<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21296
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CALIFORNIA 95-3759463
(State of Incorporation) (I.R.S Employer Identification No.)
5037 EAST HUNTER AVENUE
ANAHEIM, CALIFORNIA 92807
(Address of principal executive offices) (Zip code)
(714) 693-8066
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share, at November 21, 1997 was 13,725,042.
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 2, 1997
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements:
Balance Sheets as of November 2, 1997 (unaudited) and February 2, 1997...............3
Statements of Operations (unaudited) for the third quarter and nine months
ended November 2, 1997 and November 3, 1996......................................4
Statements of Cash Flows (unaudited) for the nine months ended
November 2, 1997 and November 3, 1996............................................5
Notes to Financial Statements......................................................6-7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................8-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................12
Item 2. Changes in Securities.................................................................12
Item 3. Defaults Upon Senior Securities.......................................................12
Item 4. Submission of Matters to a Vote of Security Holders...................................12
Item 5. Other Information.....................................................................12
Item 6. Exhibits and Reports on Form 8-K......................................................12
SIGNATURE PAGE........................................................................13
</TABLE>
2
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 2, FEBRUARY 2,
1997 1997
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<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 7,467,925 $ 9,962,626
Short-term investments 16,676,534 --
Accounts receivable 1,452,042 583,811
Merchandise inventories 35,349,278 19,760,412
Prepaid expenses, includes $2,577,499 and $1,910,681 of prepaid rent,
respectively 3,682,482 3,216,160
of prepaid rent, respectively
Deferred taxes 1,358,733 1,358,733
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Total current assets 65,986,994 34,881,742
PROPERTY AND EQUIPMENT:
Leasehold improvements 35,242,433 25,210,439
Furniture, fixtures and equipment 26,419,537 20,244,954
------------- ------------
61,661,970 45,455,393
Less accumulated depreciation and amortization (19,437,598) (15,952,174)
------------- ------------
Net property and equipment 42,224,372 29,503,219
OTHER ASSETS:
Goodwill, net of accumulated amortization of $360,826 and $292,165,
respectively 8,002,917 796,578
Deposits and other assets 1,234,851 523,018
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Total other assets 9,237,768 1,319,596
------------- ------------
Total assets $ 117,449,134 $ 65,704,557
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,534,033 $ 6,686,561
Accrued liabilities (Note 7) 7,638,055 6,035,689
Income taxes payable 1,464,239 469,258
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Total current liabilities 22,636,327 13,191,508
DEFERRED COMPENSATION 924,299 371,057
DEFERRED RENT 3,588,653 3,139,487
DEFERRED TAXES 1,456,463 1,456,463
SHAREHOLDERS' EQUITY:
Preferred Stock, par value $.01; authorized, 5,000,000 shares; none issued
and outstanding
Common Stock, par value $.01; authorized, 33,750,000 shares; issued and
outstanding, 13,664,918 and 12,138,161 shares, respectively 136,649 121,382
Additional paid-in capital 62,171,469 30,697,321
Retained earnings 26,535,274 16,727,339
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Total shareholders' equity 88,843,392 47,546,042
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Total liabilities and shareholders' equity $ 117,449,134 $ 65,704,557
============= ============
</TABLE>
See accompanying notes
3
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRD QUARTER ENDED FOR THE NINE MONTHS ENDED
-------------------------------- ----------------------------------
NOVEMBER 2, 1997 NOVEMBER 3, 1996 NOVEMBER 2, 1997 NOVEMBER 3, 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $65,312,228 $43,247,154 $152,571,105 $105,454,832
Cost of goods sold, including buying,
distribution, and occupancy costs
Cost of goods sold, including buying,
distribution and occupancy costs 41,641,155 28,959,797 101,343,997 73,071,566
----------- ----------- ------------ ------------
Gross margin 23,671,073 14,287,357 51,227,108 32,383,266
Selling, general and administrative expenses 14,536,882 9,837,141 35,858,585 25,805,134
----------- ----------- ------------ ------------
Operating income 9,134,191 4,450,216 15,368,523 6,578,132
Interest income 465,822 89,862 855,412 137,342
----------- ----------- ------------ ------------
Income before income tax expense 9,600,013 4,540,078 16,223,935 6,715,474
Income tax expense 3,796,000 1,801,000 6,416,000 2,661,000
----------- ----------- ------------ ------------
Net income $ 5,804,013 $ 2,739,078 $ 9,807,935 $ 4,054,474
=========== =========== ============ ============
Net income per common and
common equivalent share $ 0.41 $ 0.22 $ 0.73 $ 0.33
----------- ----------- ------------ ------------
Weighted average common and common
equivalent shares outstanding 14,156,319 12,513,122 13,421,957 12,402,620
=========== =========== ============ ============
</TABLE>
See accompanying notes
4
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------------
NOVEMBER 2, 1997 NOVEMBER 3, 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,807,935 $ 4,054,474
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,863,186 3,852,948
Change in, net of effect of acquisition:
Accounts receivable (868,231) (721,210)
Merchandise inventories (14,314,232) (7,276,035)
Prepaid expenses (451,322) (236,956)
Deposits and other assets (470,166) (120,825)
Accounts payable 6,847,472 4,466,230
Accrued liabilities 1,602,366 1,680,926
Income taxes and deferred income taxes 1,993,100 1,163,972
Deferred rent 449,166 363,289
Deferred compensation 553,242 115,232
------------ -----------
Net cash provided by operating activities 10,012,516 7,342,045
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (24,395,534) --
Short-term investment maturities 7,719,000 --
Acquisition, net of cash acquired (10,414,634) --
Investment in property and equipment (15,907,345) (5,779,235)
------------ -----------
Net cash used in investing activities (42,998,513) (5,779,235)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 30,085,073 --
Principal payments under loan agreement -- (781,250)
Cash paid in lieu of fractional shares due to 3-for-2 stock split (2,187) (1,692)
Proceeds from exercise of stock options 408,410 910,840
------------ -----------
Net cash provided by financing activities 30,491,296 127,898
------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS: (2,494,701) 1,690,708
CASH AND CASH EQUIVALENTS, beginning of period 9,962,626 4,315,842
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 7,467,925 $ 6,006,550
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 2,381 $ 10,811
Income taxes $ 4,422,900 $ 1,497,028
</TABLE>
Non-cash transaction: During the nine months ended November 2, 1997 and November
3, 1996 , the Company recorded an increase to additional paid-in capital of
$998,119 and $444,542, respectively, related to tax benefits associated with the
exercise of non-qualified stock options.
See accompanying notes
5
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements are unaudited except for the
February 2, 1997 balance sheet. These statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The Company's fiscal year is the 52- or 53-week period which ends on
the Sunday closest to the end of January. "Fiscal 1997" is a 52-week period
which ends February 1, 1998.
In the opinion of management, all adjustments consisting only of normal
recurring entries necessary for a fair presentation have been included. The
preparation of financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported expenses during the reported period. Actual results
could differ from these estimates. The results of operations for the third
quarter and nine months ended November 2, 1997 are not necessarily indicative of
the results that may be expected for the fiscal year ending February 1, 1998.
For further information, refer to the financial statements and notes thereto as
of and for the years ended February 2, 1997, February 4, 1996 and January 29,
1995.
NOTE 2 - CASH AND CASH EQUIVALENTS; SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash on hand and marketable
securities with original maturities of three months or less.
Short-term investments consist of highly liquid investments with
original maturities between three and twelve months. Management determines the
proper classifications of investments at the time of purchase and reevaluates
such designations as of each balance sheet date. At November 2, 1997, all
securities were classified as held-to-maturity under the provisions of SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities" based on
the Company's positive intent and ability to hold the securities to maturity. In
accordance with SFAS No. 115, these securities are carried at amortized cost,
which approximates fair market value.
NOTE 3 - FOLLOW-ON OFFERING
On June 16, 1997, the Company issued 1,260,000 shares of its common
stock in a follow-on stock offering and on July 17, 1997 issued an additional
47,250 shares upon the partial exercise of the underwriters' over-allotment
option. The Company's net proceeds, after deducting expenses associated with the
offering, were $30.1 million.
NOTE 4 - NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share are based on the
weighted average number of common and common equivalent shares outstanding
during the relevant periods.
Stock Split - On October 9, 1997, the Company effected a three-for-two
stock split. Earnings per share and share outstanding amounts have been restated
to give retroactive effect to the stock split in these financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128") which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 requires the disclosure of basic and
diluted earnings per share. For the third quarter of fiscal 1997 and fiscal
1996, the amount of basic earnings per share would have been $.42 in comparison
to $.41 per common and common equivalent share and $.23 in comparison to $.22
per common and common equivalent share, respectively. For the nine months ended
November 2, 1997 and November 3, 1996, the
6
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amount of basic earnings per share would have been $.76 in comparison to $.73
per common and common equivalent share and $.34 in comparison to $.33 per common
and common equivalent share, respectively.
NOTE 5 - CREDIT FACILITY
The Company has a credit facility with a bank which expires in August
1998. The credit facility provides for an $11.5 million line of credit, which
includes sub-limits of $7.5 million for cash advances, and $9.0 million (as
amended in June 1997) for commercial letters of credit. Interest on advances
under the line of credit facility is payable monthly at the bank's prime rate
(8.5% at November 2, 1997). At November 2, 1997, the Company had $4.1 million in
letters of credit outstanding and no cash advances outstanding. The loan
agreement subjects the Company to various restrictive covenants, including
maintenance of certain financial ratios and prohibits payment of cash dividends
on capital stock. At November 2, 1997, the Company was in compliance with such
covenants.
NOTE 6 - FEDERAL AND STATE INCOME TAX EXPENSE
The combined federal and state income tax expense was calculated using
estimated effective annual statutory tax rates.
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 2, FEBRUARY 2,
1997 1997
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<S> <C> <C>
Accrued compensation and benefits $3,055,259 $2,939,217
Reserve for store expansion/relocation and closing costs 1,964,675 1,424,315
Sales tax payable 736,104 401,181
Other accrued liabilities 1,882,017 1,270,976
---------- ----------
$7,638,055 $6,035,689
========== ==========
</TABLE>
NOTE 8 - ACQUISITION
Effective September 4,1997 the Company acquired from Good Vibrations,
Inc., a Florida corporation, the store assets and inventory, leasehold
improvements and lease rights pertaining to 15 retail stores operated by Good
Vibrations. The purchase price for this acquisition of the assets was $10.4
million, which included $7.3 million of goodwill and $.3 million for
non-competition agreements, which will be amortized over 25 years and 5 years,
respectively. The stores are located in regional malls in Florida, offering
casual young men's apparel, junior apparel, accessories and footwear to teens
and young adults.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The thirteen weeks ended November 2, 1997 (third quarter) as compared to the
thirteen weeks ended November 3, 1996 (third quarter)
Net Sales
Net sales increased to $65.3 million for the third quarter of fiscal
1997 from $43.2 million for the third quarter of fiscal 1996, an increase of
$22.1 million, or 51.2%. Of this $22.1 million increase, $8.3 million was
attributable to net sales generated by 37 new stores opened in fiscal 1997 and
not yet included in the comparable store base, $6.6 million was attributable to
a 17.2% increase in comparable store net sales in the third quarter of fiscal
1997, $4.3 million was attributable to net sales generated by new stores opened
in fiscal 1996 and not yet included in the comparable store base, $2.0 million
was attributable to 15 stores that have been expanded or relocated to the larger
format and not yet included in the comparable store base and $1.5 million was
attributable to the 15 Good Vibrations stores acquired in September 1997 and not
yet included in the comparable store base. Offsetting these increases, was a $.6
million decrease due to closing six stores, three of which were closed in the
fourth quarter of fiscal 1996 and three of which were closed during the nine
months ended November 2, 1997. The increase in comparable store net sales was
primarily attributable to the addition of footwear and juniors to certain of the
Company's stores and, to a lesser extent, increases in sales of young men's
merchandise. Net sales of footwear and junior female apparel represented
approximately 24% of total net sales for the third quarter of fiscal 1997
compared to approximately 12% for the third quarter of fiscal 1996. The average
retail price per unit sold increased approximately 5% in the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996, primarily attributable
to a change in the mix of products sold, including the addition of footwear, an
increase in sales of pants as a percentage of net sales and a decrease in
T-shirt sales as a percentage of net sales.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $23.7 million for the third quarter of fiscal 1997 from $14.3 million for the
third quarter of fiscal 1996, an increase of $9.4 million, or 65.7%. As a
percentage of net sales, gross margin increased to 36.3% from 33.1%. Of this
3.2% increase, 1.4% was due to a decrease in occupancy costs as a percentage of
net sales which was related to higher comparable store net sales, 1.3% was due
to an increase in net merchandise margins as a percentage of net sales as a
result of an increase in initial markup and .5% was due to a decrease in buying
and distribution cost as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $14.5 million
for the third quarter of fiscal 1997 from $9.8 million for the third quarter of
fiscal 1996, an increase of $4.7 million, or 48.0%. As a percentage of net
sales, these expenses decreased to 22.2% from 22.7%. Of this .5% decrease, .7%
was attributable to a decrease in store selling expenses as a percentage of net
sales, primarily as a result of an increase in comparable store net sales and
higher total net sales, partially offset by a .2% increase in general and
administrative expenses as a percentage of net sales.
Income Tax Expense
Income tax expense was $3.8 million for the third quarter of fiscal
1997 compared to $1.8 million for the third quarter of fiscal 1996. The
effective income tax rate for the third quarter of fiscal 1997 was 39.6 %
compared to 39.7% for the third quarter of fiscal 1996.
8
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The thirty-nine weeks ended November 2, 1997 (nine months) as compared to the
thirty-nine weeks ended November 3, 1996 (nine months)
Net Sales
Net sales increased to $152.6 million for the first nine months of
fiscal 1997 from $105.5 million for the first nine months of fiscal 1996, an
increase of $47.1 million, or 44.6%. Of this $47.1 million increase, $15.4
million was attributable to a 16.2% increase in comparable store net sales in
the first nine months of fiscal 1997, $15.1 million was attributable to net
sales generated by new stores opened in fiscal 1996 and not yet included in the
comparable store base, $12.6 million was attributable to 37 new stores opened in
fiscal 1997 and not yet included in the comparable store base, $4.0 million was
attributable to 15 stores that have been expanded or relocated to the larger
format and are not yet included in the comparable store base and $1.5 million
was attributable to the 15 Good Vibrations stores acquired in September 1997 and
not yet included in the comparable store base. Offsetting these increases was a
$1.5 million decrease due to closing six stores, three of which were closed in
the fourth quarter of fiscal 1996 and three of which were closed during the nine
months ended November 2, 1997. The increase in comparable store net sales was
primarily attributable to the addition of footwear and juniors to certain of the
Company's stores and, to a lesser extent, increases in sales of young men's
merchandise. Net sales of footwear and juniors represented approximately 23% of
total net sales for the first nine months of fiscal 1997 compared to
approximately 11% for the first nine months of fiscal 1996. The average retail
price per unit sold increased approximately 8% in the first nine months of
fiscal 1997 compared to the first nine months of fiscal 1996, primarily
attributable to a change in the mix of products sold, including the addition of
footwear, an increase in sales of pants as a percentage of net sales and a
decrease in T-shirt sales as a percentage of net sales.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $51.2 million for the first nine months of fiscal 1997 from $32.4 million for
the first nine months of fiscal 1996, an increase of $18.8 million, or 58.0%. As
a percentage of net sales, gross margin increased to 33.6% from 30.7%. Of this
2.9% increase, 1.8% was due to a decrease in occupancy costs as a percentage of
net sales which was related to higher comparable store net sales, 1.0% was due
to an increase in net merchandise margins due to an increase in initial markup
and a decrease in markdowns as a percentage of net sales and .1% was due to a
decrease in buying and distribution costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $35.9 million
for the nine months of fiscal 1997 from $25.8 million for the nine months of
fiscal 1996, an increase of $10.1 million, or 39.1%. As a percentage of net
sales, these expenses decreased to 23.5% from 24.5%. Of this 1.0% decrease, 1.2%
was attributable to a decrease in store selling expenses as a percentage of net
sales primarily as a result of an increase in comparable store net sales and
higher total net sales, partially offset by a .2% increase in general and
administrative expenses as a percentage of net sales.
Income Tax Expense
Income tax expense was $6.4 million for the first nine months of fiscal
1997 compared to $2.7 million for the first nine months of fiscal 1996. The
effective income tax rate for the first nine months of fiscal 1997 was 39.5%
compared to 39.6% for the first nine months of fiscal 1996.
9
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash
flow, short-term borrowings and equity financing. The Company's primary capital
requirements have been for the construction of new stores, remodeling,
expansion, or relocation of selected stores and financing of inventories.
Net cash provided by operating activities for the first nine months of
fiscal 1997 was $10.0 million compared to $7.3 million for the first nine months
of fiscal 1996. The $2.7 million increase was attributable to an increase in net
income of $5.7 million, an increase in accrued liabilities and taxes of $.8
million, an increase in depreciation and amortization of $1.0 million, offset by
an increase in merchandise inventories net of accounts payable of $4.7 million
and net increases of other items of $.1 million. Working capital at November 2,
1997 was $43.4 million compared to $21.7 million at February 2, 1997, an
increase of $21.7 million. This increase was primarily attributable to the
increase in cash and short term investments as a result of a follow-on offering
completed in the second quarter of fiscal 1997, offset by capital expenditures
related to the construction of 37 new stores and 10 expansions/relocations, as
well as the acquisition of the store assets and leasehold improvements of 15
stores operated by Good Vibrations, Inc., in the third quarter of fiscal 1997
and the goodwill generated thereby. Inventories at November 2, 1997 were $35.3
million compared to $19.8 million at February 2, 1997, an increase of $15.5
million. This increase was related to opening 37 new stores, the acquisition of
the 15 Good Vibrations stores, expanding/relocating ten stores with 50% larger
average square footage, the addition of juniors and footwear to certain of the
Company's existing stores as well as a seasonal increase in inventories in all
stores. The increase in accounts payable of $6.8 million at November 2, 1997
compared to February 2, 1997 was primarily attributable to the increase in
inventories at November 2, 1997.
Net cash used in investing activities was $43.0 million for the first
nine months of fiscal 1997 compared to $5.8 million for the first nine months of
fiscal 1996. Of this $37.2 million increase, $24.4 million is attributable to
the purchase of short-term investments in fiscal 1997, offset by $7.7 million in
short-term investment maturities. Net cash invested in property and equipment
for the first nine months of fiscal 1997 was $15.9 million compared to $5.8
million for the first nine months of fiscal 1996, due to an increase in the
number of new stores opened and, to a lesser extent, an increase in the number
of stores expanded/relocated in the first nine months of fiscal 1997 compared to
the first nine months of fiscal 1996. The Company purchased the store assets,
leasehold improvements and lease rights for 15 Good Vibrations stores for
approximately $9.2 million in cash and purchased inventories of approximately
$1.2 million in cash at the closing, which occurred on September 4, 1997. Of the
$10.4 million purchase price, $9.9 million was paid on the closing date, $.3
million was paid on September 30, 1997 and the balance of $.2 million is payable
in March 1998.
Net cash provided by financing activities for the first nine months of
fiscal 1997 was $30.5 million compared to $.1 million for the first nine months
of fiscal 1996. In the second quarter of fiscal 1997, the Company issued
1,307,250 shares of common stock in a follow-on stock offering. The net proceeds
to the Company from the issuance of these shares were $30.1 million.
Additionally, the Company made no borrowings or repayments under its loan
agreement, compared to the repayment of a term loan of $.8 million in the first
nine months of fiscal 1996. In the first nine months of fiscal 1997, the Company
received proceeds of $.4 million from the exercise of stock options compared to
$.9 million in the first nine months of fiscal 1996. At November 2, 1997, the
Company had $4.1 million in letters of credit outstanding.
The Company estimates that its capital expenditures during the fourth
quarter of 1997 will be approximately $7.0 million in connection with opening 15
new stores, the relocation of the corporate office and distribution center
scheduled to occur in the first quarter of fiscal 1998, expanding or relocating
six existing stores and commencing construction on approximately 12 new stores
opening in fiscal 1998.
The Company plans to open approximately 60 stores, and expand or
relocate 15 existing stores during fiscal 1998. In addition, the Company plans
to relocate the corporate office and distribution center to a new location in
close proximity to the current facilities in the first quarter of fiscal 1998.
The Company estimates that capital expenditures in fiscal 1998 will total
approximately $28 million.
The Company reviews the operating performance of its stores on an
ongoing basis to determine which stores, if any, to close and records closing
costs as stores are closed or identified to be closed. The Company closed three
stores in the first nine months of fiscal 1997 and anticipates closing one
additional store during the remainder of fiscal 1997.
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<PAGE> 11
Management believes that the Company's working capital, bank line of
credit and cash flows from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements through the end of
fiscal 1998.
INFLATION
The Company does not believe that inflation has had a material effect
on the results of operations during the past three years. There can be no
assurance that the Company's business will not be affected by inflation in the
future.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128") which is effective for financial statements issued for periods ending
after December 15, 1997. SFAS No. 128 requires the disclosure of basic and
diluted earnings per share. For the third quarter of fiscal 1997 and fiscal
1996, the amount of basic earnings per share would have been $.42 in comparison
to $.41 per common and common equivalent share and $.23 in comparison to $.22
per common and common equivalent share, respectively. For the first nine months
ended November 2, 1997 and November 3, 1996, the amount of basic earnings per
share would have been $.76 in comparison to $.73 per common and common
equivalent share and $.34 in comparison to $.33 per common and common equivalent
share, respectively.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is seasonal by nature, with the Christmas and
back-to-school periods historically accounting for the largest percentage of
annual net sales. The Company's first quarter historically accounts for the
smallest percentage of annual net sales. In fiscal 1996 and fiscal 1995,
excluding net sales generated by new and expanded/relocated 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 1996, excluding net sales generated by new and
expanded/relocated stores, approximately 43% of the Company's annual net sales
occurred in the first half of the fiscal year and 57% in the second half. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of store openings and 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.
SAFE HARBOR STATEMENT
The preceding "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"), and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. These forward-looking statements
include the plans and objectives of management for future operations, including
plans and objectives relating to the future economic performance of the Company.
The forward-looking statements and associated risks set forth herein may include
or relate to: (i) the planned opening of approximately 15 stores and expansion
or relocation of six stores during the remainder of fiscal 1997; (ii) the
opening of 60 new stores and expansion/relocation of 15 existing stores fiscal
year 1998; (iii) the relocation of the corporate office and distribution center
to a new location in close proximity to the current facilities in the first
quarter of fiscal 1998; (iv) anticipation of closing one additional store in
fiscal 1997; (v) the $28 million estimate of fiscal 1998 capital expenditures
and (vi) sufficiency of the Company's working capital, bank line of credit and
cash flows from operating activities for the Company's future operating and
capital requirements.
The forward-looking statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, the following: (i)
the ability of the Company to locate and obtain favorable store sites, negotiate
acceptable lease terms, and hire and train employees; (ii) management's ability
to manage the Company's planned expansion; (iii) the availability of merchandise
from the Company's vendors and private brand sources; (iv) any unexpected delays
in the timing of the availability of the Company's new corporate office and
distribution center; (v) the effect of economic conditions; and (vi) the effect
of competitive pressures from other retailers, particularly including those in
the recently introduced juniors and footwear categories. Results actually
achieved thus may differ materially from expected results in these statements.
11
<PAGE> 12
PART II-OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5 - Other Information - Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Employment Agreement, dated November 3, 1997, by
and between Pacific Sunwear of California, Inc. and Greg H.
Weaver.
(27) Financial Data Schedule
(b) Reports on Form 8-K:
On September 16, 1997 a form 8-K was filed reporting the
acquisition of certain assets of Good Vibrations , Inc. a Florida corporation.
The Company purchased the leasehold interests and improvements, store assets,
intellectual property, certain contracts and goodwill for a purchase price of
approximately $9.2 million in cash and purchased inventories of approximately
$1.2 million in cash at the closing date of September 4, 1997.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pacific Sunwear of California, Inc.
(Registrant)
Date: December 10, 1997 \s\ GREG H. WEAVER
----------------------
Greg H. Weaver
Chairman of the Board, Chief Executive Officer
Date: December 10, 1997 \s\ CARL W. WOMACK
---------------------
Carl W. Womack
Senior Vice President,
Chief Financial Officer and Secretary
13
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this
"AGREEMENT") is entered into as of November 3, 1997, by and between Pacific
Sunwear of California, Inc., a California corporation (the "Company"), and Greg
H. Weaver ("Executive").
The Company desires to employ Executive, and Executive desires
to be an employee of the Company, pursuant to the terms and conditions set forth
herein.
In consideration of the foregoing and the promises and
covenants set forth below, the parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive as
Chairman of the Board of Directors and Chief Executive Officer, and Executive
agrees to be employed in such positions during the term of this Agreement.
Executive shall devote his full time and efforts to perform his duties
faithfully and diligently and, to the best of his ability, to advance the
interests of the Company.
2. COMPENSATION. The Company shall pay Executive a base salary
of $500,000 per year, with such increases as may be approved by the Company's
Board of Directors, payable in accordance with the Company's practices in effect
from time to time. Notwithstanding the foregoing, the minimum annual adjustment
to the base salary of Executive, commencing November 3, 1997, shall be equal to
the greater of (i) the percentage by which the Consumer Price Index for the last
month of the then current year of the term of this Agreement shall have
increased as compared to the Consumer Price Index of the same month of the
immediately preceding year and (ii) 5% of Executive's then annual base salary.
"Consumer Price Index" refers to the Consumer Price Index - Los Angeles
Metropolitan Area - All items compiled by the U.S. Department of Labor, Bureau
of Labor Statistics, based on 1967 as 100.
<PAGE> 2
In addition, Executive shall receive a monthly car lease
allowance of $800 per month, reimbursement for all other automobile expenses,
family medical insurance, five weeks vacation per year and other benefits that
are comparable to the benefits offered to other executive officers of the
Company in general. The Company also shall provide Executive with a $1,000,000
term life insurance policy wherein Executive or a person designated by Executive
is the beneficiary, subject to Executive completing and passing any required
physical examinations. The Company also shall reimburse Executive for all
out-of-pocket expenses reason- ably incurred and paid by him in the performance
of his duties pursuant to this Agreement. Such reimbursement shall be in
accordance with the Company's policies, and Executive shall furnish to the
Company the documentation required to support the deductibility of such expenses
for federal income tax purposes. All payments made under this Agreement are
subject to all deductions required by law.
Executive also shall be entitled to participate in an annual
bonus program wherein Executive shall receive (i) with regard to 1998 and
thereafter, a bonus equal to a percentage of his base salary, not to exceed 150%
(100% x 150%) of his base salary and (ii) with regard to 1997, 112.5% (75% x
150%) using $400,000 as the base salary for three quarters of 1997 and using
$500,000 as the base salary for one quarter of 1997), based upon the achievement
of financial performance criteria to be established by the Company in
consultation with Executive. The bonus payment, if any, shall be made reasonably
promptly after audited financial statements are available to the Company for the
purpose of determining the satisfaction of the financial performance criteria.
Nothwithstanding the foregoing, if the Company determines in
good faith that there is a reasonable likelihood that any bonus payable to
Executive would not be deductible by the Company for federal income tax purposes
solely by reason of the limitation under Section 162(m) of the Internal Revenue
Code of 1986, as amended ("Section 162(m)"), then to the extent reasonably
deemed necessary by the Company to ensure that the entire amount of such bonus
is deductible, the Company may defer payment of all or any
2
<PAGE> 3
portion of such bonus. The amount of bonus so deferred shall accrue interest at
the rate of 7.5% per year, compounded monthly, until paid. The amount of such
deferred bonus and accrued interest shall be paid to Executive (or his estate in
the event of his death) at the earliest possible date, as determined by the
Company in good faith, on which the deductibility of compensation paid or
payable to Executive for the taxable year of the Company for which the payment
is made will not be limited by Section 162(m).
3. TERM.
(a) The term of this Agreement (the "Term") shall commence on
the date hereof and shall terminate on January 15, 1999; provided,
however, if the Company does not give Executive written notice at least
60 days prior to the end of the Term of the Company's intention to not
have the Term extended for a one year period, then the Term shall
automatically be extended for one year and shall be automatically
extended each year thereafter unless the Company gives Executive
written notice at least 60 days prior to the end of the Term (any such
notice being a "60 Day Notice") of the Company's intention not to
extend the Term.
(b) The Term may be terminated at any time upon the occurrence
of any of the following events:
(i) The death or permanent disability of
Executive;
(ii) Executive's voluntary resignation;
(iii) Executive's discharge for cause; or
(iv) Upon the 30th day following written notice of
termination other than for cause (the "Termination Without
Cause Notice") from the
Company to Executive.
(c) Executive shall be considered permanently disabled if
Executive is absent from employment or unable to render services
hereunder on a full-time
3
<PAGE> 4
basis by reason of physical or mental illness or disability for six
months or more in the aggregate in any consecutive twelve month period
during the Term.
(d) As used in Paragraph 3(b)(ii), "voluntary resignation"
means Executive has resigned for any reason other than at the express
written request, whether or not for cause, of the Board.
(e) As used in Paragraph 3(b)(iii), "cause" shall mean only
that (i) Executive has refused to perform or discharge his material
obligations or duties hereunder for 30 days after notice from the Board
of such refusal, or (ii) Executive has engaged in illegal or other
wrongful conduct substantially detrimental to the business or
reputation of the Company.
(f) If this Agreement is terminated pursuant to Paragraphs
3(b)(i), 3(b)(ii) or 3(b)(iii), this Agreement shall terminate
immediately or at such later date as shall be designated by the Board
and all of Executive's rights hereunder shall terminate effective upon
such termination, except for payment of amounts earned by or owed to
Executive prior to Executive's termination hereunder, including,
without limitation, a Pro Rata Portion of the Bonus (as defined below).
Except as provided above and as otherwise specified
in any notice of termination, Executive shall not continue after
termination to be an employee of the Company for any purpose and all
rights Executive might thereafter have as an employee pursuant to any
plan shall cease except as expressly provided to the contrary in
writing under any such plan.
(g) If the Company should terminate this Agreement pursuant to
Paragraph 3(b)(iv) by giving a Termination Without Cause Notice or
shall at any time give a 60 Day Notice:
(i) Executive shall cease to be Chairman of the Board
of Directors and Chief Executive Officer of the Company, and
to hold such other office or
4
<PAGE> 5
position Executive then holds in the Company or any subsidiary
or affiliate thereof, effective upon the date specified in the
Termination Without Cause Notice or the 60 Day Notice, as the
case may be (the "Effective Date"), and if requested by a
majority of the members of the Board, shall resign from the
Board and from any of the Boards of Directors of the Company's
subsidiaries or affiliated companies of which Executive may be
a member.
(ii) The Company shall be obligated and shall continue
to pay Executive a salary at Executive's then annual salary
(without regard to any bonus) for a period of one year
following the Effective Date. Such payments shall be made in
installments payable as provided in Section 2 hereof. The
Company also shall pay Executive in a single payment within 60
days of the end of the Company's fiscal year a Pro Rata
Portion of the Bonus (as defined below). "Pro Rata Portion of
the Bonus" means an amount equal to any bonus to which
Executive would have been entitled had Executive remained an
employee for the balance of the fiscal year in which his
employment terminated multiplied by a fraction, the numerator
of which is the number of days from February 1 to the date of
Executive's termination, and the denominator of which is 365.
(h) Executive must give the Company written notice of at least
60 days prior to Executive's voluntary resignation.
4. RETURN OF DOCUMENTS AND PROPERTY. Upon the termination of
Executive's employment by the Company, or at any time upon the request of the
Company, Executive (or his heir or personal representative) shall deliver to the
Company (a) all documents and materials containing trade secrets and other
confidential information relating to the Company's business and affairs, and (b)
all other documents, materials and other property belonging to the Company or
its
5
<PAGE> 6
affiliated companies that are in the possession or under the control of
Executive.
5. ASSIGNMENT. Executive's rights and obligations under this
Agreement shall not be assignable by Executive. The Company's rights and
obligations under this Agreement shall not be assignable by the Company except
as incident to the transfer, by merger, liquidation, or otherwise, of all or
substantially all of the business of the Company.
6. NOTICES. Any notice required or permitted under this
Agreement shall be given in writing and shall be deemed to have been effectively
made or given if personally delivered, or if telegraphed, telexed, cabled, or
mailed to the other party at its address set forth below in this Section 6, or
at such other address as such party may designate by written notice to the other
party hereto. Any effective notice hereunder shall be deemed given on the date
personally delivered or on the date telegraphed, telexed, cabled or deposited in
the United States mail (sent by certified mail, return receipt requested)
mailed, as the case may be at the following address:
(i) If to the Company:
Pacific Sunwear of California, Inc.
5037 East Hunter Avenue
Anaheim, California 92705
Attention: Secretary
(ii) If to the Executive:
Mr. Greg H. Weaver
c/o Pacific Sunwear of California, Inc.
5037 East Hunter Avenue
Anaheim, California 92705
7. MISCELLANEOUS. This Agreement constitutes the entire
agreement of the parties hereto relating to the subject matter hereof, and there
are no written or oral terms or representations made by either party other than
6
<PAGE> 7
those contained herein. This Agreement supersedes all prior agreements between
the parties concerning the subject matter hereof, including that certain
Severance Agreement dated February 6, 1996, between the Company and Executive
which is hereby deemed terminated as of the date of this Agreement. This
Agreement may only be amended in writing signed by both parties. No waiver by
any party of any breach of this Agreement shall be deemed to be a waiver by any
party of any preceding or succeeding breach. The validity, interpretation,
performance and enforcement of this Agreement shall be governed by the laws of
the State of California without regard to conflicts of laws principles. The
headings contained herein are for reference purposes only and shall not in any
away affect the meaning or interpretation of this Agreement. This Agreement may
be executed in one or more counterparts, each of which shall be deemed to be an
original, all such counterparts together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
By: ______________________________
CARL W. WOMACK
Chief Financial Officer,
Vice President of Finance
and Secretary
"EXECUTIVE"
-----------------------------------
GREG H. WEAVER
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC
SUNWEAR OF CALIFORNIA, INC.'S FORM 10Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER
2, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> AUG-04-1997
<PERIOD-END> NOV-02-1997
<CASH> 7,467,925
<SECURITIES> 16,676,534
<RECEIVABLES> 1,452,042
<ALLOWANCES> 0
<INVENTORY> 35,349,278
<CURRENT-ASSETS> 65,986,994
<PP&E> 61,661,970
<DEPRECIATION> (19,437,598)
<TOTAL-ASSETS> 117,449,134
<CURRENT-LIABILITIES> 22,636,327
<BONDS> 0
0
0
<COMMON> 136,649
<OTHER-SE> 88,706,743
<TOTAL-LIABILITY-AND-EQUITY> 117,449,134
<SALES> 65,312,228
<TOTAL-REVENUES> 65,312,228
<CGS> 41,641,155
<TOTAL-COSTS> 14,536,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (465,822)
<INCOME-PRETAX> 9,600,013
<INCOME-TAX> 3,796,000
<INCOME-CONTINUING> 5,804,013
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,804,013
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
