<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 OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-21296
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CALIFORNIA 95-3759463
(State of Incorporation) (I.R.S. Employer Identification No.)
5200 EAST LA PALMA AVENUE
ANAHEIM, CALIFORNIA 92807
(Address of principal executive offices) (Zip code)
(714) 693-8066
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share, at December 2, 1999 was 31,346,101.
<PAGE> 2
PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of October 31, 1999 (unaudited)
and January 31, 1999............................................................ 3
Consolidated Statements of Income and Comprehensive Income (unaudited) for the
third quarter and nine months ended October 31, 1999 and November 1, 1998....... 4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
October 31, 1999 and November 1, 1998........................................... 5
Notes to Consolidated Financial Statements........................................ 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................... 8-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 15
Item 2. Changes in Securities and Use of Proceeds........................................... 15
Item 3. Defaults Upon Senior Securities..................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................................. 15
Item 5. Other Information................................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................................................... 15
SIGNATURE PAGE...................................................................... 16
</TABLE>
2
<PAGE> 3
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1999 1999
- ------------- -------------
<S> <C> <C>
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents (Note 2) $ 12,122,777 $ 19,031,738
Accounts receivable 3,632,903 899,179
Merchandise inventories 66,630,894 42,469,829
Prepaid expenses, includes $4,627,470 and $3,620,435 of prepaid rent, respectively 6,533,246 5,044,941
Prepaid income tax -- 713,402
Deferred taxes 1,944,275 1,944,275
------------- -------------
Total current assets 90,864,095 70,103,364
PROPERTY AND EQUIPMENT:
Leasehold improvements 62,371,981 47,877,157
Furniture, fixtures and equipment 58,683,338 45,819,759
------------- -------------
121,055,319 93,696,916
Less accumulated depreciation and amortization (34,423,751) (26,773,496)
------------- -------------
Net property and equipment 86,631,568 66,923,420
OTHER ASSETS:
Goodwill, net of accumulated amortization of $907,119 and $758,180, respectively 7,192,646 7,605,563
Deferred compensation and other assets (Note 6) 4,564,079 3,142,504
------------- -------------
Total other assets 11,756,725 10,748,067
------------- -------------
Total assets $ 189,252,388 $ 147,774,851
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,473,998 $ 13,867,906
Accrued liabilities (Note 5) 10,858,127 8,690,783
Income taxes payable 3,304,955 --
------------ ------------
Total current liabilities 31,637,080 22,558,689
DEFERRED COMPENSATION 3,720,590 2,826,531
OTHER LONG-TERM LIABILITIES 28,316 28,316
DEFERRED RENT 5,499,304 4,689,772
DEFERRED TAXES 974,522 974,522
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01; authorized, 5,000,000; none issued and outstanding
Common stock, par value $.01; authorized, 75,937,500 shares; issued and
outstanding, 31,269,917 and 30,650,778 shares, respectively 312,699 306,508
Additional paid-in capital 66,881,959 59,800,206
Retained earnings 80,197,918 56,590,307
------------ ------------
Total shareholders' equity 147,392,576 116,697,021
------------ ------------
Total liabilities and shareholders' equity $189,252,388 $147,774,851
============ ============
</TABLE>
See accompanying notes
3
<PAGE> 4
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRD QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------------------ ------------------------------------
OCTOBER 31, 1999 NOVEMBER 1, 1998 OCTOBER 31, 1999 NOVEMBER 1, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $124,043,858 $ 91,778,786 $305,940,879 $226,144,231
Cost of goods sold, including buying,
distribution and occupancy costs 78,507,789 59,142,689 199,460,975 149,325,239
------------ ------------ ------------ ------------
Gross margin 45,536,069 32,636,097 106,479,904 76,818,992
Selling, general and administrative expenses 25,873,696 19,422,592 68,605,981 51,164,679
------------ ------------ ------------ ------------
Operating income 19,662,373 13,213,505 37,873,923 25,654,313
Interest income 291,265 237,146 529,688 776,895
------------ ------------ ------------ ------------
Income before income tax expense 19,953,638 13,450,651 38,403,611 26,431,208
Income tax expense (Note 4) 7,689,000 5,313,000 14,796,000 10,440,000
------------ ------------ ------------ ------------
Net income $ 12,264,638 $ 8,137,651 $ 23,607,611 $ 15,991,208
============ ============ ============ ============
Comprehensive income (Note 1) $ 12,264,638 $ 8,137,651 $ 23,607,611 $ 15,991,208
============ ============ ============ ============
Net income per share, basic (Note 3) $ 0.39 $ 0.26 $ 0.76 $ 0.51
------------ ------------ ------------ ------------
Net income per share, diluted (Note 3) $ 0.38 $ 0.25 $ 0.74 $ 0.49
------------ ------------ ------------ ------------
Weighted average shares outstanding, basic
(Note 3) 31,181,415 31,523,288 30,946,578 31,227,350
============ ============ ============ ============
Weighted average shares outstanding,
diluted (Note 3) 32,303,781 32,456,645 32,069,043 32,395,296
============ ============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE> 5
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------------------
OCTOBER 31, 1999 NOVEMBER 1, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,607,611 $ 15,991,208
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 10,234,678 7,453,229
Change in:
Accounts receivable (2,733,724) (652,074)
Merchandise inventories (24,161,065) (17,365,590)
Prepaid expenses (1,488,305) (703,031)
Deferred compensation and other assets (565,019) (334,370)
Accounts payable 3,606,092 2,012,264
Accrued liabilities 2,634,184 (1,048,529)
Income taxes and deferred income taxes 8,020,811 2,226,303
Deferred rent 809,532 807,150
------------ ------------
Net cash provided by operating activities 19,964,795 8,386,560
CASH FLOWS FROM INVESTING ACTIVITIES:
Short term investment maturities -- 12,742,666
Investment in property and equipment (29,668,391) (26,457,104)
------------ ------------
Net cash used in investing activities (29,668,391) (13,714,438)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in lieu of fractional shares due to 3-for-2 stock split (10,598) (28,929)
Proceeds from exercise of stock options 2,805,233 1,460,296
------------ ------------
Net cash provided by financing activities 2,794,635 1,431,367
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS: (6,908,961) (3,896,511)
CASH AND CASH EQUIVALENTS, beginning of period 19,031,738 14,781,566
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 12,122,777 $ 10,885,055
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ --
Income taxes $ 6,775,189 $ 8,213,697
</TABLE>
- -------------------------------------------------------------------------------
Non-cash transaction: During the nine months ended October 31, 1999 and November
1, 1998, the Company recorded an increase to additional paid-in capital of
$4,002,454 and $3,753,279, respectively, related to tax benefits associated with
the exercise of non-qualified stock options. In addition, during the nine months
ended October 31, 1999 and November 1, 1998, the Company recorded an increase to
additional paid-in capital of $290,354 and $0, respectively, related to the
issuance of stock to satisfy certain deferred compensation liabilities.
See accompanying notes
5
<PAGE> 6
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited except
for the January 31, 1999 balance sheet. These statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of
Pacific Sunwear of California, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany transactions have been eliminated in
consolidation.
The Company's fiscal year is the 52- or 53-week period which ends on the
Sunday closest to the end of January. "Fiscal 1999" is a 52-week period which
ends January 30, 2000.
In the opinion of management, all adjustments consisting only of normal
recurring entries necessary for a fair presentation have been included. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and reported expenses during the reported
period. Actual results could differ from these estimates. The results of
operations for the third quarter and nine months ended October 31, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 30, 2000. For further information, refer to the financial
statements and notes thereto as of and for the years ended January 31, 1999,
February 1, 1998 and February 2, 1997.
Comprehensive Income -- The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", in the
first quarter 1998. SFAS No. 130 establishes 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. The adoption of SFAS No. 130
required no additional disclosure for the Company and did not have any effect on
the Company's financial position or results of operations.
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and marketable securities
with original maturities of three months or less.
NOTE 3 - NET INCOME PER SHARE, BASIC AND DILUTED
The following table summarizes the computation of EPS:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED: OCTOBER 31, 1999 NOVEMBER 1, 1998
------------------------------------ --------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------- ---------- --------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
$12,264,638 31,181,415 $ 0.39 $ 8,137,651 31,523,288 $ 0.26
DILUTED EPS:
Effect of dilutive stock options 1,122,366 933,357
$12,264,638 32,303,781 $ 0.38 $ 8,137,651 32,456,645 $ 0.25
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS ENDED: OCTOBER 31, 1999 NOVEMBER 1, 1998
------------------------------------- ---------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
$23,607,611 30,946,578 $ 0.76 $15,991,208 31,227,350 $ 0.51
DILUTED EPS:
Effect of dilutive stock options 1,122,465 1,167,946
$23,607,611 32,069,043 $ 0.74 $15,991,208 32,395,296 $ 0.49
</TABLE>
Options to purchase 3,253 and 187,455 shares of common stock in the
third quarter of fiscal 1999 and the third quarter of fiscal 1998, respectively,
and 153,097 and 101,563 in the first nine months of fiscal 1999 and the first
nine months of fiscal 1998, 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.
Stock Split - On June 8, 1999, 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.
NOTE 4 - FEDERAL AND STATE INCOME TAX EXPENSE
The combined federal and state income tax expense was calculated using
estimated effective annual tax rates.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1999 1999
----------- -----------
<S> <C> <C>
Accrued compensation and benefits $ 5,206,881 $ 4,546,415
Sales tax payable 1,437,653 738,910
Reserve for store expansion/relocation and closing costs 1,002,720 1,322,077
Gift certificates and store merchandise credits 695,897 969,378
Other accrued liabilities 2,515,476 1,114,003
----------- -----------
$10,858,627 $ 8,690,783
=========== ===========
</TABLE>
NOTE 6 - DEFERRED COMPENSATION AND OTHER ASSETS
Deferred compensation and other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1999 1999
---------- ----------
<S> <C> <C>
Deferred compensation $4,230,386 $2,807,694
Other assets 323,693 334,810
---------- ----------
$4,554,079 $3,142,504
========== ==========
</TABLE>
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
RESULTS OF OPERATIONS
The thirteen weeks ended October 31, 1999 (third quarter) as compared to the
thirteen weeks ended November 1, 1998 (third quarter)
Net Sales
Net sales increased to $124.0 million for the third quarter of fiscal
1999 from $91.8 million for the third quarter of fiscal 1998, an increase of
$32.2 million, or 35.1%. Of this $32.2 million increase, $18.7 million was
attributable to net sales generated by 101 new stores opened in fiscal 1999 not
yet included in the comparable store base, $6.8 million was attributable to net
sales generated by new stores opened in fiscal 1998 not yet included in the
comparable store base, $5.8 million was attributable to a 6.8% increase in
comparable store net sales in the third quarter of fiscal 1999 and $1.5 million
was attributable to other non-comparable store sales. Offsetting these increases
was a $.6 million decrease in net sales attributable to the closing of four
stores during fiscal 1998 and two stores during fiscal 1999. Other
non-comparable store sales consist of: sales from Pacific Sunwear stores that
have been expanded or relocated and not yet included in the comparable store
base, Pacific Sunwear stores converted to "d.e.m.o." stores and not yet included
in the comparable store base, as well as merchandise sold over the internet.
Stores are deemed comparable stores on the first day of the first month
following the one year anniversary of their opening or expansion/relocation or
conversion from Pacific Sunwear to the d.e.m.o. format. Retail prices of the
Company's merchandise remained relatively unchanged in the third quarter of
fiscal 1999 compared to the third quarter of fiscal 1998 and had no significant
impact on the net sales increase for the third quarter of fiscal 1999.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $45.5 million for the third quarter of fiscal 1999 from $32.6 million for the
third quarter of fiscal 1998, an increase of $12.9 million, or 39.6%. As a
percentage of net sales, gross margin was 36.7% for the third quarter of fiscal
1999 compared to 35.6% for the third quarter of fiscal 1998. Of this 1.1%
increase, net merchandise margins increased 1.0% as a percentage of net sales
for the third quarter of fiscal 1999 compared to the third quarter of fiscal
1998 and occupancy costs for the third quarter of fiscal 1999 decreased .1% as a
percentage of net sales compared to the third quarter of fiscal 1998, which was
related to higher comparable store net sales and higher total net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $25.9 million
for the third quarter of fiscal 1999 from $19.4 million for the third quarter of
fiscal 1998, an increase of $6.5 million, or 33.5%. As a percentage of net
sales, these expenses decreased to 20.9% from 21.2%. Of this .3% net decrease as
a percentage of net sales, .9% was due to a decrease in store
expansion/relocation and closing expenses as a percentage of sales, offset by a
.3% increase in advertising as a percentage of net sales, a .2% increase in
general and administrative expenses and a .1% increase in store payroll as a
percentage of total net sales. The Company initiated its first ever national
print advertising campaign in February 1999.
Income Tax Expense
Income tax expense was $7.7 million for the third quarter of fiscal 1999
compared to $5.3 million for the third quarter of fiscal 1998. The effective
income tax rate was 38.5% for the third quarter of fiscal 1999 as compared to
39.5% for the third quarter of fiscal 1998. The lower effective income tax rate
for the third quarter of fiscal 1999 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 by state and changes in the weighting
formulas primarily caused by the Company's growth by state.
8
<PAGE> 9
The thirty-nine weeks ended October 31, 1999 (nine months) as compared to the
thirty-nine weeks ended November 1, 1998 (nine months)
Net Sales
Net sales increased to $305.9 million for the first nine months of
fiscal 1999 from $226.1 million for the nine months of fiscal 1998, an increase
of $79.8 million, or 35.3%. Of this $79.8 million increase, $31.4 million was
attributable to net sales generated by 101 new stores opened in fiscal 1999 not
yet included in the comparable store base, $29.8 million was attributable to net
sales generated by new stores opened in fiscal 1998 not yet included in the
comparable store base, $14.5 million was attributable to a 7.0% increase in
comparable store net sales in the first nine months of fiscal 1999 and $4.9
million was attributable to other non-comparable store sales. Offsetting these
increases was a $.8 million decrease in net sales attributable to the closing of
four stores during fiscal 1998 and two stores during fiscal 1999. Other
non-comparable sales consist of: sales from Pacific Sunwear stores that have
been expanded or relocated and not yet included in the comparable store base,
Pacific Sunwear stores converted to "d.e.m.o." stores and not yet included in
the comparable store base, as well as merchandise sold over the internet. Stores
are deemed comparable stores on the first day of the first month following the
one year anniversary of their opening or expansion/relocation or conversion from
Pacific Sunwear to the d.e.m.o. format. Retail prices of the Company's
merchandise remained relatively unchanged in the first nine months of fiscal
1999 compared to the first nine months of fiscal 1998 and had no significant
impact on the net sales increase for the first nine months of fiscal 1999.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $106.5 million for the first nine months of fiscal 1999 from $76.8 million
for the first nine months of fiscal 1998, an increase of $29.7 million, or
38.7%. As a percentage of net sales, gross margin was 34.8% for the first nine
months of fiscal 1999 compared to 34.0% for the first nine months of fiscal
1998. Of this .8% increase, net merchandise margins increased .5% as a
percentage of net sales for the first nine months of fiscal 1999 compared to the
first nine months of fiscal 1998 and occupancy costs for the first nine months
of fiscal 1999 decreased .2% as a percentage of net sales compared to the first
nine months of fiscal 1998, which was related to higher comparable store net
sales and higher total net sales. In addition, distribution costs decreased .1%
as a percentage of net sales compared to the first nine months of fiscal 1998 as
a result of leveraging these expenses over higher total net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $68.6 million
for the first nine months of fiscal 1999 from $51.2 million for the first nine
months of fiscal 1998, an increase of $17.4 million, or 34.0%. As a percentage
of net sales, these expenses decreased to 22.4% from 22.6%. Of this .2% net
decrease as a percentage of net sales, store expansion/relocation and closing
expenses decreased by .5% as a percentage of net sales and general and
administrative expenses decreased by .1% as a percentage of net sales . These
decreases as a percentage of net sales were primarily a result of leveraging
these expenses over higher total net sales. These decreases were offset by an
increase in advertising of .4% as a percentage of net sales as a result of the
Company launching its first ever national print advertising campaign in February
1999.
Income Tax Expense
Income tax expense was $14.8 million for the first nine months of fiscal
1999 compared to $10.4 million for the first nine months of fiscal 1998. The
effective income tax rate was 38.5% for the first nine months of fiscal 1999 as
compared to 39.5% for the first nine months of fiscal 1998. The lower effective
income tax rate for the first nine months of fiscal 1999 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 by state
and changes in the weighting formulas primarily caused by the Company's growth
by state.
9
<PAGE> 10
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 1999 was $20.0 million compared to $8.4 million for the first nine months
of fiscal 1998. This $11.6 million increase was attributable to an increase in
net income of $7.6 million, an increase in liabilities for income taxes and
deferred income taxes of $5.8 million, an increase in accrued liabilities of
$3.7 million and an increase in depreciation and amortization of $2.8 million.
These were offset by increases in accounts receivable of $2.1 million, an
increase in inventories net of accounts payable of $5.2 million and net
increases in other items netting to $1.0 million. Working capital at October 31,
1999 was $59.2 million compared to $47.5 million at January 31, 1999, an
increase of $11.7 million. Inventories at October 31, 1999 were $66.6 million
compared to $42.5 million at January 31, 1999, an increase of $24.1 million.
This increase was primarily related to opening 101 new stores and
expanding/relocating twelve stores with in excess of 50% larger average square
footage than their previous locations. The Company's average store inventories
vary throughout the year and increase in advance of the peak selling periods of
spring break, back-to-school and Christmas.
Net cash used in investing activities was $29.7 million for the first
nine months of fiscal 1999 compared to $13.7 million used for the first nine
months of fiscal 1998. Net cash invested in property and equipment was $29.7
million for the first nine months of fiscal 1999 compared to $26.5 million for
the first nine months of fiscal 1998. The increase in capital expenditures was
primarily due to an increase in the number of new stores opened in the first
nine months of fiscal 1999 versus the first nine months of fiscal 1998. For the
first nine months of fiscal 1998, the Company had short term investment
maturities of $12.7 million.
Net cash provided by financing activities for the first nine months of
fiscal 1999 was $2.8 million compared to $1.4 million for the first nine months
of fiscal 1998 primarily due to proceeds received from the exercise of stock
options.
The Company has a credit facility with a bank, which expires in August
2000. The credit facility provides for a $25.0 million line of credit, which can
be used for cash advances, commercial letters of credit and shipside bonds.
Interest on cash advances under the line of credit facility is payable monthly
at the bank's prime rate (8.25% at October 31, 1999). At October 31, 1999, the
Company had $5.5 million in letters of credit outstanding. The loan agreement
subjects the Company to various restrictive covenants, including maintenance of
certain financial ratios and prohibits payment of cash dividends on common
stock. At October 31, 1999, the Company was in compliance with all of the
covenants.
The Company plans to open approximately ten new stores, of which five
will be Pacific Sunwear stores, two will be Pacific Sunwear Outlet stores and
three will be d.e.m.o. stores during the fourth quarter of fiscal 1999. The
Company also plans to expand or relocate three existing smaller Pacific Sunwear
stores during the fourth quarter of fiscal 1999. The Company estimates that
capital expenditures during the remainder of fiscal 1999 will be approximately
$6 million. The Company plans to open approximately 125 new stores in the year
2000, of which 40 will be d.e.m.o. stores. Capital expenditures are expected to
be approximately $47 million in the year 2000.
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 two
stores in the first nine months of fiscal 1999. The Company plans to close one
additional store in the fourth quarter of fiscal 1999.
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 2000.
10
<PAGE> 11
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
Accounting for Derivatives and Hedging Activities -- In June 1998, the
FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities"
(SFAS 133). SFAS 133 must be implemented by the Company in fiscal 2000. SFAS 133
is not expected to have a significant impact on the Company's consolidated
financial statements.
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 1998 and fiscal 1997,
excluding sales generated by new and relocated/expanded stores, the Christmas
and back-to-school periods together accounted for approximately 34% and 35%,
respectively, of the Company's annual net sales and a higher percentage of the
Company's operating income. In fiscal 1998, excluding net sales generated by new
and relocated/expanded stores, approximately 45% of the Company's annual net
sales occurred in the first half of the fiscal year and 55% in the second half.
The Company's quarterly results of operations may also fluctuate significantly
as a result of a variety of factors, including the timing of store openings; the
amount of revenue contributed by new stores; the timing and level of markdowns;
the timing of store closings, expansions and relocations; competitive factors;
and general economic conditions.
YEAR 2000 READINESS
The Company has completed a year 2000 review of its information
technology and non-information technology systems in preparation for the year
2000.
The Company's material merchandise, financial and store computer
software systems are provided by third-party vendors and are used with minor
modifications by the Company. The software vendors have provided updated
software versions as part of the normal periodic software upgrade process that
address the year 2000 issue. This upgrade process has been substantially
completed as of the end of fiscal 1998 and did not cost the Company additional
amounts beyond normal recurring annual software maintenance fees paid by the
Company. While the Company will incur internal staff costs as well as certain
outside consulting and other expenditures related to its year 2000 readiness
efforts, the total incremental expenses are not expected to have a material
impact on the Company's financial condition or results of operations. As of
October 31, 1999, the Company had incurred less than $250,000 in expenses
relating to its year 2000 readiness efforts. The source of funds for these
expenses has been the Company's working capital, and the Company anticipates
that it will fund its additional year 2000 expenses from its working capital.
The Company's most significant software system includes purchase order
management, open order reporting, open-to- buy, receiving, distribution, basic
stock replenishment, inter-store transfers, inventory and price management,
general ledger and accounts payable functions. This system has been upgraded and
has been certified by the software vendor as year 2000 compliant. In addition,
the Company successfully completed a fully-integrated year 2000 readiness test
of this system at an off-site recovery computer center in August of fiscal 1999.
At its new distribution center, the Company uses a recently installed materials
handling system and the vendor of this system has advised the Company that the
system is year 2000 compliant.
With regard to the Company's vendors, the Company has contacted its
significant merchandise vendors regarding their state of year 2000 readiness and
these vendors have advised the Company that they expect to be ready for the year
2000. None of these vendors accounted for more than 9% of the Company's net
sales in fiscal 1998 or during the first nine months of fiscal 1999. The Company
also uses numerous third-party vendors to provide other goods and services, as
well as office, distribution center and other supplies to the Company and its
stores. The Company has contacted its significant goods and services vendors
regarding their state of year 2000 readiness and these vendors have advised the
Company that they expect to be ready for the year 2000. There is no assurance
that the systems of the vendors from whom the Company receives merchandise,
goods and services will be year 2000 ready or that any failure on their part to
be year 2000 ready would not have an adverse impact on the Company if a
11
<PAGE> 12
number of such vendors fail to be year 2000 ready on a timely basis.
The year 2000 issue presents a number of risks and uncertainties that
could impact the Company, from the failure of one or several of the Company's
significant vendors to timely fill the Company's merchandise orders to public
utility failures affecting the Company's retail stores. The Company is currently
analyzing these risks and uncertainties and has developed contingency plans to
address material risks related to the year 2000 issues. These contingency plans
include the following:
January 1, 2000 falls on a Saturday, when the Company's distribution
center and corporate offices are normally closed. The contingency plans include
operating the distribution center and corporate office systems on January 1 in
order to quickly address any year 2000 issues that may arise.
The Company's shipment of merchandise to its stores is traditionally at
a low point during the time frame surrounding the immediate beginning of the new
year due to the fact that the stores are primarily engaged in the promotional
selldown of inventories after the holiday season. The Company plans to monitor
merchandise shipments from vendors during the weeks immediately following
January 1, 2000, and survey its vendors to determine if they are encountering
year 2000 issues that may prevent them from delivering future shipments of
merchandise on a timely basis. Contingency plans include processing substitute
orders with vendors that do not have year 2000 issues.
The Company intends to open its stores for business on January 1, 2000.
Contingency plans for the Company's stores include: (i) all stores will report
to the corporate office during the morning of January 1, 2000 whether they are
open and operating normally, or if they have encountered problems, (ii) a
procedure to rank year 2000 issues reported by stores in order of importance,
using the ability of the store to conduct business and process sales as the
primary criteria, (iii) the Company's staff of information systems personnel
will be on hand and available to work on any year 2000 issues on January 1, 2000
and (iv) the use of existing manual sales processing procedures in any affected
stores until such time as any year 2000 issues are fixed.
While the Company continues to believe the year 2000 issues described
above will not materially affect its financial position or results of
operations, it remains uncertain as to what extent, if any, the Company may be
impacted.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This report on Form 10-Q contains "forward-looking statements" within
the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. The
Company is hereby providing cautionary statements identifying important factors
that could cause the Company's actual results to differ materially from those
projected in forward-looking statements of the Company herein. Any statements
that express, or involve discussions as to expectations, beliefs, plans,
objectives, assumptions, future events or performance (often, but not always
through the use of words or phrases such as "will result," "expects to," "will
continue," "anticipates," "plans," "intends," "estimated," "projects" and
"outlook") are not historical facts and may be forward-looking and, accordingly,
such statements involve estimates, assumptions and uncertainties which could
cause actual results to differ materially from those expressed in the
forward-looking statements. Such uncertainties include, among others, the
following factors:
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.
RISKS OF NEW SPECIALTY STORE CONCEPT NAMED "D.E.M.O.". The Company's
ability to expand into new concepts has not been fully tested. The Company
opened the first d.e.m.o. store in April of fiscal 1998, and at the end of the
first nine months of fiscal 1999 operated 37 d.e.m.o. stores. Accordingly, the
operation of its d.e.m.o. stores is subject to numerous risks, including
unanticipated operating problems, lack of experience, lack of customer
acceptance, new vendor relationships and competition from existing and new
retailers. There can be no assurance
12
<PAGE> 13
that the Company's d.e.m.o. stores will achieve sales and profitability levels
that justify the Company's investment in this new retail format. Expansion of
the d.e.m.o. format also involves other risks that could have a material adverse
effect on the Company, including (i) the diversion of management's attention
from the Company's core business, (ii) difficulties with the hiring, retention
and training of key personnel for the d.e.m.o. stores, (iii) risks associated
with new vendors and (iv) difficulties with locating and obtaining favorable
store sites and negotiating acceptable lease terms.
INTERNET SALES. The Company began selling merchandise over the internet
in June 1999. The Company's internet operations involve, among other things,
internet web site design activities, investment in new systems, distribution
center enhancements, training of personnel and hiring of additional personnel to
handle new functions. The Company's internet operations are subject to numerous
risks, including unanticipated operating problems, reliance on third party
computer hardware and software providers, higher than expected volumes of
traffic on the web site that could lead to system failures and the need to
invest in additional computer systems to support the traffic, lack of experience
in managing the new internet business, lack of customer acceptance and lack of
experience in the fulfillment and shipping of individual orders to customers.
There can be no assurance that the Company's internet operations will achieve
sales and profitability levels that justify the Company's investment therein.
The Company's internet operations also involve other risks that could have a
material adverse effect on the Company, including (i) the diversion of
management's attention from the Company's core business, (ii) the failure to
reach profitability within the foreseeable future, (iii) difficulties with
hiring, retention and training of key personnel to conduct the Company's
internet operations, (iv) diversion of sales from Pacific Sunwear stores, (v)
rapid technological change, (vi) liability for online content and (vii) risks
related to the failure of the computer systems that operate the web site and its
related support systems, including computer viruses, telecommunication failures
and electronic break-ins and similar disruptions. In addition, the Company's
internet operations involve risks which are beyond the Company's control that
could have a material adverse effect on the Company, including (i) price
competition involving the items the Company intends to sell, (ii) the entry of
the Company's vendors into the internet business, in direct competition with the
Company, (iii) the level of merchandise returns experienced by the Company, (iv)
governmental regulation, (v) online security breaches, (vi) credit card fraud,
(vii) general economic conditions and economic conditions specific to the
internet, online commerce and the apparel industry and (viii) competition from
other internet web sites that may have significantly more capital resources and
experience in internet sales than the Company.
EXPANSION AND MANAGEMENT OF GROWTH. Pacific Sunwear's continued growth
depends to a significant degree on its ability to open and operate stores on a
profitable basis and on management's ability to manage the Company's planned
expansion. During the remainder of fiscal 1999, the Company plans to open
approximately ten new stores, of which five will be Pacific Sunwear stores, two
will be Pacific Sunwear Outlet stores and three will be d.e.m.o. stores. The
Company also plans to expand or relocate three existing smaller Pacific Sunwear
stores during the fourth quarter of fiscal 1999. The Company plans to open
approximately 125 new stores in the year 2000, of which 40 will be d.e.m.o.
stores. The Company's planned expansion is dependant upon a number of factors,
including the ability of the Company to locate and obtain favorable store sites,
negotiate acceptable lease terms, obtain adequate merchandise supply and hire
and train qualified management level and other employees. Factors beyond the
Company's control may also affect the Company's ability to expand, including
general economic and business conditions affecting consumer spending. There can
be no assurance that the Company will achieve its planned expansion or that such
expansion will be profitable. As the Company's operations continue to grow,
there could be increasing strain on the Company's resources, and the Company
could experience difficulties relating to a variety of operational matters,
including hiring, training and managing an increasing number of employees,
having sufficient working capital, bank line of credit and cash flow from
operating activities for the Company's future operating and capital
requirements, obtaining sufficient quantities of merchandise from its preferred
vendors, obtaining sufficient materials and contract manufacturers to produce
its private brand products and enhancing its distribution, financial and
operating systems. There can be no assurance that the Company will be able to
manage its growth effectively. Any failure to manage growth could have a
material adverse effect on the Company's business, financial condition and
results of operations.
MERCHANDISING/FASHION SENSITIVITY. The Company's success is largely
dependent upon its ability to gauge the fashion tastes of its customers and to
provide merchandise that satisfies customer demand in a timely manner. The
Company's failure to anticipate, identify or react appropriately in a timely
manner to changes in fashion trends could have a material adverse effect on the
Company's business, financial condition and results of operations. Misjudgements
or unanticipated fashion misjudgements could have a material adverse effect on
the Company's image with its customers.
PRIVATE BRAND MERCHANDISE. Sales from private brand merchandise
accounted for approximately 36% and
13
<PAGE> 14
38% of net sales in fiscal 1998 and fiscal 1997, respectively, and is trending
at a similar percentage for the first nine months of fiscal 1999. Because the
Company's private brand 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 brand merchandise,
particularly if the percentage of net sales derived from private brand
merchandise increases, may have a material adverse affect on the Company's
business, financial condition and results of operations.
RELIANCE ON KEY PERSONNEL. The continued success of the Company is
dependant to a significant degree upon the services of its key personnel,
particularly its executive officers. The loss of the services of any member of
senior management could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's success
in the future will also be dependent upon the Company's ability to attract and
retain qualified personnel. The Company's inability to attract and retain
qualified personnel in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDANCE ON SINGLE DISTRIBUTION FACILITY. The Company's distribution
functions for all of its stores are handled from a single facility in Anaheim,
California. In addition, the Company processes shipments related to sales of
merchandise over the internet from the same facility. Any significant
interruption in the operation of the distribution facility due to natural
disasters, accidents, system failures arising from the year 2000 issue or
otherwise, would have a material adverse effect on the Company's business,
financial condition and results of operations.
YEAR 2000 READINESS AND CONTINGENCY PLAN. There can be no assurance that
a failure in the Company's information and non-information technology systems
due to the year 2000 will not occur. Any significant failure due to the year
2000 could have a material adverse effect on the Company's business, financial
condition and results of operations. Examples of failures due to the year 2000
include, among others: (i) failures of one or several of the Company's
significant vendors to timely fill the Company's merchandise orders, (ii) public
utility failures that prevent some of the Company's stores from opening for
normal business hours, the Company's distribution center from handling
distribution functions, and/or the Company's corporate office from conducting
normal business, (iii) failures in the banking system, including the processing
of charge card, check and debit card transactions and (iv) other unforeseen
failures in the national infrastructure that the Company depends upon to conduct
its business.
VOLATILITY OF STOCK PRICE. The market price of the Company's common
stock has fluctuated substantially in the past and there can be no assurance
that the market price of the Common Stock will not continue to fluctuate
significantly. Future announcements or management discussions concerning the
Company or its competitors, internet sales results, d.e.m.o. sales and
profitability results, 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. For example, in December 1998 the Company's stock
price decreased dramatically after a decrease in the Company's comparable store
net sales for the month of November 1998 was reported. 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 small public companies for reason frequently unrelated to the operating
performance of the specific companies.
*************
The Company cautions that the risk factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Further, management cannot assess the impact of each such factor on the
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest
rates. A discussion of the Company's accounting policies for financial
instruments and further disclosures relating to financial instruments is
included in the Summary of Significant Accounting Policies and Nature of
Business in the Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended January 31, 1999. The Company monitors the risks
associated with interest rates and financial instrument positions.
14
<PAGE> 15
PART II-OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
Item 2 - Changes in Securities and Use of Proceeds - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5 - Other Information - Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on form 8-K during the quarter for which
this report is filed.
15
<PAGE> 16
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 3, 1999 \s\ GREG H. WEAVER
---------------------------------------
Greg H. Weaver
Chairman of the Board
and Chief Executive Officer
Date: December 3, 1999 \s\ CARL W. WOMACK
---------------------------------------
Carl W. Womack
Senior Vice President, Chief
Financial Officer and Secretary
16
<PAGE> 17
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pacific
Sunwear of California, Inc's Form 10-Q for the quarterly period ended October
31, 1999, and is qualified in its entirety by reference to such Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-2000
<PERIOD-START> AUG-02-1999
<PERIOD-END> OCT-31-1999
<CASH> 12,122,777
<SECURITIES> 0
<RECEIVABLES> 3,632,903
<ALLOWANCES> 0
<INVENTORY> 66,630,894
<CURRENT-ASSETS> 90,864,095
<PP&E> 121,055,319
<DEPRECIATION> (34,423,751)
<TOTAL-ASSETS> 189,252,388
<CURRENT-LIABILITIES> 31,637,080
<BONDS> 0
0
0
<COMMON> 312,699
<OTHER-SE> 147,079,877
<TOTAL-LIABILITY-AND-EQUITY> 189,252,388
<SALES> 124,043,858
<TOTAL-REVENUES> 124,043,858
<CGS> 78,507,789
<TOTAL-COSTS> 25,873,696
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (291,265)
<INCOME-PRETAX> 19,953,638
<INCOME-TAX> 7,689,000
<INCOME-CONTINUING> 12,264,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,264,638
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.38
</TABLE>
