UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

OR

Commission file number 0-21296

PACIFIC SUNWEAR OF CALIFORNIA, INC.

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
Preferred Stock Purchase Rights
(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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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 as of August 2, 2003, the end of the most recently completed second quarter, was approximately $1.5 billion. 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 24, 2004, the registrant had 78,462,485 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive Proxy Statement for the 2004 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.

Table of Contents

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 “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 inspired casual apparel and related accessories catering to teenagers and young adults. In addition, the Company operates a website through a subsidiary that sells PacSun merchandise online, provides content and community for its target customers and provides information about the Company.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2003 was the 52-week period ended January 31, 2004. Fiscal 2002 was the 52-week period ended February 1, 2003. Fiscal 2001 was the 52-week period ended February 2, 2002. Fiscal 2004 will be the 52-week period ending January 29, 2005.

The Company, a California corporation, was incorporated in August 1982. At the end of fiscal 2003, the Company operated 677 PacSun stores, 79 PacSun Outlet stores and 121 d.e.m.o. stores for a total of 877 stores in 50 states and Puerto Rico. As of March 26, 2004, the Company operated 682 PacSun stores, 79 PacSun Outlet stores and 127 d.e.m.o. stores for a total of 888 stores in 50 states and Puerto Rico.

The Company’s executive offices are located at 3450 East Miraloma Avenue, Anaheim, California, 92806; the telephone number is (714) 414-4000; and the Company’s internet address is www.pacsun.com. Through the Company’s website, the Company makes available free of charge, as soon as reasonably practicable after such information has been filed or furnished to the Securities and Exchange Commission (the “Commission”), its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Store Formats

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 both male and female customers between the ages of 12 and 22. PacSun stores offer a broad wardrobe selection, with the goal of being viewed by its customers as the dominant retailer in its niche. PacSun stores average approximately 3,500 square feet in size. The Company currently seeks locations of approximately 3,500 to 4,000 square feet for its new PacSun stores. At the end of fiscal 2003, the Company operated 677 PacSun stores totaling approximately 2,380,000 square feet.

PacSun Outlet - These stores average approximately 4,100 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 2003, the Company operated 79 PacSun Outlet stores totaling approximately 323,000 square feet.

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 inspired casual apparel and related accessories. d.e.m.o. targets both male and female 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 malls as PacSun stores. The Company currently seeks locations of approximately 2,500 to 3,000 square feet for its new d.e.m.o. stores.

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At the end of fiscal 2003, the Company operated 121 d.e.m.o. stores totaling approximately 294,000 square feet.

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 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 competitors who may offer 100% private labels, greater than 80% name brands, or seek to serve a wider customer base and age range. See “Merchandising.”

Promote the PacSun Brand Image. The Company promotes the PacSun brand through national print advertising in major magazines that target teens and young adults. In the past, the Company has sponsored sporting events consistent with the PacSun brand image and lifestyle and has conducted PacSun television advertising campaigns. The Company’s current promotional efforts are focused exclusively on national print advertising, a trend that the Company expects to continue through fiscal 2004. The Company also maintains a private label credit card through a third party to promote the PacSun brand image and lifestyle.

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, PacSun Outlet 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 non-intrusive 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 accompanied by 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 in the next four years. The Company has previously announced its plans to operate 1,400 total stores by the end of 2007, of which approximately 900 will be PacSun stores, approximately 100 will be PacSun Outlet stores, and approximately 400 will be d.e.m.o. stores. In each of the last three fiscal years in the period ended January 31, 2004, the Company opened 86, 73, and 129 net

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new stores, respectively. See “Store Expansion” within the “Stores” section of this document for further details regarding plans for fiscal 2004.

Internet Strategy. The Company sells merchandise over the internet at www.pacsun.com. The website offers a selection of the same merchandise carried in 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 and search engines and markets its website in its PacSun stores using in-store signage, merchandise bags and receipts. The Company’s internet strategy benefits from the nationwide retail presence of its stores, 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.

Merchandising

Merchandise. PacSun, PacSun Outlet and d.e.m.o. stores offer a broad selection of casual apparel, related accessories and footwear 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:

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, Hurley and O’Neill. d.e.m.o. offers well-known name brands sought by its target customers, such as Ecko, Phat Farm/Baby Phat, Enyce, Rocawear and Sean John. In addition, the Company continuously adds and supports up-and-coming new brands in both PacSun and d.e.m.o. No vendor accounted for more than 8% of total net sales during fiscal 2003.

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. A product design group, in collaboration with the Company’s buying staff, designs the Company’s private brand merchandise internally. The Company has a sourcing group that oversees the manufacture and delivery of its private label merchandise, with manufacturing contracted both domestically and internationally. Private label merchandise sales accounted for 32% and 33% of the Company’s net sales in fiscal 2003 and fiscal 2002, respectively.

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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, PacSun Outlet 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 100 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 Wednesday” program, during which new vendors are encouraged to make presentations of their merchandise to the Company’s buying staff.

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 label 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, PacSun Outlet 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, identifying emerging fashion trends, and selecting branded and private label merchandise styles in quantities, colors and sizes to meet inventory levels established by management. 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.

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Stores

Locations. The Company has expanded from 11 stores in California at the end of fiscal 1986 to 877 stores in 50 states and Puerto Rico at the end of fiscal 2003. The table below sets forth the number of stores located in each state as of the end of fiscal 2003:

Store Expansion. During fiscal 2003, the Company opened 86 net new stores, which included 65 PacSun stores, 7 PacSun Outlet stores and 14 d.e.m.o. stores. In addition, the Company expanded or relocated 27 existing stores during fiscal 2003. During fiscal 2004, the Company plans to open approximately 110 net new stores, of which approximately 65 will be PacSun stores, approximately five will be PacSun Outlet stores and approximately 40 will be d.e.m.o. stores. The Company also plans to expand or relocate approximately 35 existing smaller stores during fiscal 2004. As of the date of this filing, approximately 75% of the leases for the approximately 110 net new stores the Company expects to open in fiscal 2004 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 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 3,500 to 4,000 square feet and d.e.m.o. store locations of approximately 2,500 to 3,000

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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. For details concerning average costs to build and stock new and relocated stores in fiscal 2003, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources.”

The Company’s continued growth depends upon 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, 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, one or more co-managers or assistant managers, and approximately six to twelve part-time sales associates. District managers supervise approximately seven to twelve stores and approximately six to ten 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 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. In each fiscal year since fiscal 1991, the Company has achieved an inventory shrinkage rate of 1.3% or less of net sales at retail, or .6% or less of net sales at cost.

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. Management uses weekly best/worst item sales reports 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 offices. Each of the regional and district managers uses a laptop computer and can instantly access appropriate or relevant 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 2004.

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, Aeropostale and Hot Topic. 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.

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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 intends to maintain its marks and the related registrations.

Employees

At the end of fiscal 2003, the Company had approximately 12,200 employees, of whom approximately 8,800 were part-time. Of the total employees, approximately 450 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 26, 2004:

Set forth below is certain information with respect to the 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 since joining the Company. 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.

Timothy M. Harmon, who joined the Company in September 1991, has served as President and Chief Merchandising Officer since November 1997. Prior to November 1997, he served in various senior level executive merchandising positions since joining the Company. Prior to joining the Company, Mr. Harmon served in various merchandising positions at Wideworld/MTV Sportswear, a domestic apparel manufacturer, Chauvin International, an import apparel manufacturer, Anchor Blue, a teen apparel retailer, and Federated Department Stores.

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 relocated to its current corporate office and distribution center located in Anaheim, California. The Company’s facilities encompass approximately

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550,000 square feet. The Company believes the current facilities are capable of servicing approximately 1,500 stores.

The Company continues to lease its former facilities under an operating lease covering approximately 176,000 square feet. The lease expires in February 2008. The Company is currently seeking a tenant to sublease the remaining square footage of its former facilities for the remainder of the lease term (see note 7 to the consolidated financial statements).

The Company leases substantially all of its stores under operating lease agreements with initial terms ranging from approximately eight to ten years (see note 7 to the consolidated financial statements). 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

During fiscal 2003, the Company reached an agreement to settle all claims related to two lawsuits concerning overtime pay for a total of $4.0 million. The Company had accrued $3.9 million related to these matters at the end of fiscal 2002. The suits are Auden v. Pacific Sunwear of California, Inc., which was filed September 17, 2001, and Adams v. Pacific Sunwear of California, Inc., which was filed August 2, 2002. The complaints alleged that the Company improperly classified certain California-based employees as “exempt” from overtime pay. In February 2004, the Company made a $3.1 million payment on the aggregate settlement amount with the remaining amounts expected to be paid in the first half of fiscal 2004. The settlement did not have a material impact on results of operations for fiscal 2003.

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.

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 (as adjusted to reflect the Company’s 3-for-2 stock splits in December 2002 and August 2003):

As of March 26, 2004, the number of holders of record of common stock of the Company was approximately 140, and the number of beneficial holders of the common stock was in excess of 24,000.

The Company has never declared or paid any dividends on its common stock. The Company’s current credit facility prohibits the payment of cash dividends on its capital stock.

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ITEM 6. SELECTED FINANCIAL DATA

The selected balance sheet and income statement data as of January 31, 2004, and February 1, 2003, and for each of the three fiscal years in the period ended January 31, 2004, 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 should also 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 data as of February 2, 2002, February 4, 2001 (“fiscal 2000”), and January 30, 2000 (“fiscal 1999”), and the consolidated income statement data for each of the two fiscal years in the period ended February 4, 2001, are derived from audited consolidated financial statements of the Company, which are not included herein.

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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.

Executive Overview

Management of the Company considers the following items to be key performance indicators in evaluating Company performance:

Comparable (or “same store”) sales - Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or expansion/relocation. Management of the Company considers same store sales to be an important indicator of current Company performance. Same store sales results are important in achieving operating leverage of certain expenses such as store payroll, store occupancy, depreciation, general and administrative expenses, and other costs that are somewhat fixed. Positive same store sales results generate greater operating leverage of expenses while negative same store sales results negatively impact operating leverage. Same store sales results also have a direct impact on the Company’s total net sales, cash, and working capital.

Net merchandise margins - Management analyzes the components of net merchandise margins, specifically initial markup and markdowns as a percentage of net sales. Any inability to obtain acceptable levels of initial markups or any significant increase in the Company’s use of markdowns could have an adverse impact on the Company’s gross margin results and results of operations.

Operating margin - Management views operating margin as a key indicator of the Company’s success. The key drivers of operating margins are comparable store net sales, net merchandise margins, and the Company’s ability to control operating expenses. Operating margin for fiscal 2003, 2002 and 2001, was 12.3%, 9.6% and 6.5%, respectively. The Company’s highest historical operating margin was 12.9% for fiscal 1999.

Store sales trends - Management evaluates store sales trends in assessing the operational performance of the Company’s store expansion strategies. Important store sales trends include average net sales per store, average net sales per square foot, and average trend sales for new stores. Average net sales per store (in thousands) for fiscal 2003, 2002 and 2001 were $1,229, $1,102 and $1,031, respectively. Average net sales per square foot were $363, $330 and $321, respectively.

Cash flow and liquidity (working capital) - Management evaluates cash flow from operations, liquidity and working capital to determine the Company’s short-term operational financing needs. Cash flows from operations were significantly higher in fiscal 2003 as compared to fiscal 2002, primarily due to higher net income driven by the 13.1% comparable store net sales increase in fiscal 2003. Management expects cash flows from operations will be sufficient to finance operations without borrowing under the Company’s credit facility.

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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 upon shipment for orders placed through the Company’s website. The Company records the sale of gift cards as a current liability and recognizes a sale when a customer redeems a gift card. The amount of the gift card liability is determined taking into account the Company’s estimate of the portion of gift cards that will not be redeemed or recovered. The Company accrues for estimated 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 event that the actual rate of sales returns by customers increased significantly, the Company’s operational results could be adversely affected. The Company accrued $.6 million at the end of fiscal 2003 for estimated sales returns by customers based on historical sales return results.

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 primarily upon its current rate of sale and the age of the item, among other factors. 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.

Long-Lived Assets - In the normal course of business, the Company acquires tangible and intangible assets. The Company periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant and equipment, and other intangible assets) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Impairment is assessed when the undiscounted expected future cash flows derived from an asset or asset group are less than its carrying amount. Impairments are recognized in operating earnings. The Company uses its best judgment based on the most current facts and circumstances surrounding its business when applying these impairment rules to determine the timing of the impairment test, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. Changes in assumptions used could have a significant impact on the Company’s assessment of recoverability. Numerous factors, including changes in the Company’s business, industry segment, and the global economy, could significantly impact management’s decision to retain, dispose of, or idle certain of its long-lived assets.

Goodwill and Other Intangible Assets - The Company evaluates the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates the Company’s cost of capital. Such estimates are subject to change and the Company may be required to recognize impairment losses in the future.

Insurance Reserves - The Company is responsible for workers’ compensation insurance claims up to a specified aggregate stop loss amount. The Company maintains a reserve for estimated claims, both reported and incurred but not reported, based on historical claims experience and other estimated assumptions. Actual claims activity has historically been within management’s expectations and the reserves established. To the extent claims experience or management’s estimates change, additional charges may be recorded in the future up to the aggregate stop loss amount for each policy year.

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Accrued Sublease Loss Charges - The Company remains liable under two operating leases covering its former corporate offices and a former store location. These facilities remain vacant as of the date of this filing. At the end of fiscal 2002, the Company had accrued $3.6 million to account for the difference between the Company’s remaining contractual lease obligations and the rate and timeframe within which the Company expected to be able to sublease these properties. During fiscal 2003, based on a review of real estate market conditions and on-going negotiations, the Company revised its sublease assumptions and increased its accrued sublease loss charges by $1.9 million to a total of $5.5 million. To the extent management’s estimates relating to the Company’s ability to sublease these facilities at the assumed rates or within the assumed timeframes changes or is incorrect, additional charges or reversals of previous charges may be recorded in the future. At January 31, 2004, the aggregate remaining obligations under these leases were approximately $5.4 million for the former corporate offices and approximately $6.7 million for the former store location. These amounts are included in the contractual obligations table within Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources.”

Income Taxes - Current income tax expense is the amount of income taxes expected to be payable for the current year. The combined federal and state income tax expense was calculated using estimated effective annual tax rates. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing prudent and feasible tax planning in assessing the value of its deferred tax assets. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company determines that it is more likely than not that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

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 could be recorded in the future, which may have an adverse effect on the Company’s operating results (see note 7 to the consolidated financial statements).

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. The discussion that follows should be read in conjunction with the following table:

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Fiscal 2003 Compared to Fiscal 2002

Net Sales

Net sales increased to $1.04 billion in fiscal 2003 from $846.4 million in fiscal 2002, an increase of $193.9 million, or 22.9%. The components of this $193.9 million increase in net sales are as follows:

Of the 13.1% increase in comparable store net sales in fiscal 2003, PacSun and PacSun Outlet comparable store net sales increased a combined 12.3% and d.e.m.o. comparable store net sales increased 21.0%. The increase in comparable store net sales within PacSun and PacSun Outlet was primarily attributable to increases in comparable store net sales of footwear, accessories, juniors and, to a lesser extent, young men’s merchandise. The increase in comparable store net sales within d.e.m.o. was primarily attributable to increases in comparable store net sales of juniors, accessories, footwear and, to a lesser extent, young men’s merchandise. Average retail prices of merchandise sold remained relatively unchanged in fiscal 2003 compared to fiscal 2002 and had no significant impact on the net sales increase for fiscal 2003.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $363.3 million in fiscal 2003 from $283.7 million in fiscal 2002, an increase of $79.6 million, or 28.1%. As a percentage of net sales, gross margin was 34.9% for fiscal 2003 compared to 33.5% for fiscal 2002. The components of this 1.4% increase in gross margin as a percentage of net sales are as follows:

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Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $235.1 million in fiscal 2003 from $202.4 million in fiscal 2002, an increase of $32.7 million, or 16.2%. As a percentage of net sales, these expenses decreased to 22.6% from 23.9%. The components of this 1.3% net decrease as a percentage of net sales are as follows:

Net Interest Income/Expense

Net interest income was $.7 million in fiscal 2003 compared to net interest expense of $.6 million in fiscal 2002, an increase of $1.3 million in net interest income. This increase was primarily the result of higher average cash balances in fiscal 2003. Average cash balances were higher in fiscal 2003 primarily due to higher net income driven by the comparable store net sales increase in fiscal 2003 as well as the absence of the construction loan related to the Company’s new corporate offices and distribution center that was outstanding for a portion of fiscal 2002.

Income Tax Expense

Income tax expense was $48.8 million in fiscal 2003 compared to $31.0 million in fiscal 2002. The effective income tax rate was 37.8% in fiscal 2003 and 38.4% in fiscal 2002. The lower effective income tax rate for fiscal 2003 was primarily attributable to a lower weighted effective state income tax rate for the Company. The weighted effective state income tax rate of the Company will vary depending on a number of factors, such as differing income tax rates and net sales by state.

Fiscal 2002 Compared to Fiscal 2001

Net Sales

Net sales increased to $846.4 million in fiscal 2002 from $684.8 million in fiscal 2001, an increase of $161.6 million, or 23.6%. The components of this $161.6 million increase in net sales are as follows:

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Of the 9.7% increase in comparable store net sales in fiscal 2002, PacSun and PacSun Outlet comparable store net sales increased 9.4% and d.e.m.o. comparable store net sales increased 12.4%. The increase in comparable store net sales within PacSun and PacSun Outlet was primarily attributable to increases in comparable store net sales of footwear, juniors, and accessories. The increase in comparable store net sales within d.e.m.o. was primarily attributable to increases in comparable store net sales of juniors and accessories merchandise. Average retail prices of merchandise sold remained relatively unchanged in fiscal 2002 compared to fiscal 2001 and had no significant impact on the net sales increase for fiscal 2002.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $283.7 million in fiscal 2002 from $220.2 million in fiscal 2001, an increase of $63.5 million, or 28.8%. As a percentage of net sales, gross margin was 33.5% for fiscal 2002 compared to 32.2% for fiscal 2001. The components of this 1.3% increase in gross margin are as follows:

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $202.4 million in fiscal 2002 from $175.9 million in fiscal 2001, an increase of $26.5 million, or 15.1%. As a percentage of net sales, these expenses decreased to 23.9% from 25.7%. The components of this 1.8% net decrease as a percentage of net sales are as follows:

Selling, general and administrative expenses include provisions made by the Company for the wage and hour litigation (see Item 3, “Legal Proceedings,” and note 7 to the consolidated financial statements). These amounts are included in store payroll.

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Net Interest Expense/Income

Net interest expense was $.6 million in fiscal 2002 compared to interest income of $.5 million in fiscal 2001, a decrease of $1.1 million. This decrease was primarily the result of interest expense arising from a construction loan related to the construction of the Company’s new corporate offices and distribution center in fiscal 2002 as well as lower average cash balances during fiscal 2002 as compared to fiscal 2001.

Income Tax Expense

Income tax expense was $31.0 million in fiscal 2002 compared to $17.2 million in fiscal 2001. The effective income tax rate in fiscal 2002 and fiscal 2001 was 38.4%.

Liquidity and Capital Resources

The Company has financed its operations primarily from internally generated cash flow, with occasional short-term and long-term borrowings and equity financing in past years. 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. 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 for fiscal 2004.

Operating Cash Flows

Net cash provided by operating activities for fiscal 2003, fiscal 2002 and fiscal 2001 was $151.6 million, $76.6 million and $58.4 million, respectively. The $75.0 million increase in cash provided by operations in fiscal 2003 as compared to fiscal 2002 was attributable to the following:

(1) Accounts payable as a percentage of inventories increased to 26.2% at January 31, 2004, as compared to 23.1% at February 1, 2003, primarily due to timing of payments.

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.

Working Capital

Working capital at the end of fiscal 2003, fiscal 2002 and fiscal 2001 was $243.0 million, $109.3 million and $78.9 million, respectively. The $133.7 million increase in working capital at January 31, 2004 as compared to February 1, 2003 was attributable to the following:

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Investing Cash Flows

Net cash used in investing activities in fiscal 2003, fiscal 2002 and fiscal 2001 was $73.2 million, $40.4 million and $92.9 million, respectively. The components of the $73.2 million of net cash used in investing activities in fiscal 2003 are as follows:

In fiscal 2004, capital expenditures are expected to be approximately $56 million, of which approximately $48 million will be for opening new and relocated/expanded stores, and approximately $8 million will be used for other capital expenditures, including maintenance capital on existing stores and computer hardware and software.

On January 27, 2004, the Board of Directors of the Company adopted a resolution authorizing the Company to purchase up to 2.5 million shares of the Company’s common stock in open market transactions. As of January 31, 2004, no purchases had been made pursuant to the resolution. Subsequent to January 31, 2004, the Company repurchased shares as follows:

Financing Cash Flows

Net cash provided by financing activities in fiscal 2003 was $28.0 million as compared to cash used of $22.9 million in fiscal 2002 and cash provided of $28.7 million in fiscal 2001, respectively. Of the $28.0 million of net cash provided by financing activities in fiscal 2003, $30.4 million was due to proceeds received from the exercise of stock options, offset by principal payments under capital lease and long-term debt obligations of $2.4 million.

The Company has a credit facility with a bank, which expires April 1, 2007. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) through March 31, 2005 to be used for cash advances, commercial letters of credit and shipside bonds. The Credit Line increases to $50.0 million from April 1, 2005 through March 31, 2006, and $60.0 million from April 1, 2006 through expiration on April 1, 2007. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.0% at January 31, 2004) or at optional interest rates that are primarily dependent upon the London Inter-bank Offered Rates for the time

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period chosen. The Company did not borrow under the credit facility at any time during fiscal 2003. The Company had $13.1 million outstanding in letters of credit at January 31, 2004. 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 January 31, 2004, the Company was in compliance with all of the covenants.

A significant decrease in the Company’s operating results could adversely affect the Company’s ability to maintain the required financial ratios under the Company’s credit facility. Required financial ratios include total liabilities to tangible net worth, 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, if any. The most likely result would require the Company to 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. At January 31, 2004, the Company had no borrowings outstanding under its credit facility.

Contractual Obligations

The Company has minimum annual rental commitments under existing store leases, the lease for its former corporate offices and distribution center, capital leases for computer equipment, and other long-term debt obligations for multi-year computer maintenance contracts. The Company’s financial obligations under these arrangements are approximately $83.0 million in fiscal 2004 and similar amounts annually thereafter. The Company leases all of its retail store locations under operating leases. The Company leases equipment, from time to time, under capital leases. In addition, at any time, the Company is contingently liable for open letters of credit with foreign suppliers of merchandise. At January 31, 2004, the Company’s future financial commitments under these arrangements are as follows:

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 Company’s 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 four stores in fiscal 2003 and anticipates closing approximately five stores in fiscal 2004.

New Store Costs

The Company’s average cost to build a new store in fiscal 2003, including leasehold improvements, furniture and fixtures, and net of landlord allowances, was approximately $241,000 for PacSun stores, approximately $247,000 for PacSun Outlet stores, and approximately $248,000 for d.e.m.o. stores. The average cost of expanding or relocating a PacSun store was approximately $407,000 and the average cost of expanding or relocating a d.e.m.o. store was approximately $369,000 in fiscal 2003. 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 cost for initial inventory for new stores opened in fiscal 2003 was approximately $128,000 for PacSun stores, approximately $202,000 for PacSun Outlet stores, and approximately $167,000 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.

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New Accounting Pronouncements

Information regarding new accounting pronouncements is contained in note 1 to the consolidated financial statements for the year ended January 31, 2004, which note is incorporated herein by this reference.

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 2003 and fiscal 2002, excluding sales generated by new and relocated/expanded stores, the Christmas and back-to-school periods together accounted for approximately 36% of the Company’s annual net sales and a higher percentage of the Company’s operating income. In fiscal 2003, excluding net sales generated by new and relocated/expanded stores, approximately 43% of the Company’s annual net sales occurred in the first half of the fiscal year and approximately 57% in the second half. The Company’s quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings; the amount of revenue contributed by new stores; the timing and level of markdowns; the timing of store closings, expansions and relocations; competitive factors; and general economic conditions.

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 Exchange Act, 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. All forward-looking statements included in this report, including forecasts of fiscal 2004 planned new store openings, 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 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 same store sales results, operating margins, financial condition and results of operations. Misjudgments or unanticipated fashion changes could also have a 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 32% and 33% of net sales in fiscal 2003 and fiscal 2002, 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

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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 effect on the Company’s same store sales results, operating margins, 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. The Company has previously announced plans to operate 1,400 stores by the end of 2007, of which approximately 900 will be PacSun stores, approximately 100 will be PacSun Outlet stores, and approximately 400 will be d.e.m.o. stores. As of March 26, 2004, the Company operated 888 stores, of which 682 were PacSun stores, 79 were PacSun Outlet stores, and 127 were 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, that such expansion will be profitable, or 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.

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.

Internet Sales. The Company’s internet operations are subject to numerous risks that could have a material adverse effect on the Company’s operational results, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems. Specific risks include: (i) diversion of sales from PacSun stores; (ii) rapid technological change; (iii) liability for online content; and (iv) risks related to the failure of the computer systems that operate the website and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions. In addition, internet operations involve risks which are beyond the Company’s control that could have a material adverse effect on the Company’s operational results, 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

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regulation; (v) online security breaches; (vi) credit card fraud; and (vii) competition and general economic conditions specific to the internet, online commerce and the apparel industry.

Economic Impact of Terrorist Attacks or War/Threat of War. The majority of the Company’s stores are located in regional shopping malls. Any 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. Mall closures, as well as lower customer traffic due to security concerns, could result in decreased sales. Additionally, war or the threat of war could significantly diminish consumer spending, resulting in decreased sales for the Company. Decreased sales would have a material adverse effect on the Company’s 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) enhanced security measures at United States ports, which could delay delivery of imports; (iii) 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; (iv) imposition of duties, taxes, and other charges on imports; (v) delayed receipt or non-delivery of goods due to the failure of foreign-source suppliers to comply with applicable import regulations; and (vi) 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 that, 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 effect on the Company’s business, financial condition and results of operations.

Credit Facility Financial Covenants. 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 a rolling four-quarter EBITDA requirement, total liabilities to tangible net worth ratio, and limitations on capital expenditures. 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, if any. The most likely result would require the Company to 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 FASB and the Commission have 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 Company’s quarterly and annual financial statements in accordance with accounting principles generally accepted in the United States of America but does not include compensation expense related to stock options in the Company’s reported financial statements. If accounting standards are changed to require the Company to expense stock options, the Company’s 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, management’s assessment of the Company’s 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 management’s evaluation of the possible liability or outcome of such litigation.

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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, net 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.”

*************

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.

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 January 31, 2004, there were no borrowings outstanding under the Company’s credit facility. Based on the weighted average interest rate of 3.67% on the Company’s credit facility during fiscal 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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer of the Company (collectively, the “certifying officers”) evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). These disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in its periodic reports filed with the Commission is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that the information is communicated to the certifying officers on a timely basis.

The certifying officers concluded, based on their evaluation, that the Company’s disclosure controls and procedures were effective for the Company as of the end of the period covered by this report, taking into consideration the size and nature of the Company’s business and operations.

No change in the Company’s internal control over financial reporting occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over

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financial reporting.

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 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.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

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 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

On November 10, 2003, the Company filed an 8-K furnishing a press release announcing results of operations for the third quarter and 39 weeks ended November 1, 2003.

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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 23, 2004, on its behalf by the undersigned, thereunto duly authorized.

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.

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003, AND FEBRUARY 2, 2002:

CONSOLIDATED FINANCIAL STATEMENTS:

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 subsidiaries as of January 31, 2004 and February 1, 2003, 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 January 31, 2004. 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 subsidiaries as of January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for goodwill and other intangible assets during the year ended February 1, 2003, as a result of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective February 3, 2002.

DELOITTE & TOUCHE LLP
Costa Mesa, California
March 19, 2004

F-2

PACIFIC SUNWEAR OF CALIFORNIA, INC.

See notes to consolidated financial statements

F-3

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per share amounts)

See notes to consolidated financial statements

F-4

PACIFIC SUNWEAR OF CALIFORNIA, INC.

See notes to consolidated financial statements

F-5

PACIFIC SUNWEAR OF CALIFORNIA, INC.

Supplemental disclosures of non-cash transactions: During the fiscal years ended February 1, 2003 and February 2, 2002, the Company recorded an increase to additional paid-in capital of $291 and $290, respectively, related to the issuance of stock to satisfy certain deferred compensation liabilities. During the year ended February 1, 2003, the Company purchased a three-year computer maintenance agreement under a long-term debt obligation for $2,413. During the years ended February 1, 2003 and February 2, 2002, the Company acquired property pursuant to capital lease obligations in the amount of $3,016 and $493, respectively. Additionally, during the year ended February 2, 2002, the Company financed the purchase of a vehicle for $24.

See notes to consolidated financial statements

F-6

PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002
(all amounts in thousands, except share and per share amounts, unless otherwise indicated)

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS

Nature of Business — Pacific Sunwear of California, Inc. and its 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 teens and young adults. d.e.m.o. specializes in hip-hop inspired casual apparel and related accessories catering to teens and young adults. In addition, the Company operates a website through a 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 the 52- or 53-week period ending on the Saturday closest to January 31. Fiscal 2003 was the 52-week period ended January 31, 2004. Fiscal 2002 was the 52-week period ended February 1, 2003. Fiscal 2001 was the 52-week period ended February 2, 2002. Fiscal 2004 will be the 52-week period ending January 29, 2005.

Principles of Consolidation —The consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its subsidiaries, Pacific Sunwear Stores Corp. and ShopPacSun.com Corp. All 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 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 consolidated financial statements as well as the reported revenues and expenses during the reporting period. Actual results could differ from these estimates.

Fair Value of Financial Instruments — Statement of Financial Accounting Standards No. 107 (“SFAS 107”), “Disclosures about Fair Value of Financial Instruments,” requires management to disclose the estimated fair value of certain assets and liabilities defined by SFAS 107 as financial instruments. Financial instruments are generally defined by SFAS 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 January 31, 2004, management believes that the carrying amounts of cash, short-term investments, 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 purchased with an original maturity of three months or less to be cash equivalents.

Short-term Investments – Short-term investments are classified as held-to-maturity and consist of marketable corporate and U.S. agency debt instruments with original maturities of three months to one year and are carried at amortized cost. Cost is determined by specific identification. At January 31, 2004, the market value of the Company’s portfolio is $32.7 million, consisting of U.S. agency debentures of $16.8 million and corporate debentures of $15.9 million.

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. 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 primarily upon its current rate of sale and the age of the item, among other factors.

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 an asset’s estimated useful life or the life of the related store’s lease (generally 10 years). Depreciation on furniture, fixtures and equipment is computed on the straight-line method over five years.

F-7

Goodwill and Other Intangible Assets — On February 3, 2002, the Company adopted SFAS 142, “Goodwill and Intangible Assets,” which revised the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested for impairment annually and also in the event of an impairment indicator. The Company completed the required transitional impairment test and the annual test and determined that no impairment existed. Any subsequent impairment losses will be reflected in operating income. With the adoption of SFAS 142, the Company discontinued amortization of goodwill.

The Company evaluates the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is determined based on estimated future cash flows, discounted at a rate that approximates the Company’s cost of capital. Such estimates are subject to change and the Company may be required to recognize impairment losses in the future.

Other Long-Lived Assets — On February 3, 2002, the Company adopted SFAS 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 144, the Company reviewed long-lived assets and determined that no impairment existed. Under SFAS 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.

Insurance Reserves — The Company is responsible for workers’ compensation insurance claims up to a specified aggregate stop loss amount. The Company maintains a reserve for estimated claims, both reported and incurred but not reported, based on historical claims experience and other estimated assumptions.

Income Taxes — Current income tax expense is the amount of income taxes expected to be payable for the current year. The combined federal and state income tax expense was calculated using estimated effective annual tax rates. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing prudent and feasible tax planning in assessing the value of its deferred tax assets. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company determines that it is more likely than not that these assets will not be realized, the Company would reduce the value of these assets to their expected realizable value through a valuation allowance, thereby decreasing net income. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

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 could be recorded in the future, which may have an adverse affect on the Company’s operating results (see note 7).

Stock Split — On August 25, 2003, the Company effected a three-for-two stock split. Shareholders’ equity was restated to give retroactive recognition to the stock split in prior periods by reclassifying the par value ($247) of the additional shares arising from the split from additional paid-in capital to common stock. Additionally, all share and per share amounts were restated to give effect to the stock split in prior periods.

Revenue Recognition — Sales are recognized upon purchase by customers at the Company’s retail store locations or upon shipment for orders placed through the Company’s website. The Company records the sale of gift cards as a current liability and recognizes a sale when a customer redeems a gift card. The amount of the gift card liability is determined taking into account the Company’s estimate of the portion of gift cards that will not be redeemed or recovered. The Company accrues for estimated sales returns by customers based on historical sales return results. Sales return accrual activity for each of the three fiscal years in the period ended January 31, 2004 is as follows:

F-8

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 becomes publicly available. Costs associated with placing advertising that has been produced, such as television and magazine advertising, are expensed when the advertising becomes publicly available. Advertising costs were $10,430, $8,897 and $12,967 in fiscal 2003, 2002 and 2001, respectively.

Earnings per Share — The Company reports earnings per share in accordance with the provisions of SFAS 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 2,253,893, 1,215,471 and 955,362, in fiscal 2003, 2002 and 2001, respectively, were used in the calculation of diluted earnings per common share. Options to purchase 31,996, 2,033,399 and 2,377,778 shares of common stock in fiscal 2003, 2002 and 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 during the respective period.

Stock-Based Compensation — The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 (APB 25). In March 2000, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 44 of APB 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.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods for voluntary transition to SFAS 123’s fair value method of accounting for stock-based employee compensation (“the fair value method”). SFAS 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financial statements. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS 148 for fiscal 2003, 2002 and 2001 below.

SFAS 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income and earnings per share. Under SFAS 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 from option date; stock volatility, 37.1% in fiscal 2003, 55.2% in fiscal 2002 and 71.4% in fiscal 2001; risk-free interest rates, 3.2% in fiscal 2003, 3.0% in fiscal 2002 and 4.4% in fiscal 2001; and no dividends during the expected term. The Company’s calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 2003, 2002 and 2001 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 in the following table:

F-9

Comprehensive Income — The Company reports comprehensive income in accordance with the provisions of SFAS 130, “Reporting Comprehensive Income.” SFAS 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 fiscal 2003, 2002 and 2001.

Segment Information – The Company operates exclusively in the retail apparel industry in which the Company distributes, designs and produces clothing, accessories and related products. Operating results of the Company’s retail concepts and sales channels have been aggregated due to the similarities of economic and operating characteristics among the retail concepts and sales channels as well as their reliance on shared operating functions, including the sourcing, merchandising and distribution functions.

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 — In April 2002, the FASB issued SFAS 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 amended certain provisions of SFAS 13 and requires the fair value recognition of guarantee obligations under which the Company may become secondarily liable. The Company adopted SFAS 145 during fiscal 2002. The adoption of SFAS 145 resulted in the recognition of a $.5 million liability related to the Company’s guarantee of an assignee’s performance under a lease obligation (see note 7).

In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of commitment to an exit or disposal plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 has not had a material impact on the Company’s financial position or results of operations.

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

F-10

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities” and in December 2003, issued FIN 46(R) (revised December 2003) “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46(R) clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (ARB 51), to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. FIN 46(R) applies immediately to variable interest entities created after December 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies no later than the first reporting period ending after December 15, 2004, to variable interest entities in which an enterprise holds a variable interest (other than special purpose) that it acquired before January 1, 2004. FIN 46(R) applies to public enterprises as of the beginning of the applicable interim or annual period. The Company believes that the adoption of FIN 46 and FIN 46(R) will not have a material impact on its financial position or results of operations because the Company has no variable interest entities.

On February 2, 2003, the Company adopted EITF 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor.” The consensus reached by the EITF addressed the accounting for cash consideration received from a vendor, which includes vendor allowances, rebates, cooperative advertising payments, etc. The consensus of the EITF establishes an overall presumption that cash received from a vendor is a reduction in the price of a vendor’s products and should be recognized accordingly as a reduction in cost of sales at the time the related inventory is sold. Some consideration could be characterized as a reduction of expense if the cash received represents a reimbursement of specific, incremental, identifiable costs incurred by the retailer to sell the vendor’s products. The adoption of EITF 02-16 did not have a material impact on the Company’s financial position or results of operations.

Reclassifications — Certain prior year amounts have been reclassified to conform to the current year presentation.

2.

DEFERRED COMPENSATION AND OTHER ASSETS

The Company maintains an Executive Deferred Compensation Plan (the “Executive Plan”) covering Company officers that is funded by participant contributions and periodic Company discretionary contributions. For fiscal 2003, 2002 and 2001, the Company made contributions of $256, $206 and $175, respectively, to the Executive Plan. The deferred compensation asset balance represents the investments held by the Company to cover the vested participant balances in the Executive Plan, which is represented by the deferred compensation liability of $10,925 and $7,097 in long-term liabilities as of January 31, 2004 and February 1, 2003, respectively. For a description of other employee compensation arrangements, see note 9. Deferred compensation and other assets consist of the following:

3.

GOODWILL

On February 3, 2002, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets,” which eliminated amortization of goodwill and other intangible assets with indefinite useful lives. SFAS 142 requires, among other items, 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 Company’s operating results of the adoption of SFAS 142 as if the non-amortization provisions of the standard had been in effect for all periods presented:

F-11

4.

CREDIT FACILITY

The Company has a credit facility with a bank, which expires April 1, 2007. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) through March 31, 2005 to be used for cash advances, commercial letters of credit and shipside bonds. The Credit Line increases to $50.0 million from April 1, 2005 through March 31, 2006, and $60.0 million from April 1, 2006 through expiration on April 1, 2007. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.0% at January 31, 2004) or at optional interest rates that are primarily dependent upon the London Inter-bank Offered Rates for the time period chosen. The Company did not borrow under the credit facility at any time during fiscal 2003. The Company had $13.1 million outstanding in letters of credit at January 31, 2004. 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 January 31, 2004, the Company was in compliance with all of the covenants.

5.

ACCRUED LIABILITIES

Accrued liabilities consist of the following: