of net sales.
Income Tax Expense
Income tax expense was $4.5 million for the first thirteen weeks of fiscal 2002 compared to $2.2 million for the second quarter of fiscal 2001. The effective income tax rate was 38.4% in each of the second quarters of fiscal 2002 and fiscal 2001.
The twenty-six weeks ended August 3, 2002 (first half) as compared to the twenty-six weeks ended August 5, 2001 (first half)
Net Sales
Net sales increased to $352.6 million for the first half of fiscal 2002 from $294.2 million for the first half of fiscal 2001, an increase of $58.4 million, or 19.9%. Of this $58.4 million increase, $32.9 million was attributable to net sales generated by 67 new stores opened in fiscal 2001 and not yet included in the comparable store base, $13.6 million was attributable to net sales generated by 67 new stores opened in fiscal 2002 and not yet included in the comparable store base, $11.1 million was attributable to a 4.2% increase in comparable store net sales in the first half of fiscal 2002 compared to the first half of fiscal 2001, and $3.8 million was attributable other non-comparable store net sales. Offsetting these increases was a $3.0 million decrease attributable to the closing of eight and six stores during fiscal 2002 and fiscal 2001, respectively. Other non-comparable store net sales consist primarily 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 4.2% increase in comparable store net sales in the first half of fiscal 2002, PacSun and PacSun Outlet comparable store net sales increased 4.5% and d.e.m.o. comparable store net sales increased .9%. Stores are deemed comparable stores on the first day of the first month following the one-year anniversary of their opening or expansion/relocation. Retail prices of the Companys merchandise remained relatively unchanged in the first half of fiscal 2002 compared to the first half of fiscal 2001 and had no significant impact on the net sales increase for the first half of fiscal 2002.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased to $109.8 million for the first half of fiscal 2002 from $90.1 million for the first half of fiscal 2001, an increase of $19.7 million, or 21.9%. As a percentage of net sales, gross margin was 31.1% for the first half of fiscal 2002 compared to 30.6% for the first half of fiscal 2001. Of this .5% increase as a percentage of net sales, .5% was due to a decrease in buying costs as a percentage of net sales primarily due to a decrease in salaries and travel expenses as a percentage of net sales in the first half of fiscal 2002 as compared to the first half of fiscal 2001, .3% was due to an increase in net merchandise margins as a percentage of net sales due to a higher initial markup partially offset by a higher markdown rate and .2% was due to a decrease in distribution costs as a percentage of net sales primarily due to reduced freight and payroll expenses as a percentage of net sales. Offsetting these decreases was a .5% increase in occupancy costs as a percentage of net sales compared to the first half of fiscal 2001, which was related to opening 59 net new stores in the first half of fiscal 2002 and the residual impact from opening 129 net new stores in fiscal 2001. Occupancy costs as a percentage of net sales for new stores are generally higher than for mature stores.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $92.2 million for the first half of fiscal 2002 from $83.0 million for the first half of fiscal 2001, an increase of $9.2 million, or 11.1%. These expenses decreased to 26.1% as a percentage of net sales in the first half of fiscal 2002 from 28.2% in the first half of fiscal 2001, excluding the non-cash charge incurred in the first quarter of fiscal 2001. Of this 2.1% net decrease as a percentage of net sales, 1.2% was attributable to decreased advertising expenses as a percentage of net sales primarily due to the elimination of television advertising in fiscal 2002, .9% was due to a decrease in store closing expenses as a percentage of net sales and .2% was due to a decrease in store payroll expenses as a percentage of net sales. Store closing expenses were higher in fiscal 2001 due to the non-cash charge pre-tax charge of $4.2 million related to the disposal of most of the materials handling equipment in the Companys former distribution center as part of its relocation to its new distribution facility in Anaheim, California at the end of fiscal 2001. Offsetting these decreases was a .2% increase in other direct store selling expenses as a percentage of net sales.
Income Tax Expense
Income tax expense was $6.6 million for the first half of fiscal 2002 compared to $2.8 million for the first half of fiscal 2001. The effective income tax rate was 38.4% in each of the first halves of fiscal 2002 and fiscal 2001.
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 Companys 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 Companys new corporate offices and distribution center.
Net cash used in operating activities for each of the first half of fiscal 2002 and fiscal 2001 was $8.8 million. For the first half of fiscal 2002 as compared to the first half of fiscal 2001, changes in cash used were a decrease in accrued income taxes and deferred income taxes of $8.1 million and a decrease in losses on the disposal of property and equipment of $3.2 million, offset by an increase in net income of $6.0 million, an increase in depreciation of $3.3 million, an increase in accrued liabilities of $1.7 million and other items netting to a decrease in cash used of $.3 million. Working capital at August 3, 2002 was $63.0 million compared to $78.9 million at February 2, 2002, a decrease of $15.9 million. Of the $15.9 million decrease in working capital, $25.0 million was due to the reclassification of the Companys Construction Facility from long-term liabilities to current liabilities due to the Companys intent to repay the Construction Facility prior to September 30, 2002, $19.0 million was due to decreases in cash and $11.7 million was due to net borrowings under the Companys Credit Line, partially offset by an increase in inventory net of accounts payable of $32.2 million, a decrease in income taxes payable of $7.1 million and other items netting to an increase in working capital of $.5 million. Inventories at August 3, 2002 were $153.2 million compared to $102.5 million at February 2, 2002, an increase of $50.7 million. This increase was primarily related to opening 59 net new stores and expanding/relocating 19 stores with more than 50% larger average square footage than their previous locations. The Companys average store inventories vary throughout the year and increase in advance of the peak selling periods of spring break, back-to-school and Christmas.
Net cash used in investing activities was $22.7 million for property and equipment for the first half of fiscal 2002 compared to $40.0 million for property and equipment for the first half of fiscal 2001. Of the $22.7 million of net cash used for investment in property and equipment in the first half of fiscal 2002, $21.0 million was used for new and existing stores and $1.7 million was used for other capital expenditures including computer hardware and software.
Net cash provided by financing activities for the first half of fiscal 2002 was $12.6 million compared to $23.5 million for the first half of fiscal 2001. Of the $12.6 million of net cash provided by financing activities in the first half of fiscal 2002, $11.7 million was due to net borrowings under the Companys line of credit and $1.3 million was due to proceeds received from the exercise of stock options, offset by $.4 million of payments under capital lease and long-term debt obligations.
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The Company amended its credit facility with a bank on August 19, 2002. The credit facility expires March 31, 2004. The amended credit facility provides for a $45.0 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 Companys new corporate office and distribution center. Interest on each of the Credit Line and Construction Facility is payable monthly at the banks prime rate (4.75% at August 3, 2002) or at optional interest rates that are primarily dependant upon the London Inter-bank Offered Rates for the time period chosen. The Companys weighted average interest rate on its outstanding borrowings was 3.77% at August 3, 2002. At August 3, 2002, the Company had $11.7 million outstanding under the Credit Line and $25.0 million outstanding under the Construction Facility. Additionally, the Company had $9.3 million in letters of credit outstanding at August 3, 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 August 3, 2002, the Company was in compliance with all of the covenants.
The Company intends to repay the $25.0 million outstanding under the Construction Facility prior to September 30, 2002 using cash flows generated from operations. Accordingly, the entire balance of the Construction Facility has been classified as current at August 3, 2002.
During the remainder of fiscal 2002, the Company plans to open approximately 16 net new stores, of which approximately 13 will be PacSun stores, approximately two will be PacSun Outlet stores and approximately one will be a d.e.m.o. store. The Company also plans to expand or relocate approximately 10 existing smaller stores during the remainder of fiscal 2002. The Company estimates that capital expenditures during the remainder of fiscal 2002 will be approximately $16 million, of which approximately $14 million will be for new and existing stores and approximately $2 million will be used for other capital expenditures, including computer hardware and software. The Company plans to open approximately 50 net new stores during the year ended January 31, 2004 (fiscal 2003).
The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. Most leases contain cancellation or kick-out clauses in the Companys favor that relieve the Company of any future obligation under a lease if specified sales levels are not achieved by a specified date. The Company closed six stores in fiscal 2001 and anticipates closing approximately ten stores in fiscal 2002.
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 Companys financial commitments under these arrangements, please see Note 6 to the consolidated financial statements contained in the Companys Form 10-K for the year ended February 2, 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 Companys working capital, cash flows from operating activities and credit facility will be sufficient to meet the Companys operating and capital expenditure requirements for the next twelve months.
The Companys 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 Companys 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 Companys business, operating results, cash flows from operations and financial condition.
A significant decrease in the Companys operating results could adversely affect the Companys ability to maintain required financial ratios under the Companys credit facility. Required financial ratios include total liabilities to tangible net worth ratio, limitations on capital expenditures and achievement of certain rolling four-quarter
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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.
New Accounting Pronouncements
Business Combinations, Goodwill and Other Intangible Assets The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and 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. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001 and, therefore, the Companys 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. Upon adoption of SFAS No. 142, the Company performed an impairment test of its goodwill and intangible assets and determined that no impairment existed. 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 The Company has adopted 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. The adoption of SFAS No. 144 did not have a significant impact on the Companys financial position or results of operations. However, future impairment reviews may result in charges against earnings if the Company is required to write down the value of long-lived assets.
Accounting for Costs Associated with Exit or Disposal Activities In June, 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entitys commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after February 1, 2003.
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 Companys business will not be affected by inflation in the future.
Seasonality and Quarterly Results
The Companys business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Companys 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 Companys annual net sales and a higher percentage of the Companys operating income. In fiscal 2001, excluding net sales generated by new and relocated/expanded stores, approximately 45% of the Companys annual net sales occurred in the first half of the fiscal year and 55% in the second half. The Companys 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
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This report on Form 10-Q contains forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The Company is hereby providing cautionary statements identifying important factors that could cause the Companys 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. All forward-looking statements included in this report are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. Such uncertainties include, among others, the following factors:
Merchandising/Fashion Sensitivity. The Companys 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 Companys failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on the Companys business, financial condition and results of operations. Misjudgments or unanticipated fashion changes could also have a material adverse effect on the Companys image with its customers.
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 Companys private label merchandise generally carries higher merchandise margins than its other merchandise, the Companys 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 Companys business, financial condition and results of operations.
Fluctuations in Comparable Store Net Sales Results. The Companys 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 Companys comparable store net sales results, including changes in fashion trends, changes in the Companys merchandise mix, calendar shifts of holiday periods, actions by competitors, weather conditions and general economic conditions. The Companys 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 Companys future comparable store net sales results are likely to have a significant effect on the market price of the Companys common stock.
Expansion and Management of Growth. PacSuns continued growth depends to a significant degree on its ability to open and operate stores on a profitable basis and on managements ability to manage the Companys planned expansion. During the remainder of fiscal 2002, the Company plans to open approximately 16 net new stores, of which approximately 13 will be PacSun stores, approximately two will be PacSun Outlet stores and approximately one will be a d.e.m.o. store. The Company plans to open approximately 50 net new stores during the year ended January 31, 2004 (fiscal 2003). The Companys 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 Companys control may also affect the Companys 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 Companys operations grow, there could be increasing strain on the Companys 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 Companys future operating and capital requirements, obtaining sufficient quantities of merchandise from
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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 Companys 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 Companys business, financial condition and results of operations. The Companys success in the future will also be dependent upon the Companys ability to attract and retain qualified personnel. The Companys inability to attract and retain qualified personnel in the future could have a material adverse effect on the Companys business, financial condition and results of operations.
Dependence on Single Distribution Facility. The Companys 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 Companys business, financial condition and results of operations. There can be no assurance that the Companys new corporate office and distribution center will be adequate to support the Companys future growth.
Stores in the d.e.m.o. Format. Comparable store results for d.e.m.o. stores did not meet managements expectations during the first half of fiscal 2002 (+.9%) nor during fiscal 2001 (+1.6%). The Company is not certain that d.e.m.o. stores will achieve acceptable levels of sales or profitability in the future. Continued disappointing sales results for d.e.m.o. stores may have a material adverse affect on the Companys business, financial condition and results of operations and may result in a greater number of store closings.
Internet Sales. The Company began selling merchandise over the internet in June 1999. The Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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.
Economic Impact of Recent Terrorist Attacks. The majority of the Companys 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
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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 Companys 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 Companys business, financial condition and results of operations.
Reliance on Foreign Sources of Production. The Company purchases merchandise directly in foreign markets for its private label brands. In addition, the Company purchases merchandise from domestic vendors, some of which is manufactured overseas. The Company does not have any long-term merchandise supply contracts and its imports are subject to existing or potential duties, tariffs and quotas. The Company faces competition from other companies for production facilities and import quota capacity. The Company also faces a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) imposition of new legislation relating to import quotas that may limit the quantity of goods which may be imported into the United States from countries in a region that the Company does business; (iii) imposition of duties, taxes, and other charges on imports; and (iv) local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity. New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions which, if enacted, would increase the cost of products purchased from suppliers in countries that the Company does business with. The inability of the Company to rely on its foreign sources of production due to any of the factors listed above could have a material adverse affect on the Companys business, financial condition and results of operations.
Credit Facility Financial Covenants. A significant decrease in the Companys operating results could adversely affect the Companys ability to maintain required financial ratios under the Companys 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.
Stock Options. A number of publicly-traded companies have recently announced that they will begin expensing stock option grants to employees. In addition, the Securities and Exchange Commission has indicated that possible rule changes requiring expensing of stock options may be adopted in the near future. Currently, the Company includes such expenses on a pro forma basis in the notes to the Companys annual financial statements in accordance with accounting principles generally accepted in the United States of America but does not include stock option expenses in the Companys reported financial statements. If accounting standards are changed to require the Company to expense stock options, the Companys reported earnings will decrease and its stock price could decline.
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. However, managements assessment of the Companys current litigation could change in light of the discovery of facts with respect to legal actions pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which do not accord with managements evaluation of the possible liability or outcome of such litigation.
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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 Companys 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.
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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 August 3, 2002, $36.7 million in borrowings were outstanding under the Companys credit facility. Based on the weighted average interest rate of 4.75% on the Companys credit facility during the first half ended August 3, 2002, if interest rates on the credit facility were to increase by 10%, and to the extent borrowings were outstanding, for every $1.0 million outstanding on the Companys credit facility, net income would be reduced by approximately $3,000 per year. A discussion of the Companys accounting policies for financial instruments and further disclosures relating to financial instruments is included in the Summary of Significant Accounting Policies and Nature of Business in the Notes to Consolidated Financial Statements in the Companys Form 10-K for the year ended February 2, 2002. The Company is not a party with respect to derivative financial instruments.
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PART II-OTHER INFORMATION
Item 1 Legal Proceedings
On September 17, 2001 a former Pacific Sunwear employee filed a putative class action lawsuit against Pacific Sunwear which alleges that Pacific Sunwear has not properly paid wages to its California-based store managers, co-managers and assistant managers working in PacSun stores. 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.
On May 3, 2002 a former Pacific Sunwear employee filed a putative class action lawsuit against Pacific Sunwear in the California Superior Court for the County of Orange, alleging claims substantially similar to the claims alleged in the Auden case described above. In the case, Adams v. Pacific Sunwear of California, Inc., Case No. 02CC00120, the plaintiff alleges that Pacific Sunwear has not properly paid wages to its California store managers and co-managers working in d.e.m.o. stores. The complaint in the action seeks 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 2 Changes in Securities and Use of Proceeds Not Applicable
Item 3 Defaults Upon Senior Securities Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
a) The 2002 Annual Meeting of Shareholders of the Company was held on May 29, 2002.
b) At the 2002 Annual Meeting, Greg H. Weaver, Julius Jensen III, Pearson C. Cummin III, Peter L. Harris and Sally Frame Kasaks were elected as Directors of the Company for a one-year term ending in 2003.
Voting at the 2002 Annual Meeting for the election of directors was as set forth below. Each of the nominees identified below was elected a director.
NAME | VOTES CAST FOR |
VOTES WITHHELD |
||||||
Greg H. Weaver |
26,469,155 | 66,352 | ||||||
Julius Jensen III |
26,180,718 | 354,789 | ||||||
Pearson C. Cummin III |
26,353,076 | 182,431 | ||||||
Peter L. Harris |
26,471,454 | 64,053 | ||||||
Sally Frame Kasaks |
26,193,484 | 342,023 |
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Item 5 Other Information Not Applicable
Item 6 Exhibits and Reports on Form 8-K
(a) | Exhibits: |
10.1 | Third Amendment to Business Loan Agreement, dated as of
August 19, 2002, between the Company and Bank of America
N.A. |
(b) | Reports on Form 8-K: | ||
No reports were filed on form 8-K during the quarter for which this report is filed. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pacific Sunwear of California, Inc. (Registrant) |
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Date: September 6, 2002 | \s\ GREG H. WEAVER |
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Greg H. Weaver Chairman of the Board and Chief Executive Officer |
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Date: September 6, 2002 | \s\ CARL W. WOMACK |
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Carl W. Womack Senior Vice President, Chief Financial Officer and Secretary |
CERTIFICATIONS
I, Greg H. Weaver, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Sunwear of California, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
Date: September 6, 2002 |
\s\ GREG H. WEAVER |
|
|
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Greg H. Weaver Chairman of the Board and Chief Executive Officer |
I, Carl W. Womack, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pacific Sunwear of California, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
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Date: September 6, 2002 |
\s\ CARL W. WOMACK |
|
|
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Carl W. Womack Senior Vice President, Chief Financial Officer and Secretary |
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Exhibit No. | Description | ||
10.1 | Third Amendment to Business Loan Agreement, dated as of August 19, 2002, between the Company and Bank of America N.A. |