10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: February 1, 2003

	OR
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to

Commission file number 0-21296

PACIFIC SUNWEAR OF CALIFORNIA, INC.

(Exact name of registrant as specified in its charter)

California	95-3759463
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
3450 E. Miraloma Avenue, Anaheim, California	92806
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (714) 414-4000

Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
(Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]  No  [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  [X]   No  [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [  ].

     The aggregate market value of Common Stock held by non-affiliates of the registrant on August 3, 2002 was approximately $556 million. All outstanding shares of voting stock, except for shares held by executive officers and members of the Board of Directors and their affiliates, are deemed to be held by non-affiliates.

     On March 24, 2003 the registrant had 49,545,251 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Part III incorporates information by reference from the definitive Proxy Statement for the 2002 Annual Meeting of Shareholders, to be filed with the Commission no later than 120 days after the end of the registrant’s fiscal year covered by this Form 10-K.

TABLE OF CONTENTS

PART I
	ITEM 1. BUSINESS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. CONTROLS AND PROCEDURES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
INDEX TO EXHIBITS
EXHIBIT 3.2
EXHIBIT 3.3
EXHIBIT 3.6
EXHIBIT 10.4
EXHIBIT 10.6
EXHIBIT 10.20
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 99.1

PART I

ITEM 1. BUSINESS

Pacific Sunwear of California, Inc. and its wholly owned subsidiaries (the “Company” or the “Registrant”) is a leading specialty retailer of everyday casual apparel, accessories and footwear designed to meet the needs of active teens and young adults. The Company operates three nationwide, primarily mall-based chains of retail stores under the names “Pacific Sunwear” (also known as “PacSun”), “Pacific Sunwear (PacSun) Outlet,” and “d.e.m.o.” PacSun and PacSun Outlet stores specialize in board-sport inspired casual apparel, footwear and related accessories catering to teenagers and young adults. d.e.m.o. specializes in hip-hop music inspired casual apparel and related accessories catering to teenagers and young adults. In addition, the Company operates a website through a wholly owned subsidiary that sells PacSun merchandise online, provides content and community for its target customers and provides information about the Company.

As of the close of the year ended February 1, 2003 (“fiscal 2002”), the Company operated 612 PacSun stores, 72 PacSun Outlet stores and 107 d.e.m.o. stores for a total of 791 stores in 48 states and Puerto Rico. As of March 24, 2003, the Company operated 619 PacSun stores, 73 PacSun Outlet stores and 107 d.e.m.o. stores for a total of 799 stores in 48 states and Puerto Rico.

The Company, a California corporation, was incorporated in August 1982.

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

Store Formats

PacSun stores - The Company’s original and primary store format, located primarily in regional malls, offers a selection of board-sport inspired casual apparel, footwear and related accessories to satisfy the casual wardrobe needs of its customers. PacSun targets customers between the ages of 12 and 22. Within each merchandise classification, PacSun stores offer a broad selection, with the goal of being viewed by its customers as the dominant retailer in its niche. PacSun stores average approximately 3,500 square feet in size. The Company currently seeks locations of approximately 4,000 square feet for its new PacSun stores. At the end of fiscal 2002, the Company operated 612 PacSun stores containing a total of 2,102,822 square feet.

PacSun Outlet - These stores average approximately 4,100 square feet and are located in value-oriented outlet malls, both open-air and enclosed. This format carries a selection similar to the PacSun mall stores, with an emphasis on value pricing. The merchandise offerings at PacSun Outlets consist primarily of off-price branded merchandise, private brand merchandise and a smaller selection of full-priced branded merchandise. At the end of fiscal 2002, the Company operated 72 PacSun Outlet stores containing a total of 293,511 square feet.

d.e.m.o. - d.e.m.o. stores, located in regional malls, average approximately 2,400 square feet and offer a broad assortment of hip-hop music inspired casual apparel and related accessories. d.e.m.o. targets customers between the ages of 16 and 24. d.e.m.o. stores have no merchandise overlap with PacSun or PacSun Outlet stores, and many d.e.m.o. stores are located in the same malls as PacSun stores. At the end of fiscal 2002, the Company operated 107 d.e.m.o. stores containing a total of 251,010 square feet.

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Strategy

The Company’s mission is to be the leading lifestyle retailer of casual fashion apparel, footwear and accessories for teens. The Company’s target customers are young men and women between the ages of 12 and 24. The Company believes its customers want to stay current with or ahead of fashion trends and continually seek newness in their everyday wear. The Company offers a complete wardrobe selection representing fashion trends considered timely by the Company’s target customers. The key elements of the Company’s strategy are as follows:

Offer Popular Name Brands Supplemented by Private Brands. In each of its store formats, the Company offers a carefully edited selection of popular name brands supplemented by private brands, with the goal of being seen by its teenage and young adult customers as the source for wardrobe choices appropriate to their lifestyle. The Company believes that its merchandising strategy differentiates its stores from competitors who may offer 100% private labels or greater than 80% name brands or seek to serve a wider customer base and age range. See “Merchandising.”

Promote the PacSun and d.e.m.o. Brand Images. The Company promotes the PacSun and d.e.m.o. brands through national print advertising in major magazines that target teens and young adults. In the past, the Company has sponsored sporting events consistent with the PacSun brand image and lifestyle and has conducted PacSun television advertising campaigns. The Company’s current promotional efforts are focused exclusively on national print advertising, a trend that we expect to continue through the year ending January 31, 2004 (“fiscal 2003”). The Company also maintains a private label credit card through a third party to promote the PacSun brand image and lifestyle.

Actively Manage Merchandise Trends. The Company does not attempt to dictate fashion, but instead devotes considerable effort to identifying emerging fashion trends and brand names. By using focus groups, listening to its customers and store employees, monitoring sell-through trends, testing small quantities of new merchandise in a limited number of stores, and maintaining domestic and international sourcing relationships, the Company enhances its ability to identify and respond to emerging fashion trends and brand names as well as develop new private brand styles in order to capitalize on existing fashion trends.

Maintain Strong Vendor Relationships. The Company views its vendor relationships as important to its success, and promotes frequent personal interaction with its vendors. The Company believes many of its vendors view PacSun stores, PacSun Outlets and d.e.m.o. stores as important distribution channels, in many cases as one of their largest customers, which enhance their own brand image in the eyes of the customer.

Provide Attentive Customer Service. The Company is committed to offering courteous, professional and non-intrusive customer service. The Company strives to give its young customers the same level of respect that is generally given to adult customers at other retail stores, and to provide friendly and informed customer service for parents. Responding to the expressed preferences of its customers, the Company trains its employees to greet each customer, to give prompt and courteous assistance when asked, and to thank customers after purchases are made, but to refrain from giving extensive unsolicited advice. PacSun and PacSun Outlet stores display large assortments of name brands and private brands, merchandised by category. d.e.m.o. merchandise is displayed by brand together with vendor logo signage. Additionally, the stores provide a friendly and social atmosphere for teens with appropriate background music, while also providing a comfortable environment for parents and other adults. The Company believes the combination of its attentive customer service and its unique store environments is key to its success.

Store Growth Strategy. The Company intends to continue its store growth through the opening of new stores under its three formats. During fiscal 2003, the Company plans to open approximately 75 net new stores among its three formats. The Company also plans to expand or relocate approximately 30 existing smaller PacSun stores during fiscal 2003. See “Expansion.”

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Internet Strategy. The Company sells merchandise over the internet at www.pacsun.com. The website offers a selection of the same merchandise carried in the PacSun stores. In addition, the website offers content including videos, contests, advice columns and lifestyle articles. The Company maintains a substantial database of e-mail names that it uses for marketing purposes. The Company also advertises its website as a shopping destination on major internet portals as well as markets its website in its PacSun stores using in-store signage, merchandise bags and receipts. The Company’s internet strategy benefits from the Company’s nationwide retail presence of its stores and the strong brand recognition of PacSun, a loyal and internet-savvy customer base, the participation of PacSun’s key brands and the ability to return merchandise to PacSun stores.

Merchandising

Merchandise. PacSun, PacSun Outlet and d.e.m.o. stores offer a broad selection of casual apparel, related accessories and, within PacSun and PacSun Outlet stores, footwear for young men (“guys”) and young women (“girls”), with the goal of being viewed by their customers as the dominant retailer for their lifestyle.

The following table sets forth the Company’s merchandise assortment as a percentage of net sales for the periods shown:

	Fiscal Year Ended
	Feb. 1,			Feb. 2,			Feb. 4,
	2003			2002			2001
Guys apparel		41	%		46	%		50	%
Girls apparel		31			28			26
Accessories		18			17			16
Footwear		10			9			8
Total		100	%		100	%		100	%

The Company offers many name brands best known by its target customers. PacSun offers a wide selection of well-known board-sport inspired name brands, such as Quiksilver, Hurley and Billabong. d.e.m.o. offers well-known name brands sought by its target customers, such as Sean John, Enyce, J. Lo and Phat Farm/Baby Phat. In addition, the Company continuously adds and supports up-and-coming new brands in both PacSun and d.e.m.o. No vendor accounted for more than 9% of total net sales during fiscal 2002.

The Company supplements its name brand offerings with private brands. The Company believes that offering high-quality private brands contributes to its status as a key fashion resource for the casual lifestyle and differentiates the Company from its competitors. In addition, private brands provide the Company an opportunity to broaden its customer base by providing merchandise of comparable quality to brand name merchandise at lower prices, to capitalize on emerging fashion trends when branded merchandise is not available in sufficient quantities, and to exercise a greater degree of control over the flow of its merchandise. The Company’s private brand merchandise is designed internally by a product design group in collaboration with the Company’s buying staff. The sourcing group oversees the manufacture and delivery of the private brand merchandise, with manufacturing done on a contract basis domestically, in Asia and in Mexico. Private brand merchandise sales accounted for 33% and 34% of the Company’s net sales in fiscal 2002 and fiscal 2001, respectively.

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Vendor and Contract Manufacturer Relationships. The Company views its vendor relationships as important to its success and promotes frequent personal interaction with its vendors. The Company believes many of its vendors view PacSun stores, PacSun Outlets and d.e.m.o. stores as important distribution channels, in many cases as one of their largest customers, which enhance their own brand image in the eyes of the customer. The Company’s vendor base currently includes more than 100 vendors. The Company maintains strong and interactive relationships with its vendors, many of whose philosophies of controlled distribution and merchandise development are consistent with the Company’s strategy. The Company generally purchases merchandise from vendors who prefer distributing through specialty retailers, small boutiques and, in some cases, better department stores, rather than distributing their merchandise through mass-market channels.

To encourage the design and development of new merchandise, the Company frequently shares ideas regarding fashion trends and merchandise sell-through information with its vendors. The Company also suggests merchandise design and fabrication to certain vendors. The Company encourages the development of new vendor relationships by attending trade shows and through its weekly “Open-house Wednesday” program, during which new vendors are encouraged to make presentations of their merchandise to the Company’s buying staff. A number of the Company’s key vendors have been introduced to the Company through this program.

The Company has cultivated its private brand sources with a view toward high-quality merchandise, production reliability and consistency of fit. The Company sources its private brand merchandise both domestically and internationally in order to benefit from the lower costs associated with foreign manufacturing and the shorter lead times associated with domestic manufacturing.

The Company’s business is dependent upon its ability to offer current season, brand name apparel at competitive prices and in adequate quantities. Some of the Company’s vendors have limited resources, production capacities and operating histories and some have intentionally limited the distribution of their merchandise. The inability or unwillingness on the part of key vendors to expand their operations to keep pace with the anticipated growth of PacSun stores, PacSun Outlets and d.e.m.o. stores, or the loss of one or more key vendors or private brand sources for any reason, could have a material adverse effect on the Company’s business.

Purchasing, Allocation and Distribution. The Company’s merchandising department oversees the purchasing and allocation of the Company’s merchandise. The Company’s buyers are responsible for reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends, and selecting branded and private label merchandise styles in quantities, colors and sizes to meet inventory levels established by management. The Company’s planning and allocation department is responsible for management of inventory levels by store and by class, allocation of merchandise to stores and inventory replenishment based upon information generated by the Company’s merchandise management information systems. These systems provide the planning department with current inventory levels at each store and for the Company as a whole, as well as current selling history within each store by merchandise classification and by style. See “Information Systems.”

All merchandise is delivered to the Company’s distribution facility, where it is inspected, received into the Company’s computer system, allocated to stores, ticketed when necessary, and boxed for distribution to the Company’s stores. Each store is typically shipped merchandise three to five times a week, providing it with a steady flow of new merchandise. The Company uses a national and a regional small package carrier to ship merchandise to its stores and occasionally uses air freight during peak selling periods.

In January 2002, the Company completed construction of and relocated to its current corporate offices and distribution center located in Anaheim, California. The Company believes the current facilities are capable of servicing at least 1,200 stores.

5

Stores

Locations. The Company has expanded from 11 stores in California at the end of fiscal 1986 to 791 stores in 48 states and Puerto Rico at the end of fiscal 2002. The table below sets forth the number of stores located in each state as of the end of fiscal 2002:

			PacSun								PacSun
State	PacSun		Outlets		d.e.m.o	Total		State	PacSun		Outlets	d.e.m.o	Total
Alabama		9		2			11	Nebraska		4				4
Alaska		3					3	Nevada		4	1			5
Arizona		12		2	1		15	New Hampshire		4	1			5
California		70		12	21		103	New Jersey		20	2	6		28
Colorado		10		2	2		14	New Mexico		2				2
Connecticut		9			1		10	New York		27	6	4		37
Delaware		3		1			4	North Carolina		16	2	3		21
Florida		47		6	14		67	North Dakota		4				4
Georgia		17		1	5		23	Ohio		31	2	5		38
Hawaii		5			1		6	Oklahoma		4				4
Idaho		3					3	Oregon		5	2			7
Illinois		19		1	4		24	Pennsylvania		38	3	7		48
Indiana		14		2	3		19	Rhode Island		2				2
Iowa		7					7	South Carolina		6	2	3		11
Kansas		5					5	South Dakota		2				2
Kentucky		6			1		7	Tennessee		8	2			10
Louisiana		8			4		12	Texas		39	3	5		47
Maine		2		2	1		5	Utah		8	1			9
Maryland		13		2	5		20	Vermont		3	1			4
Massachusetts		19		1	3		23	Virginia		15	2	1		18
Michigan		23		3	4		30	Washington		13	1			14
Minnesota		12		1	2		15	West Virginia		7				7
Mississippi		2					2	Wisconsin		13				13
Missouri		9		2			11	Puerto Rico		7	1	1		9
Montana		3					3	Total		612	72	107		791

Store Expansion. During fiscal 2002, the Company opened 73 net new stores, which included 63 PacSun stores, four PacSun Outlet stores and six d.e.m.o. stores. In addition, the Company expanded or relocated 30 PacSun stores during fiscal 2002. During fiscal 2003, the Company plans to open approximately 75 net new stores, of which approximately 61 will be PacSun stores, approximately four will be PacSun Outlet stores and approximately ten will be d.e.m.o. stores. The Company also plans to expand or relocate approximately 30 existing smaller PacSun stores during fiscal 2003. The Company has identified regional malls in major metropolitan areas nationwide and in Puerto Rico for potential new stores subject to financial return and site selection criteria. As of the date of this filing, approximately 50% of the leases for the approximately 75 net new stores the Company expects to open in fiscal 2003 have been executed.

The Company’s site selection strategy is to locate its stores primarily in regional malls serving markets that meet its demographic criteria, including average household income and population density. The Company also considers mall sales per square foot, the performance of other retail tenants serving teens and young adult customers, anchor tenants and occupancy costs. The Company currently seeks PacSun store locations of approximately 4,000 square feet and d.e.m.o. store locations of approximately 2,200-2,400 square feet

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primarily in high-traffic locations within regional malls. The Company currently seeks PacSun Outlet store locations of approximately 4,000 square feet primarily in high-traffic value-oriented outlet malls, both open-air and enclosed.

The Company’s average cost to build a new store in fiscal 2002, including leasehold improvements, furniture and fixtures, and landlord allowances, was approximately $285,000 for PacSun stores, approximately $210,000 for PacSun Outlet stores, and approximately $225,000 for d.e.m.o. stores. The average cost of expanding or relocating a PacSun store was approximately $430,000 and approximately $360,000 in fiscal 2002 and fiscal 2001, respectively. The average total cost to build new stores and relocate or expand stores will vary in the future depending on various factors, including square footage, changes in store design, local construction costs and landlord allowances. The Company’s average cost for initial inventory for new stores opened in fiscal 2002 was approximately $118,000 for PacSun stores, approximately $150,000 for PacSun Outlet stores, and approximately $77,000 for d.e.m.o. stores. The Company’s initial inventory for new stores will vary in the future depending on various factors, including store concept and square footage.

The Company’s continued growth depends upon its ability to open and operate stores on a profitable basis. The Company’s ability to expand successfully will be dependent upon a number of factors, including sufficient demand for the Company’s merchandise in its existing and new markets, the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate merchandise supply, and hire and train qualified management and other employees.

Store Operations. Each store has a manager, one or more co-managers or assistant managers, and approximately six to twelve part-time sales associates. Approximately seven to twelve stores are managed by a district manager and approximately six to nine district managers report to a regional manager. Regional, district, store managers and store co-managers participate in a bonus program based on achieving predetermined levels of sales and inventory shrinkage. Company stores are open during mall shopping hours. The Company has well-established store operating policies and procedures and an extensive four-week in-store training program for new store managers and co-managers. The Company places great emphasis on its loss prevention program in order to control inventory shrinkage. This program includes the installation of electronic article surveillance systems in all stores, education of store personnel on loss prevention, and monitoring of returns, voids and employee sales. Since fiscal 1991, the Company has achieved an inventory shrinkage rate of 1.3% or less of net sales in each fiscal year.

Information Systems

The Company’s merchandise, financial and store computer systems are fully integrated and operate using primarily IBM equipment. The software, which is primarily provided by one of the largest vendors to the retail trade, is regularly upgraded or modified as needs arise or change. The Company’s information systems provide management, buyers and planners comprehensive data that helps them identify emerging trends and manage inventories. The systems include purchase order management, electronic data interchange, open order reporting, open-to-buy, receiving, distribution, merchandise allocation, basic stock replenishment, inter-store transfers, inventory and price management. Weekly best/worst item sales reports are used by management to enhance the timeliness and effectiveness of purchasing and markdown decisions. Merchandise purchases are based on planned sales and inventories and are frequently revised to reflect changes in demand for a particular item or classification.

All of the Company’s stores have a point-of-sale system operating on IBM in-store computer hardware. The system features bar-coded ticket scanning, automatic price look-up, dial-out check and credit authorization and automatic nightly transmittal of data between the store and the Company’s corporate offices. Each of the regional and district managers uses a laptop computer and can instantly access appropriate or relevant Company-wide information, including actual and budgeted sales by store, district and region, transaction information and payroll data. The Company believes its management information systems are adequate to support its planned expansion at least through fiscal 2003.

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Competition

The retail apparel, footwear and accessory business is highly competitive. PacSun stores, PacSun Outlets and d.e.m.o. stores compete on a national level with certain leading department stores and national chains that offer the same or similar brands and styles of merchandise. The Company’s stores also compete with a wide variety of regional and local specialty stores, such as Abercrombie and Fitch, American Eagle Outfitters, The Gap, Old Navy, Wet Seal and Hot Topic. Many of the Company’s competitors are larger and have significantly greater resources than the Company. The Company believes the principal competitive factors in its industry are fashion, merchandise assortment, quality, price, store location, environment and customer service.

Trademarks and Service Marks

The Company is the owner in the United States of the marks “Pacific Sunwear of California,” “PacSun,” “Pacific Sunwear,” and “d.e.m.o.” The Company also uses and has registered, or has a pending registration on, a number of other marks. The Company has also registered many of its marks outside of the United States. The Company believes its rights in its marks are important to its business and intends to maintain its marks and the related registrations.

Employees

At February 1, 2003, the Company had approximately 9,400 employees, of whom approximately 6,500 were part-time. Of the total employees, approximately 400 were employed at the Company’s corporate headquarters and distribution center. A significant number of seasonal employees are hired during peak selling periods. None of the Company’s employees is represented by a labor union, and the Company believes that its relationships with its employees are good.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the names, ages and titles of persons serving as executive officers of the Company as of March 24, 2003:

Executive Officers	Age		Position
Greg H. Weaver		49	Chairman of the Board and Chief Executive Officer
Timothy M. Harmon		51	President and Chief Merchandising Officer
Carl W. Womack		51	Senior Vice President, Chief Financial Officer
			and Secretary

Set forth below is certain information with respect to the executive officers of the Company:

Greg H. Weaver, who joined the Company in July 1987, has served as Chairman of the Board and Chief Executive Officer since November 1997. He served as President and Chief Executive Officer from October 1996 to November 1997 and as a director since February 1996. Prior to October 1996, Mr. Weaver served in various senior level executive positions since joining the Company. Prior to joining the Company, he was employed for 13 years by Jaeger Sportswear Ltd. in both operational and merchandising capacities for the U.S. and Canadian stores.

Timothy M. Harmon, who joined the Company in September 1991, has served as President and Chief Merchandising Officer from November 1997. Prior to November 1997, he served in various senior level executive merchandising positions since joining the Company. Prior to joining the Company, Mr. Harmon served in various merchandising positions at Wideworld/MTV Sportswear, a domestic apparel

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manufacturer, Chauvin International, an import apparel manufacturer, Anchor Blue, a teen apparel retailer, and Federated Department Stores.

Carl W. Womack, who joined the Company in May 1986, has served as Senior Vice President and Chief Financial Officer since October 1994. He served as Vice President of Finance and Chief Financial Officer from May 1986 to September 1994. He has served as Secretary of the Company since November 1992. Prior to joining the Company, Mr. Womack served in several positions in public and private accounting. Mr. Womack is a certified public accountant.

ITEM 2. PROPERTIES

In January 2002, the Company completed construction of and relocated to its current corporate office and distribution center located in Anaheim, California. The Company’s facilities encompass approximately 550,000 square feet. The Company believes the current facilities are capable of servicing at least 1,200 stores.

The Company continues to lease its former facilities of approximately 267,000 square feet under two separate leases. The Company has exercised its option to terminate the smaller of the two leases, covering approximately 91,000 square feet, effective July 31, 2003. The remaining lease, which encompasses approximately 176,000 square feet, expires in February 2008. The Company is currently seeking a tenant to sublease the remaining square footage of its former facilities for the remainder of the lease (see note 10 to the consolidated financial statements).

The majority of the Company’s stores are leased with initial lease terms ranging from approximately eight to ten years. Substantially all leases for the Company’s stores provide for percentage rent, in excess of specified minimums, based upon net sales.

ITEM 3. LEGAL PROCEEDINGS

On September 17, 2001 a former Pacific Sunwear employee filed a putative class action lawsuit against Pacific Sunwear which alleges that Pacific Sunwear has not properly paid wages to its California-based store managers, co-managers and assistant managers working in PacSun stores. The action, Auden v. Pacific Sunwear of California, Inc., Case No. 01CC00383, was filed in the California Superior Court for the County of Orange. The complaint in the action seeks both monetary and injunctive relief. Pacific Sunwear has filed an answer in the action denying the allegations and raising affirmative defenses. No class has been certified at this time.

On May 3, 2002 a former Pacific Sunwear employee filed a putative class action lawsuit against Pacific Sunwear in the California Superior Court for the County of Orange, alleging claims substantially similar to the claims alleged in the Auden case described above. In the case, Adams v. Pacific Sunwear of California, Inc., Case No. 02CC00120, the plaintiff alleges that Pacific Sunwear has not properly paid wages to its California store managers and co-managers working in d.e.m.o. stores. The complaint in the action seeks monetary and injunctive relief. Pacific Sunwear has filed an answer in the action denying the allegations and raising affirmative defenses. No class has been certified at this time.

The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of the fiscal year covered by this report.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s common stock trades on the NASDAQ National Market under the symbol “PSUN”. The following table sets forth for the quarterly periods indicated the high and low bid prices per share of the common stock as reported by NASDAQ (as adjusted to reflect the Company’s 3-for-2 stock split in December 2002):

Fiscal 2002	High		Low		Fiscal 2001	High		Low
1st Quarter	$	17.87	$	13.38	1st Quarter	$	23.92	$	13.33
2nd Quarter		16.57	$	10.81	2nd Quarter	$	17.37	$	11.91
3rd Quarter		16.79	$	10.82	3rd Quarter	$	12.69	$	7.63
4th Quarter		20.11	$	15.23	4th Quarter	$	16.21	$	10.03

As of March 24, 2003, the number of holders of record of common stock of the Company was approximately 300, and the number of beneficial holders of the common stock was in excess of 5,500.

The Company has never declared or paid any dividends on its common stock and does not intend to pay any dividends on its common stock in the foreseeable future. In addition, the Company’s current credit facility prohibits the payment of cash dividends on its capital stock.

ITEM 6. SELECTED FINANCIAL DATA

The selected balance sheet and income statement data as of February 1, 2003, and February 2, 2002, and for each of the three fiscal years in the period ended February 1, 2003, are derived from audited consolidated financial statements of the Company included herein and should be read in conjunction with such financial statements. Such data and the selected consolidated operating data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report. The consolidated balance sheet data as of February 4, 2001 (“fiscal 2000”), January 30, 2000, and January 31, 1999, and the consolidated income statement data for each of the two fiscal years in the period ended January 30, 2000, are derived from audited consolidated financial statements of the Company, which are not included herein.

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	Fiscal Year Ended (1)
	Feb. 1,			Feb. 2,			Feb. 4,			Jan. 30,			Jan. 31,
	2003			2002			2001			2000			1999
	(in thousands, except per share and selected operating data)
Consolidated Income Statement Data:
Net sales	$	846,393		$	684,840		$	589,438		$	436,808		$	321,125
Cost of goods sold (including buying, distribution and occupancy costs)		562,710			464,660			391,816			284,187			212,859
Gross margin		283,683			220,180			197,622			152,621			108,266
Selling, general and administrative expenses		202,445			175,898			133,999			96,117			70,369
Operating income		81,238			44,282			63,623			56,504			37,897
Net interest expense/(income)		594			(470	)		(1,344	)		(916	)		(977	)
Income before income tax expense		80,644			44,752			64,967			57,420			38,874
Income tax expense		30,967			17,186			25,213			22,119			15,369
Net income	$	49,677		$	27,566		$	39,754		$	35,301		$	23,505
Net income per share, diluted (2)	$	0.99		$	0.56		$	0.81		$	0.73		$	0.49
Weighted average shares outstanding, diluted (2)		50,098			49,659			48,822			48,285			48,350
Selected Consolidated Operating Data:
Stores open at end of period		791			718			589			450			342
Stores opened during period		85			135			142			111			74
Stores closed during period		12			6			3			3			4
Capital expenditures (000’s)	$	40,423		$	92,936		$	61,869		$	40,219		$	31,603
Average net sales per gross square foot (3) (4)	$	330		$	321		$	368		$	398		$	403
Average net sales per store (000’s) (3) (4)	$	1,102		$	1,031		$	1,082		$	1,084		$	1,034
Square footage of gross store space		2,647,343			2,319,149			1,764,123			1,254,373			888,507
Comparable store net sales increase/ (decrease) (4) (5)		9.7	%		(2.5	)%		3.5	%		7.8	%		8.6	%
Consolidated Balance Sheet Data:
Working capital	$	109,305		$	78,899		$	79,799		$	67,351		$	47,545
Total assets		399,743			355,440			277,453			209,342			147,775
Long-term debt		1,102			24,597			—			—			—
Shareholders’ equity	$	302,391		$	247,955		$	213,131		$	161,826		$	116,697

(1)	Except for the fiscal year ended February 4, 2001, which included 53 weeks, all fiscal years presented included 52 weeks. Effective February 1, 2002, the Company changed its fiscal year end from the Sunday closest to the end of January to the Saturday closest to the end of January. As a result, the last day of fiscal 2001 was Saturday, February 2, 2002.
(2)	Adjusted to give effect to the three-for-two stock splits effected as of December 18, 2002, June 8, 1999, and June 8, 1998.
(3)	For purposes of calculating these amounts, the number of stores and the amount of square footage reflect the number of months during the period that new stores and closed stores were open.
(4)	These amounts have been adjusted to exclude the fifty-third week in the fiscal year ended February 4, 2001.
(5)	Stores are deemed comparable stores on the first day of the first month following the one-year anniversary of their opening. In conjunction with the expansion or relocation of certain stores to a larger format with a square footage increase of 15% or more, the Company excludes each such store’s net sales results from the first day of the month of its expansion or relocation. Each of these stores is deemed a comparable store on the first day of the first month following the one-year anniversary of its expansion or relocation. In conjunction with the conversion of certain PacSun stores to the d.e.m.o. format, the Company excludes each such store’s net sales results from the first day of the month of its conversion. Each of these stores is deemed a comparable store on the first day of the first month following the one-year anniversary of its conversion to the d.e.m.o. format.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Company included elsewhere in this Form 10-K. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements and Risk Factors” in this section.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reported period. Actual results could differ from these estimates. The accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating reported financial results include the following:

Revenue Recognition - Sales are recognized upon purchase by customers at the Company’s retail store locations or through the Company’s website. The Company has recorded reserves of $.5 million to estimate sales returns by customers based on historical sales return results. Actual return rates have historically been within management’s expectations and the reserves established. However, in the unlikely event that the actual rate of sales returns by customers increased significantly, the Company’s operational results could be adversely affected.

Inventory Valuation - Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market. Cost is determined using the retail inventory method. At any one time, inventories include items that have been marked down to management’s best estimate of their fair market value. Management bases the decision to mark down merchandise upon the age of the item and its current rate of sale. To the extent that management estimates differ from actual results, additional markdowns may have to be recorded, which could reduce the Company’s gross margins and operating results.

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

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

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

Corporate Rent Reserve - During fiscal 2001, the Company recorded a $1.4 million charge to accrue for rent expense associated with the Company’s former corporate offices, which remain unused at the end of fiscal 2002. The current accrual at March 24, 2003 of $1.3 million is approximately the amount of rent expense for one year, within which time the Company currently believes a tenant will be identified to sublease the premises. To the extent management’s estimate relating to the Company’s ability to sublease these premises within one year changes, additional charges may be recorded in the future up to the net remaining obligation under the lease depending on the facts and circumstances in existence at the time. As of February 1, 2003, the aggregate net remaining obligation under this lease was approximately $6.7 million.

Litigation - The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and, from time to time, may make provisions for potential litigation losses. Depending on the actual outcome of pending litigation, charges in excess of any provisions could be recorded in the future that may have an adverse effect on the Company’s operating results (see Note 7 to the consolidated financial statements).

Results of Operations

The following table sets forth selected income statement data of the Company expressed as a percentage of net sales for the fiscal years indicated. The discussion that follows should be read in conjunction with the table below:

	As a Percentage of Net Sales,
	Fiscal Year Ended
	Feb. 1,			Feb. 2,			Feb. 4,
	2003			2002			2001
Net sales		100.0	%		100.0	%		100.0	%
Cost of goods sold (including buying, distribution and occupancy costs)		66.5			67.8			66.5
Gross margin		33.5			32.2			33.5
Selling, general and administrative expenses		23.9			25.7			22.7
Operating income		9.6			6.5			10.8
Interest expense/(income), net		0.1			(0.1	)		(0.2	)
Income before income tax expense		9.5			6.6			11.0
Income tax expense		3.6			2.6			4.3
Net income		5.9	%		4.0	%		6.7	%
Number of stores open at end of period		791			718			589

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Fiscal 2002 Compared to Fiscal 2001

Net Sales

Net sales increased to $846.4 million in fiscal 2002 from $684.8 million in fiscal 2001, an increase of $161.6 million, or 23.6%. Of this $161.6 million increase, $61.0 million was attributable to a 9.7% increase in comparable store net sales in fiscal 2002 compared to the comparable 52-week period ended February 2, 2002, $50.6 million was attributable to net sales generated by 85 new stores opened in fiscal 2002 not yet included in the comparable store base, $40.9 million was attributable to net sales generated by new stores opened in fiscal 2001 not yet included in the comparable store base, $13.7 million was attributable to other non-comparable store sales, and $1.4 million was due to the change in the Company’s fiscal year end from the Sunday closest to the end of January to the Saturday closest to the end of January effective for fiscal 2001, which resulted in an additional shopping day in fiscal 2002 as compared to fiscal 2001. Offsetting these increases was a $6.0 million decrease in net sales attributable to the closing of twelve stores during fiscal 2002 and six stores during fiscal 2001. Other non-comparable sales consist of sales from stores that have been expanded or relocated and not yet included in the comparable store base as well as merchandise sold over the internet. Of the 9.7% increase in comparable store net sales in fiscal 2002, PacSun and PacSun Outlet comparable store net sales increased 9.4% and d.e.m.o. comparable store net sales increased 12.4%. The increase in comparable store net sales within PacSun and PacSun Outlet was primarily attributable to increases in comparable store net sales of footwear, juniors, and accessories. The increase in comparable store net sales within d.e.m.o. was primarily attributable to increases in comparable store net sales of juniors and accessories merchandise. Stores are deemed comparable stores on the first day of the first month following the one-year anniversary of their opening or expansion/relocation. Average retail prices of merchandise sold remained relatively unchanged in fiscal 2002 compared to fiscal 2001 and had no significant impact on the net sales increase for fiscal 2002.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $283.7 million in fiscal 2002 from $220.2 million in fiscal 2001, an increase of $63.5 million, or 28.8%. As a percentage of net sales, gross margin was 33.5% for fiscal 2002 compared to 32.2% for fiscal 2001. Of this 1.3% increase, occupancy costs and buying costs each decreased by .4% as a percentage of net sales compared to fiscal 2001, primarily due to leveraging these costs over higher total sales, distribution costs as a percentage of net sales decreased .3% due to freight and labor efficiencies in the new distribution center as well as leveraging these costs over higher total sales, and .2% was due to an increase in net merchandise margins as a percentage of sales, primarily due to a higher initial markup partially offset by a higher markdown rate.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $202.4 million in fiscal 2002 from $175.9 million in fiscal 2001, an increase of $26.5 million, or 15.1%. As a percentage of net sales, these expenses decreased to 23.9% from 25.7%. Of this 1.8% net decrease, .8% was attributable to decreased advertising expenses as a percentage of net sales, primarily due to the elimination of television advertising and a sports game sponsorship in fiscal 2002, .6% was due to a decrease in store closing expenses as a percentage of net sales, and .4% was attributable to a decrease in store payroll expenses as a percentage of net sales, primarily due to the operating leverage associated with a 9.7% increase in comparable store net sales. Selling, general and administrative expenses include provisions made by the Company for the wage and hour litigation pending against the Company (see Item 3. “Legal Proceedings” and Note 7 to the consolidated financial statements).

Net Interest Expense/Income

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

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Income Tax Expense

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

Fiscal 2001 Compared to Fiscal 2000

Net Sales

Net sales increased to $684.8 million in fiscal 2001 from $589.4 million in fiscal 2000, an increase of $95.4 million, or 16.2%. Of this $95.4 million increase, $69.9 million was attributable to net sales generated by 135 new stores opened in fiscal 2001 not yet included in the comparable store base, $40.2 million was attributable to net sales generated by new stores opened in fiscal 2000 not yet included in the comparable store base and $8.3 million was attributable to other non-comparable store sales. Offsetting these increases was a $13.0 million decrease in net sales attributable to a 2.5% decrease in comparable store net sales in fiscal 2001 compared to the comparable 52-week period ended February 3, 2001, a $6.1 million decrease in net sales attributable to the one less week in fiscal 2001 (fiscal 2001 had 52 weeks and fiscal 2000 had 53 weeks), a $2.5 million decrease in net sales attributable to the closing of six stores during fiscal 2001 and three stores during fiscal 2000 and a $1.4 million decrease due to the change in the Company’s fiscal year end from the Sunday closest to the end of January to the Saturday closest to the end of January effective for fiscal 2001. Other non-comparable sales consist of sales from stores that have been expanded or relocated and not yet included in the comparable store base as well as merchandise sold over the internet. Of the 2.5% decrease in comparable store net sales in fiscal 2001, PacSun and PacSun Outlet comparable store net sales decreased 2.8% and d.e.m.o. comparable store net sales increased 1.6%. Stores are deemed comparable stores on the first day of the first month following the one-year anniversary of their opening or expansion/relocation. Average retail prices of merchandise sold remained relatively unchanged in fiscal 2001 compared to fiscal 2000 and had no significant impact on the net sales increase for fiscal 2001.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, increased to $220.2 million in fiscal 2001 from $197.6 million in fiscal 2000, an increase of $22.6 million, or 11.4%. As a percentage of net sales, gross margin was 32.2% for fiscal 2001 compared to 33.5% for fiscal 2000. Of this 1.3% decrease, occupancy costs for fiscal 2001 increased 1.4% as a percentage of net sales compared to fiscal 2000, primarily due to the 2.5% decrease in comparable store net sales in fiscal 2001 as well as opening 135 new stores in fiscal 2001. Occupancy costs as a percentage of net sales for new stores are generally higher than for mature stores. Offsetting this increase was a .1% decrease in buying and distribution costs as a percentage of net sales in fiscal 2001 compared to fiscal 2000.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $175.9 million in fiscal 2001 from $134.0 million in fiscal 2000, an increase of $41.9 million, or 31.3%. As a percentage of net sales, these expenses increased to 25.7% from 22.7%. Of this 3.0% net increase, 1.6% was due to an increase in store payroll and other store selling expenses, primarily as a result of lower comparable store net sales as well as opening 135 new stores in fiscal 2001. Store payroll and other store selling expenses as a percentage of net sales for new stores are generally higher than for mature stores. In addition, .6% was due to the one-time non-cash charge of $4.2 million related to the disposal of most of the materials handling equipment in the Company’s former distribution center. Of the remaining increase of .8%, .3% was due to an increase in general and administrative expenses, .2% was due to an increase in store closing expenses, .2% was due to the Company’s charge to accrue for rent expense for the Company’s former corporate office and distribution center that became unused when the Company moved into its new corporate office and distribution center at the end of fiscal 2001 and .1% was due to an increase in advertising expenses.

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Net Interest Income

Net interest income was $.5 million in fiscal 2001 compared to $1.3 million in fiscal 2000, a decrease of $.8 million. This decrease was primarily the result of lower average cash balances and lower interest rates during fiscal 2001 as compared to fiscal 2000.

Income Tax Expense

Income tax expense was $17.2 million in fiscal 2001 compared to $25.2 million in fiscal 2000. The effective income tax rate in fiscal 2001 was 38.4% compared to 38.8% in fiscal 2000.

Liquidity and Capital Resources

The Company has financed its operations from internally generated cash flow, short-term and long-term borrowings and equity financing. The Company’s primary capital requirements have been for the construction of new stores, remodeling, expansion, or relocation of selected stores, financing of inventories and, in fiscal 2001, construction of the Company’s new corporate offices and distribution center.

Net cash provided by operating activities for fiscal 2002, fiscal 2001 and fiscal 2000 was $76.6 million, $58.4 million and $52.0 million, respectively. The $18.2 million increase in cash provided by operations in fiscal 2002 as compared to fiscal 2001 was attributable to an increase in net income of $22.1 million, an increase in accrued liabilities of $12.3 million, and an increase in depreciation and amortization of $5.3 million. Offsetting these increases were a $14.9 million decrease in accounts payable, a $3.2 million decrease in losses on fixed asset disposals, a $3.0 million decrease in accrued income taxes and deferred income taxes, and other items netting to a decrease of $.4 million. Working capital at the end of fiscal 2002, fiscal 2001 and fiscal 2000 was $109.3 million, $78.9 million and $79.8 million, respectively. The $30.4 million increase in working capital at February 1, 2003, as compared to February 2, 2002, was attributable to an increase in inventories of $20.9 million, an increase in cash of $13.3 million, a decrease in accounts payable of $9.0 million, and other items netting to an increase of $4.0 million. Offsetting these increases in working capital was a $16.8 million increase in accrued liabilities. The Company’s average store inventories vary throughout the year and increase in advance of the peak selling periods of spring break, back-to-school and Christmas. The increase in inventories at February 1, 2003, was primarily related to the 9.7% comparable store net sales increase as well as opening 85 new stores and expanding/relocating 30 stores that have in excess of 50% larger average square footage than their previous locations. The decrease in accounts payable of $9.0 million at February 1, 2003, as compared to February 2, 2002, was primarily attributable to increased efficiencies in the Company’s new distribution center in fiscal 2002 as compared to fiscal 2001 when the Company started up operations in its new distribution center which delayed payments in some cases. Accounts payable as a percentage of inventory decreased to 23.1% at February 1, 2003, as compared to 36.6% at February 2, 2002. The increase in accrued liabilities of $16.8 million at February 1, 2003, as compared to February 2, 2002, was primarily attributable to increased payroll and bonus accruals.

Net cash used in investing activities in fiscal 2002, fiscal 2001 and fiscal 2000 was $40.4 million, $92.9 million and $61.9 million, respectively, which was used for investment in property and equipment. Of the $40.4 million of net cash used for investment in property and equipment in fiscal 2002, $29.4 million was used for 85 new stores and 30 expansions/relocations opened in fiscal 2002, $4.4 million was used for the initial construction costs of new stores and expansions/relocations to be opened in fiscal 2003, $4.4 million was used for maintenance capital expenditures on existing stores, and $2.2 million was used for other capital expenditures including computer hardware and software. Property and equipment expenditures were significantly lower in fiscal 2002 as compared to fiscal 2001, primarily due to the Company’s construction of its new corporate facilities during fiscal 2001.

Net cash used in financing activities in fiscal 2002 was $22.9 million as compared to cash provided by financing activities in fiscal 2001 and fiscal 2000 of $28.7 million and $6.4 million, respectively. Of the $22.9 million of net cash used in financing activities in fiscal 2002, $25.5 million was due to the repayment

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of the Company’s construction loan and $.8 million was due to principal payments under capital lease obligations, offset by $3.4 million in proceeds received from the exercise of stock options.

The Company has a credit facility with a bank, which expires March 31, 2004. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) to be used for cash advances, commercial letters of credit and shipside bonds, and an additional $25.0 million line of credit (the “Construction Facility”) which was used to finance the construction of the Company’s current corporate office and distribution center. On August 30, 2002, the Company repaid the outstanding balance of $25.0 million related to the Construction Facility using available cash generated from operations. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.25% at February 1, 2003) or at optional interest rates that are primarily dependent upon the London Inter-bank Offered Rates for the time period chosen. The Company’s weighted average interest rate on its outstanding borrowings was 3.67% at February 1, 2003. At February 1, 2003, the Company had no borrowings outstanding under the Credit Line and $10.3 million outstanding in letters of credit. The credit facility subjects the Company to various restrictive covenants, including maintenance of certain financial ratios, and prohibits payment of cash dividends on common stock. At February 1, 2003, the Company was in compliance with all of the covenants.

The Company has minimum annual rental commitments under existing store leases, the lease for its former corporate offices and distribution center, capital leases for computer equipment, and other long-term debt obligations for multi-year computer maintenance contracts. The Company’s financial obligations under these arrangements are approximately $76 million in fiscal 2003 and similar amounts thereafter. The Company leases all of its retail store locations under operating leases. The Company leases equipment, from time to time, under capital leases. In addition, at any time, the Company is contingently liable for open letters of credit with foreign suppliers of merchandise. There were $10.3 million of open letters of credit outstanding as of February 1, 2003. As of February 1, 2003, the Company’s future financial commitments under these arrangements are as follows:

	Payments Due by Period
Contractual Obligations			Less than 1		1-3		3-5		More than
(in millions)	Total		year		years		years		5 years
Operating lease obligations	$	583.7	$	73.2	$	146.8	$	147.0	$	216.7
Capital lease obligations		4.0		1.7		2.1		0.2		—
Long-term debt obligations		2.1		0.9		1.2		—		—
Letters of credit		10.3		10.3		—		—		—
Total	$	600.1	$	86.1	$	150.1	$	147.2	$	216.7

The Company’s average cost to build a new store in fiscal 2002, including leasehold improvements, furniture and fixtures and landlord allowances, was approximately $285,000 for PacSun stores, approximately $210,000 for PacSun Outlet stores, and approximately $225,000 for d.e.m.o. stores. The average cost of expanding or relocating a PacSun store was approximately $430,000 and approximately $360,000 in fiscal 2002 and fiscal 2001, respectively. The average total cost to build new stores and relocate or expand stores will vary in the future, depending on various factors, including square footage, changes in store design, local construction costs and landlord allowances. The Company’s average initial inventory, at cost, for new stores opened in fiscal 2002 was approximately $118,000 for PacSun stores, approximately $150,000 for PacSun Outlet stores and approximately $77,000 for d.e.m.o. stores. The Company’s initial inventory for new stores will vary in the future depending on various factors, including store concept and square footage.

During fiscal 2003, the Company plans to open approximately 75 net new stores, of which approximately 61 will be PacSun stores, approximately four will be PacSun Outlet stores and approximately ten will be d.e.m.o. stores. The Company also plans to expand or relocate approximately 30 existing smaller PacSun stores. In fiscal 2003, capital expenditures are expected to be approximately $46 million, of which approximately $41 million will be for opening approximately 75 net new stores and for approximately 30 expansions/relocations, and approximately $5 million will be used for other capital expenditures including maintenance capital on existing stores and computer hardware and software.

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The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. Most leases contain cancellation or kick-out clauses in the Company’s favor that relieve the Company of any future obligation under a lease if specified sales levels are not achieved by a specified date. The Company closed twelve stores in fiscal 2002 and anticipates closing approximately eleven stores in fiscal 2003.

The Company relies primarily on internally generated cash flows to finance its operations. In addition, to the extent necessary, the Company relies on its credit facility to finance operations and provide additional resources for capital expenditures. Management believes that the Company’s working capital, cash flows from operating activities and credit facility will be sufficient to meet the Company’s operating and capital expenditure requirements for the next twelve months.

The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand. Any inability to provide appropriate merchandise in sufficient quantities in a timely manner could have a material adverse effect on the Company’s business, operating results, cash flows from operations and financial condition. Any economic downturn that affects the retail industry as a whole could also adversely affect the Company’s business, operating results, cash flows from operations and financial condition.

A significant decrease in the Company’s operating results could adversely affect the Company’s ability to maintain required financial ratios under the Company’s credit facility. Required financial ratios include total liabilities to tangible net worth ratio, limitations on capital expenditures and achievement of certain rolling four-quarter EBITDA requirements. If these financial ratios are not maintained, the bank will have the option to require immediate repayment of all amounts outstanding under the credit facility. The most likely result would require the Company to either renegotiate certain terms of the credit agreement, obtain a waiver from the bank, or obtain a new credit agreement with another bank, which may contain different terms. As of February 1, 2003, the Company had no borrowings outstanding under its credit facility.

New Accounting Pronouncements

Goodwill and Other Intangible Assets — On February 3, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Intangible Assets,” which revises the accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but are tested for impairment annually and also in the event of an impairment indicator. The Company completed the required transitional impairment test and the annual test and determined that no impairment existed. Any subsequent impairment losses will be reflected in operating income. With the adoption of SFAS No. 142, the Company discontinued amortization of goodwill. Had amortization of goodwill not been recorded in fiscal 2001 and fiscal 2000, net income would have increased by $.2 million in each fiscal year, net of taxes, and diluted earnings per share would have increased by $.01 in fiscal 2000 due to rounding.

Accounting for the Impairment or Disposal of Long-Lived Assets — In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The Company adopted SFAS No. 144 effective February 3, 2002. Upon adoption of SFAS No. 144, the Company reviewed long-lived assets and determined that no impairment existed. Under SFAS No. 144, long-lived assets, including amortizing intangible assets, will be tested for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

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

18

Company’s guarantee of an assignee’s performance under a lease obligation (see Note 7 to the consolidated financial statements).

Accounting for Costs Associated with Exit or Disposal Activities — In June, 2002 the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.

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

Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123 — In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods for voluntary transition to SFAS No.123’s fair value method of accounting for stock-based employee compensation (“the fair value method”). SFAS No. 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS No. 148 for the year ended February 1, 2003 (see Notes 1 and 9) and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ending May 3, 2003.

Consolidation of Variable Interest Entities — In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not currently have any variable interest entities and expects that the adoption of the provisions of FIN 46 will not have a material impact on the Company’s financial position or results of operations.

19

Inflation

The Company does not believe that inflation has had a material effect on the results of operations in the recent past. There can be no assurance that the Company’s business will not be affected by inflation in the future.

Seasonality and Quarterly Results

The Company’s business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Company’s first quarter historically accounts for the smallest percentage of annual net sales. In each of fiscal 2002 and fiscal 2001, excluding sales generated by new and relocated/expanded stores, the Christmas and back-to-school periods together accounted for approximately 36% of the Company’s annual net sales and a higher percentage of the Company’s operating income. In fiscal 2002, excluding net sales generated by new and relocated/expanded stores, approximately 43% of the Company’s annual net sales occurred in the first half of the fiscal year and approximately 57% in the second half. The Company’s quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings; the amount of revenue contributed by new stores; the timing and level of markdowns; the timing of store closings, expansions and relocations; competitive factors; and general economic conditions.

Cautionary Note Regarding Forward-Looking Statements and Risk Factors

This report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The Company is hereby providing cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those projected in forward-looking statements of the Company herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always through the use of words or phrases such as “will result,” “expects to,” “will continue,” “anticipates,” “plans,” “intends,” “estimated,” “projects” and “outlook”) are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. All forward-looking statements included in this report are based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. Such uncertainties include, among others, the following factors:

Merchandising/Fashion Sensitivity. The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand in a timely manner. The Company’s failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on the Company’s business, financial condition and results of operations. Misjudgments or unanticipated fashion changes could also have a material adverse effect on the Company’s image with its customers. See Item 1. “Business - Merchandising.”

Private Label Merchandise. Sales from private label merchandise accounted for approximately 33% and 34% of net sales in fiscal 2002 and fiscal 2001, respectively. The Company may increase the percentage of net sales in private label merchandise in the future, although there can be no assurance that the Company will be able to achieve increases in private label merchandise sales as a percentage of net sales. Because the Company’s private label merchandise generally carries higher merchandise margins than its other merchandise, the Company’s failure to anticipate, identify and react in a timely manner to fashion trends with its private label merchandise, particularly if the percentage of net sales derived from private label merchandise increases, may have a material adverse effect on the Company’s business, financial condition and results of operations. See Item 1. “Business - Merchandising.”

20

Fluctuations in Comparable Store Net Sales Results. The Company’s comparable store net sales results have fluctuated significantly in the past on a monthly, quarterly, and annual basis, and are expected to continue to fluctuate in the future. A variety of factors affect the Company’s comparable store net sales results, including changes in fashion trends, changes in the Company’s merchandise mix, calendar shifts of holiday periods, actions by competitors, weather conditions and general economic conditions. The Company’s comparable store net sales results for any particular fiscal month, fiscal quarter or fiscal year in the future may decrease. As a result of these or other factors, the Company’s future comparable store net sales results are likely to have a significant effect on the market price of the Company’s common stock.

Expansion and Management of Growth. PacSun’s continued growth depends to a significant degree on its ability to open and operate stores on a profitable basis and on management’s ability to manage the Company’s planned expansion. During fiscal 2003, the Company plans to open approximately 75 net new stores, of which approximately 61 will be PacSun stores, approximately four will be PacSun Outlet stores and approximately ten will be d.e.m.o. stores. The Company’s planned expansion is dependent upon a number of factors, including the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate supplies of merchandise and hire and train qualified management level and other employees. Factors beyond the Company’s control may also affect the Company’s ability to expand, including general economic and business conditions affecting consumer spending. There can be no assurance that the Company will achieve its planned expansion or that such expansion will be profitable nor that the Company will be able to manage its growth effectively. Any failure to manage growth could have a material adverse effect on the Company’s business, financial condition and results of operations.

Reliance on Key Personnel. The continued success of the Company is dependent to a significant degree upon the services of its key personnel, particularly its executive officers. The loss of the services of any member of senior management could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company’s success in the future will also be dependent upon the Company’s ability to attract and retain qualified personnel. The Company’s inability to attract and retain qualified personnel in the future could have a material adverse effect on the Company’s business, financial condition and results of operations.

Dependence on Single Distribution Facility. The Company’s distribution functions for all of its stores and for internet sales are handled from a single facility in Anaheim, California. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes would have a material adverse effect on the Company’s business, financial condition and results of operations. There can be no assurance that the Company’s new corporate office and distribution center will be adequate to support the Company’s future growth.

Stores in the d.e.m.o. Format. Comparable store net sales results for d.e.m.o. stores did not meet management’s expectations during the first half of fiscal 2002 (+.9%) or during fiscal 2001 (+1.6%). Although comparable store net sales results improved significantly for d.e.m.o. stores during the second half of fiscal 2002, the Company is not certain that d.e.m.o. stores will achieve acceptable levels of sales or profitability in the future. Negative comparable store net sales results for d.e.m.o. stores may have a material adverse effect on the Company’s business, financial condition and results of operations and may result in a greater number of store closings.

Internet Sales. The Company’s internet operations are subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems. There can be no assurance that the internet operations will achieve sales and profitability levels that justify the Company’s investment therein. The internet operations also involve other risks that could have a material adverse effect on the Company, including (i) difficulties with hiring, retention and training of key personnel to conduct the Company’s internet operations, (ii) diversion of sales from PacSun stores, (iii) rapid technological change, (iv) liability for online content and (v) risks related to the failure of the computer systems that operate the web site and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions. In addition, the internet operations involve risks which are beyond the Company’s control that could have a material adverse effect on the Company, including (i) price competition involving

21

the items the Company intends to sell, (ii) the entry of the Company’s vendors into the internet business, in direct competition with the Company, (iii) the level of merchandise returns experienced by the Company, (iv) governmental regulation, (v) online security breaches, (vi) credit card fraud and (vii) competition and general economic conditions and economic conditions specific to the internet, online commerce and the apparel industry.

Economic Impact of Terrorist Attacks or War/Threat of War. The majority of the Company’s stores are located in regional shopping malls. In response to the terrorist attacks of September 11, 2001, security has been heightened in public areas. Any further threat of terrorist attacks or actual terrorist events, particularly in public areas, could lead to lower customer traffic in regional shopping malls. In addition, local authorities or mall management could close regional shopping malls in response to any immediate security concern. For example, on September 11, 2001, a substantial number of the Company’s stores were closed early due to closure of the malls in response to the terrorist attacks. Mall closures, as well as lower customer traffic due to security concerns, could result in decreased sales. Additionally, war or the threat of war could significantly diminish consumer spending, resulting in decreased sales for the Company. Decreased sales would have a material adverse effect on the Company’s business, financial condition and results of operations.

Reliance on Foreign Sources of Production. The Company purchases merchandise directly in foreign markets for its private label brands. In addition, the Company purchases merchandise from domestic vendors, some of which is manufactured overseas. The Company does not have any long-term merchandise supply contracts and its imports are subject to existing or potential duties, tariffs and quotas. The Company faces competition from other companies for production facilities and import quota capacity. The Company also faces a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) imposition of new legislation relating to import quotas that may limit the quantity of goods which may be imported into the United States from countries in a region that the Company does business; (iii) imposition of duties, taxes, and other charges on imports; and (iv) local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity. New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions which, if enacted, would increase the cost of products purchased from suppliers in countries that the Company does business with. The inability of the Company to rely on its foreign sources of production due to any of the factors listed above could have a material adverse effect on the Company’s business, financial condition and results of operations.

Credit Facility Financial Covenants. A significant decrease in the Company’s operating results could adversely affect the Company’s ability to maintain required financial ratios under the Company’s credit facility. Required financial ratios include total liabilities to tangible net worth ratio, limitations on capital expenditures and achievement of certain rolling four-quarter EBITDA requirements. If these financial ratios are not maintained, the bank will have the option to require immediate repayment of all amounts outstanding under the credit facility. The most likely result would require the Company to either renegotiate certain terms of the credit agreement, obtain a waiver from the bank, or obtain a new credit agreement with another bank, which may contain different terms.

Stock Options. A number of publicly traded companies have recently announced that they will begin expensing stock option grants to employees. In addition, the FASB and the Commission have indicated that possible rule changes requiring expensing of stock options may be adopted in the near future. Currently, the Company includes such expenses on a pro forma basis in the notes to the Company’s annual financial statements in accordance with accounting principles generally accepted in the United States of America but does not include stock option expenses in the Company’s reported financial statements. If accounting standards are changed to require the Company to expense stock options, the Company’s reported earnings will decrease and its stock price could decline.

Litigation. The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company. However, management’s assessment of the

22

Company’s current litigation could change in light of the discovery of facts with respect to legal actions pending against the Company not presently known to the Company or determinations by judges, juries or other finders of fact which do not accord with management’s evaluation of the possible liability or outcome of such litigation.

Volatility of Stock Price. The market price of the Company’s common stock has fluctuated substantially in the past and there can be no assurance that the market price of the common stock will not continue to fluctuate significantly. Future announcements or management discussions concerning the Company or its competitors, internet sales results, d.e.m.o. sales and profitability results, quarterly variations in operating results or comparable store net sales, changes in earnings estimates by analysts or changes in accounting policies, among other factors, could cause the market price of the common stock to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies. See Item 5. “Market for Registrant’s Common Equity and Related Stockholder Matters.”

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

The Company cautions that the risk factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Further, management cannot assess the impact of each such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To the extent the Company borrows under its credit facility, the Company is exposed to market risk related to changes in interest rates. At February 1, 2003, there were no borrowings outstanding under the Company’s credit facility. Based on the weighted average interest rate of 3.67% on the Company’s credit facility during the 52 weeks ended February 1, 2003, if interest rates on the credit facility were to increase by 10%, and to the extent borrowings were outstanding, for every $1,000,000 outstanding on the Company’s credit facility, net income would be reduced by approximately $3,000 per year. See “Summary of Significant Accounting Policies” and “Nature of Business.” The Company is not a party with respect to derivative financial instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information with respect to this item is set forth in “Index to Financial Statements.”

ITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to this item is incorporated by reference from the Registrant’s definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant’s fiscal year.

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ITEM 11. EXECUTIVE COMPENSATION

Information with respect to this item is incorporated by reference from the Registrant’s definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant’s fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to this item is incorporated by reference from the Registrant’s definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant’s fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to this item is incorporated by reference from the Registrant’s definitive Proxy Statement to be filed with the Commission not later than 120 days after the end of the Registrant’s fiscal year.

ITEM 14. CONTROLS AND PROCEDURES

In the 90-day period before the filing of this report, the Chief Executive Officer and Chief Financial Officer of the Company (collectively, the “certifying officers”) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act). These disclosure controls and procedures are designed to ensure that the information required to be disclosed by the Company in its periodic reports filed with the Commission is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that the information is communicated to the certifying officers on a timely basis.

The certifying officers concluded, based on their evaluation, that the Company’s disclosure controls and procedures are effective for the Company, taking into consideration the size and nature of the Company’s business and operations.

No significant changes in the Company’s internal controls or in other factors were detected that could significantly affect the Company’s internal controls subsequent to the date when the internal controls were evaluated.

PART IV

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

(a)	1.	The financial statements listed in the “Index to Consolidated Financial Statements” at page F-1 are filed as a part of this report.
	2.	Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
	3.	Exhibits included or incorporated herein:
		See Index to Exhibits.
(b)		Reports on Form 8-K - None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on March 27, 2003 on its behalf by the undersigned, thereunto duly authorized.

PACIFIC SUNWEAR OF CALIFORNIA, INC.

By: /s/ GREG H. WEAVER

Greg H. Weaver
Chairman of the Board and
Chief Executive Officer

Each person whose signature appears below hereby authorizes Greg H. Weaver and Carl W. Womack or either of them, as attorneys-in-fact to sign on his behalf, individually, and in each capacity stated below and to file all amendments and/or supplements to the Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature		Title	Date
/s/	GREG H. WEAVER Greg H. Weaver	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	March 27, 2003
/s/	CARL W. WOMACK Carl W. Womack	Sr. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 27, 2003
/s/	JULIUS JENSEN III	Director	March 27, 2003
	Julius Jensen III
/s/	PEARSON C. CUMMIN III	Director	March 27, 2003
	Pearson C. Cummin III
/s/	PETER L. HARRIS	Director	March 27, 2003
	Peter L. Harris
/s/	SALLY FRAME KASAKS	Director	March 27, 2003
	Sally Frame Kasaks
/s/	PETER STARRETT	Director	March 27, 2003
	Peter Starrett
/s/	THOMAS M. MURNANE	Director	March 27, 2003
	Thomas M. Murnane

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CERTIFICATIONS

I, Greg H. Weaver, certify that:

     1.     I have reviewed this annual report on Form 10-K of Pacific Sunwear of California, Inc.;

     2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

     4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 27, 2003

/s/ GREG H. WEAVER

Greg H. Weaver
Chairman of the Board and Chief Executive Officer

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I, Carl W. Womack, certify that:

     1.     I have reviewed this annual report on Form 10-K of Pacific Sunwear of California, Inc.;

     2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

     3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

     4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

     5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

     6.     The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 27, 2003

/s/ CARL W. WOMACK

Carl W. Womack
Senior Vice President, Chief Financial Officer and Secretary

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED FEBRUARY 1, 2003, FEBRUARY 2, 2002, AND FEBRUARY 4, 2001:

CONSOLIDATED FINANCIAL STATEMENTS:

Independent Auditors’ Report	F-2
Consolidated Balance Sheets as of February 1, 2003, and February 2, 2002	F-3
Consolidated Statements of Income and Comprehensive Income for each of the three fiscal years in the period ended February 1, 2003	F-4
Consolidated Statements of Shareholders’ Equity for each of three fiscal years in the period ended February 1, 2003	F-5
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended February 1, 2003	F-6
Notes to Consolidated Financial Statements	F-7

F-1

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders
Pacific Sunwear of California, Inc.
Anaheim, California

We have audited the accompanying consolidated balance sheets of Pacific Sunwear of California, Inc. and its wholly owned subsidiaries as of February 1, 2003 and February 2, 2002, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended February 1, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Pacific Sunwear of California, Inc. and its wholly owned subsidiaries as of February 1, 2003, and February 2, 2002, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America.

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

DELOITTE & TOUCHE LLP
Costa Mesa, California
March 11, 2003

F-2

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

				February 1,			February 2,
				2003			2002
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents (Note 1)			$	36,438		$	23,136
	Accounts receivable				2,916			3,044
	Merchandise inventories				123,433			102,512
	Prepaid expenses, includes $9,664 and $8,410 of prepaid rent, respectively				14,871			11,856
	Deferred taxes – current (Note 6)				4,975			4,282
		Total current assets			182,633			144,830
PROPERTY AND EQUIPMENT (Note 1):
	Land				12,156			12,156
	Buildings and building improvements				26,680			26,475
	Leasehold improvements				111,431			102,075
	Furniture, fixtures and equipment				148,377			125,706
		Total property and equipment			298,644			266,412
	Less accumulated depreciation and amortization				(97,131	)		(71,412	)
		Net property and equipment			201,513			195,000
OTHER ASSETS:
	Goodwill (Notes 1 and 3)				6,492			6,492
	Deferred compensation and other assets (Notes 2 and 9)				9,105			7,807
	Deferred taxes – noncurrent (Note 6)				—			1,311
		Total other assets			15,597			15,610
			Total assets	$	399,743		$	355,440
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Line of credit (Note 4)			$	—		$	—
	Current portion of long-term debt (Notes 4 and 7)				829			425
	Current portion of capital lease obligations (Note 7)				1,521			834
	Accounts payable				28,456			37,493
	Accrued liabilities (Notes 5 and 10)				34,522			17,743
	Income taxes payable (Note 6)				8,000			9,436
		Total current liabilities			73,328			65,931
LONG-TERM LIABILITIES:
Long-term debt (Notes 4 and 7)					1,102			24,597
Long-term capital lease obligations (Note 7)					2,236			731
Deferred compensation (Note 9)					7,097			7,439
Deferred rent					10,574			8,759
Deferred taxes (Note 6)					3,015			—
Other long-term liabilities					—			28
		Total long-term liabilities			24,024			41,554
Commitments and contingencies (Note 7)
SHAREHOLDERS’ EQUITY (Notes 8 and 9):
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and outstanding					—			—
Common stock, $.01 par value; 113,906,250 shares authorized; 49,488,764 and 49,155,753 shares issued and outstanding, respectively (Note 1)					495			492
Additional paid-in capital					93,008			88,252
Retained earnings					208,888			159,211
		Total shareholders’ equity			302,391			247,955
			Total liabilities and shareholders’ equity	$	399,743		$	355,440

See notes to consolidated financial statements

F-3

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

	Fiscal Year Ended
	February 1,		February 2,			February 4,
	2003		2002			2001
Net sales	$	846,393	$	684,840		$	589,438
Cost of goods sold, including buying, distribution and occupancy costs		562,710		464,660			391,816
Gross margin		283,683		220,180			197,622
Selling, general and administrative expenses		202,445		175,898			133,999
Operating income		81,238		44,282			63,623
Interest expense/(income), net		594		(470	)		(1,344	)
Income before income tax expense		80,644		44,752			64,967
Income tax expense (Note 6)		30,967		17,186			25,213
Net income	$	49,677	$	27,566		$	39,754
Comprehensive income (Note 1)	$	49,677	$	27,566		$	39,754
Net income per share, basic (Note 1)	$	1.01	$	0.56		$	0.83
Net income per share, diluted (Note 1)	$	0.99	$	0.56		$	0.81
Weighted average shares outstanding, basic (Note 1)		49,287,680		49,021,791			47,842,611
Weighted average shares outstanding, diluted (Note 1)		50,097,994		49,658,699			48,822,429

See notes to consolidated financial statements

F-4

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)

	Common			Common		Additional
	Stock			Stock		Paid-in			Retained
	Shares			Amount		Capital			Earnings		Total
BALANCE, January 31, 2000		47,194,127		$	472	$	69,461		$	91,891	$	161,824
Exercise of stock options and shares sold under employee stock purchase plan and restricted stock grant (Note 9)		1,468,026			15		6,431			—		6,446
Restricted stock award, vesting of shares (Note 9)		—			—		290			—		290
Tax benefits related to exercise of stock options (Note 9)		—			—		4,816			—		4,816
Net income		—			—		—			39,754		39,754
BALANCE, February 4, 2001		48,662,153			487		80,998			131,645		213,130
Exercise of stock options and shares sold under employee stock purchase plan and restricted stock grant (Note 9)		493,600			5		4,256			—		4,261
Restricted stock award, vesting of shares (Note 9)		—			—		290			—		290
Tax benefits related to exercise of stock options (Note 9)		—			—		2,708			—		2,708
Net income		—			—		—			27,566		27,566
BALANCE, February 2, 2002		49,155,753			492		88,252			159,211		247,955
Exercise of stock options and shares sold under employee stock purchase plan (Note 9)		333,803			3		3,441			—		3,444
Cancellation of fractional shares due to 3-for-2 stock split (Note 1)		(792	)		—		(14	)		—		(14	)
Restricted stock award, vesting of shares (Note 9)		—			—		291			—		291
Tax benefits related to exercise of stock options (Note 9)		—			—		1,038			—		1,038
Net income		—			—		—			49,677		49,677
BALANCE, February 1, 2003		49,488,764		$	495	$	93,008		$	208,888	$	302,391

See notes to consolidated financial statements

F-5

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

					Fiscal Year Ended
					February 1,			February 2,			February 4,
					2003			2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	49,677		$	27,566		$	39,754
	Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization			32,453			27,146			19,871
			Loss on disposal of equipment (Note 10)			4,240			7,451			1,440
			Change in operating assets and liabilities:
				Accounts receivable		128			(290	)		(576	)
				Merchandise inventories		(20,921	)		(19,819	)		(22,691	)
				Prepaid expenses		(1,949	)		(1,669	)		(3,144	)
				Deferred compensation and other assets		231			(127	)		633
				Accounts payable		(9,037	)		5,861			11,519
				Accrued liabilities		16,751			4,492			(623	)
				Income taxes payable and deferred taxes		3,235			6,203			4,474
				Deferred rent		1,815			1,548			1,379
				Net cash provided by operating activities		76,623			58,362			52,036
CASH FLOWS FROM INVESTING ACTIVITIES:
	Investment in property and equipment					(40,423	)		(92,936	)		(61,869	)
				Net cash used in investing activities		(40,423	)		(92,936	)		(61,869	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	(Repayments)/borrowings under long-term debt obligations					(25,504	)		24,998			—
	Principal payments under capital lease obligations					(824	)		(519	)		(58	)
	Cash paid in lieu of fractional shares due to 3-for-2 stock split					(14	)		—			—
	Proceeds from exercise of stock options					3,444			4,260			6,445
				Net cash (used in)/provided by financing activities		(22,898	)		28,739			6,387
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:						13,302			(5,835	)		(3,446	)
CASH AND CASH EQUIVALENTS, beginning of fiscal year						23,136			28,971			32,417
CASH AND CASH EQUIVALENTS, end of fiscal year					$	36,438		$	23,136		$	28,971
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
		Interest, including $428 of capitalized interest paid in fiscal 2001			$	944		$	515		$	12
		Income taxes			$	27,732		$	10,983		$	20,739

Supplemental disclosures of non-cash transactions: During the fiscal years ended February 1, 2003, February 2, 2002 and February 4, 2001, the Company recorded an increase to additional paid-in capital of $1,038, $2,708 and $4,816, respectively, related to tax benefits associated with the exercise of nonqualified stock options. During the fiscal years ended February 1, 2003, February 2, 2002 and February 4, 2001, the Company recorded an increase to additional paid-in capital of $291, $290 and $290, respectively, related to the issuance of stock to satisfy certain deferred compensation liabilities. During the year ended February 1, 2003, the Company purchased a prepaid three-year computer maintenance agreement under a long-term debt obligation for $2,413. During the years ended February 1, 2003, February 2, 2002 and February 4, 2001, the Company acquired property pursuant to capital lease obligations in the amount of $3,016, $493 and $1,650, respectively. Additionally, during the year ended February 2, 2002, the Company financed the purchase of a vehicle for $24.

See notes to consolidated financial statements

F-6

PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended February 1, 2003, February 2, 2002 and February 4, 2001
(all amounts in thousands, except share and per share amounts, unless otherwise indicated)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS

Nature of Business — Pacific Sunwear of California, Inc. and its wholly-owned subsidiaries (the “Company”) is a leading specialty retailer of everyday casual apparel, footwear and accessories designed to meet the needs of active teens and young adults. The Company operates three nationwide, primarily mall-based chains of retail stores, under the names “Pacific Sunwear” (as well as “PacSun”), “Pacific Sunwear Outlet” and “d.e.m.o.” Pacific Sunwear and Pacific Sunwear Outlet stores specialize in board-sport inspired casual apparel, footwear and related accessories catering to teenagers and young adults. d.e.m.o. specializes in hip-hop music inspired casual apparel and related accessories catering to teenagers and young adults. In addition, the Company operates a website through a wholly-owned subsidiary which sells PacSun merchandise online, provides content and community for its target customers, and provides information about the Company.

The Company’s fiscal year is a 52- or 53-week period ending near January 31. Fiscal 2002 was a 52-week period ended February 1, 2003. Fiscal 2001 was a 52-week period ended February 2, 2002. Fiscal 2000 was a 53-week period ended February 4, 2001.

Principles of Consolidation —The consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its wholly-owned subsidiaries, Pacific Sunwear Stores Corp. and ShopPacSun.com Corp. All intercompany transactions have been eliminated in consolidation.

Basis of Presentation — The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.

Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported revenues and expenses during the reporting period. Actual results could differ from these estimates.

Fair Value of Financial Instruments — Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures about Fair Value of Financial Instruments,” requires management to disclose the estimated fair value of certain assets and liabilities defined by SFAS No. 107 as financial instruments. Financial instruments are generally defined by SFAS No. 107 as cash, evidence of ownership interest in an entity, or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. At February 1, 2003, management believes that the carrying amounts of cash, receivables and payables approximate fair value because of the short maturity of these financial instruments.

Cash and Cash Equivalents — The Company considers all highly liquid financial instruments, if any, purchased with an original maturity of three months or less to be cash equivalents.

Merchandise Inventories — Merchandise inventories are stated at the lower of cost (first-in, first-out method) or market. Cost is determined using the retail inventory method. At any one time, inventories include items that have been marked down to management’s best estimate of their fair market value. Management bases the decision to mark down merchandise upon the age of the item and its current rate of sale. To the extent that management estimates differ from actual results, additional markdowns may have to be recorded, which could reduce the Company’s gross margins and operating results. The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand. Any inability to provide appropriate merchandise in sufficient quantities in a timely manner could increase future markdown rates.

Property and Equipment — Leasehold improvements and furniture, fixtures and equipment are stated at cost. Amortization of leasehold improvements is computed on the straight-line method over the lesser of their estimated useful lives or the life of the lease (generally 10 years). Depreciation on furniture, fixtures and equipment is computed on the straight-line method over five years.

The Company completed construction of and moved into a new corporate office and distribution center in January 2002. The total cost of the completed facilities, including purchased land, was $54.5 million. Of the $54.5 million total cost, $26.5 million was

F-7

buildings, $12.2 million was land, $12.2 million was a new materials handling system and $3.6 million was furniture, fixtures and equipment.

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

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

Other Long-Lived Assets — In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The Company adopted SFAS No. 144 effective February 3, 2002. Upon adoption of SFAS No. 144, the Company reviewed long-lived assets and determined that no impairment existed. Under SFAS No. 144, long-lived assets, including amortizing intangible assets, will be tested for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.

Corporate Rent Reserve — During fiscal 2001, the Company recorded a $1.4 million charge to accrue for rent expense associated with the Company’s former corporate offices, which remain unused at the end of fiscal 2002. The current accrual of $1.3 million is approximately the amount of rent expense for one year, within which time the Company currently believes a tenant will be identified to sublease the premises. To the extent management’s estimates relating to the Company’s ability to sublease these premises within one year changes, additional charges may be recorded in the future up to the net remaining obligation under the lease depending on the facts and circumstances in existence at that time. As of February 1, 2003, the aggregate net remaining obligation under this lease was approximately $6.7 million.

Litigation — The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company and, from time to time, may make provisions for potential litigation losses. Depending on the actual outcome of pending litigation, charges in excess of any provisions could be recorded in the future which may have an adverse affect on the Company’s operating results (see Note 7).

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

Deferred Rent — The Company averages any defined rental escalations over the term of the related lease in order to provide level recognition of rent expense.

Stock Split — On December 18, 2002, the Company effected a three-for-two stock split. Shareholders’ equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying the par value ($164) of the additional shares arising from the split from additional paid-in capital to common stock. Additionally, all share and per share amounts have been restated to give effect to the stock split.

Revenue Recognition — Sales are recognized upon purchase by customers at the Company’s retail store locations or through the Company’s website. The Company has recorded reserves to estimate sales returns by customers based on historical sales return results. Actual return rates have historically been within management’s expectations and the reserves established. However, in the unlikely event that the actual rate of sales returns by customers increased significantly, the Company’s operational results could be adversely affected.

F-8

Advertising Costs — Costs associated with the production of advertising, such as photography, design, creative talent, editing and other costs, are expensed the first time the advertising takes place. Costs associated with placing advertising that has been produced, such as television and magazine advertising, are expensed when the advertising takes place. Advertising costs were $8,897, $12,967 and $10,766 in fiscal 2002, 2001 and 2000, respectively.

Earnings per Share — The Company reports earnings per share in accordance with the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Incremental shares of 810,314, 636,908, and 979,818 in fiscal 2002, 2001 and 2000, respectively, were used in the calculation of diluted earnings per common share. Options to purchase 1,355,599, 1,585,185 and 1,132,794 shares of common stock in fiscal 2002, 2001 and 2000, respectively, were not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the common stock during the respective period.

Stock-Based Compensation — The Company accounts for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25. In March 2000, the FASB issued Interpretation No. 44 of APB Opinion No. 25, “Accounting for Certain Transactions Involving Stock Compensation,” which, among other things, addressed accounting consequences of a modification that reduces the exercise price of a fixed stock option award (otherwise known as repricing). The adoption of this interpretation did not impact the Company’s consolidated financial statements.

SFAS No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income and earnings per share. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: expected life, 5 years following vesting; stock volatility, 55.2% in fiscal 2002, 71.4% in fiscal 2001 and 104.1% in fiscal 2000; risk-free interest rates, 3.0% in fiscal 2002, 4.4% in fiscal 2001 and 4.85% in fiscal 2000; and no dividends during the expected term. The Company’s calculations are based on a multiple-option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 2002, 2001 and 2000 awards had been amortized to expense over the vesting period of the awards, pro forma net income and earnings per share would have been reduced to the pro forma amounts indicated below:

		Fiscal 2002			Fiscal 2001			Fiscal 2000
Net Income
	As reported	$	49,677		$	27,566		$	39,754
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(5,589	)		(5,153	)		(4,631	)
	Pro forma	$	44,088		$	22,413		$	35,123
Net Income Per Share, Basic
	As reported	$	1.01		$	0.56		$	0.83
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(0.12	)		(0.10	)		(0.10	)
	Pro forma	$	0.89		$	0.46		$	0.73
Net Income Per Share, Diluted
	As reported	$	0.99		$	0.56		$	0.81
	Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(0.10	)		(0.10	)		(0.08	)
	Pro forma	$	0.89		$	0.46		$	0.73

Comprehensive Income — The Company reports comprehensive income in accordance with the provisions of SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 established standards for the reporting and display of comprehensive

F-9

income. Components of comprehensive income include net earnings (loss), foreign currency translation adjustments and gains/losses associated with investments available for sale. There was no difference between net income and comprehensive income for the years ended February 1, 2003, February 2, 2002 and February 4, 2001.

Segment Information — The Company has one reportable segment representing the aggregation of its operating segments due to the similarities of economic and operating characteristics among the operating segments represented by the Company’s three store formats.

Merchandise Risk — The Company’s success is largely dependent upon its ability to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand. Any inability to provide appropriate merchandise in sufficient quantities in a timely manner could have a material adverse effect on the Company’s business, operating results and financial condition.

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

In June, 2002 the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force (“EITF”) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company will adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.

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

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods for voluntary transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation (“the fair value method”). SFAS No. 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS No. 148 for the year ended February 1, 2003 (see Notes 1 and 9) and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ending April 3, 2003.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Since the Company does not currently have any variable interest entities, the Company expects that the adoption of the provisions of FIN 46 will not have a material impact on the Company’s financial position or results of operations.

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

F-10

2. DEFERRED COMPENSATION AND OTHER ASSETS

Deferred compensation and other assets consist of the following:

	February 1,		February 2,
	2003		2002
Deferred compensation	$	7,565	$	7,587
Long-term computer maintenance contracts		1,359		—
Other assets		181		220
	$	9,105	$	7,807

3. GOODWILL

On February 3, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which eliminated the amortization of goodwill and other intangible assets with indefinite useful lives. SFAS No. 142 requires, among other items, disclosure of the after-tax impact to reported net income and earnings per share of the adoption of the statement for all periods presented. The following table recognizes the after-tax impact to the Company’s operating results of the adoption of SFAS No. 142 as if the non-amortization provisions of the standard had been in effect for all periods presented:

		February 1,		February 2,		February 4,
		2003		2002		2001
For the Year Ended:
Reported net income		$	49,677	$	27,566	$	39,754
Add back goodwill amortization (tax effected)			—		192		192
Adjusted net income		$	49,677	$	27,758	$	39,946
Basic earnings per share:
	Reported net income	$	1.01	$	0.56	$	0.83
	Add back goodwill amortization (tax effected)		0.00		0.01		0.00
	Adjusted net income	$	1.01	$	0.57	$	0.83
Diluted earnings per share:
	Reported net income	$	0.99	$	0.56	$	0.81
	Add back goodwill amortization (tax effected)		0.00		0.00		0.01
	Adjusted net income	$	0.99	$	0.56	$	0.82

4. CREDIT FACILITY

The Company has a credit facility with a bank, which expires March 31, 2004. The credit facility provides for a $45.0 million line of credit (the “Credit Line”) to be used for cash advances, commercial letters of credit and shipside bonds, and an additional $25.0 million line of credit (the “Construction Facility”) which was used to finance the construction of the Company’s new corporate office and distribution center. On August 30, 2002, the Company repaid the outstanding balance of $25.0 million related to the Construction Facility using available cash generated from operations. Interest on the Credit Line is payable monthly at the bank’s prime rate (4.25% at February 1, 2003) or at optional interest rates that are primarily dependent upon the London Inter-bank Offered Rates for the time period chosen. The Company’s weighted average interest rate on its outstanding borrowings was 3.67% at February 1, 2003. At February 1, 2003, the Company had no borrowings outstanding under the Credit Line and $10.3 million outstanding in letters of credit. The credit facility subjects the Company to various restrictive covenants, including maintenance of certain financial ratios, and prohibits payment of cash dividends on common stock. At February 1, 2003, the Company was in compliance with all of the covenants.

F-11

5. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

	February 1,		February 2,
	2003		2002
Accrued compensation and benefits	$	14,420	$	4,620
Gift certificates and store merchandise credits		5,967		4,160
Reserve for store expansion/relocation and closing costs		3,653		2,094
Sales tax payable		2,290		1,647
Reserve for corporate rent – old corporate facilities (Note 10)		1,263		1,396
Accrued medical insurance costs		980		855
Other		5,949		2,971
	$	34,522	$	17,743

6. INCOME TAXES

The components of the income tax expense are as follows:

	Fiscal Year Ended
	February 1,		February 2,			February 4,
	2003		2002			2001
Current income taxes:
Federal	$	23,938	$	18,040		$	22,001
State		3,396		2,659			3,137
		27,334		20,699			25,138
Deferred income taxes:
Federal		3,231		(3,066	)		19
State		402		(447	)		56
		3,633		(3,513	)		75
	$	30,967	$	17,186		$	25,213

A reconciliation of the income tax expense to the amount of income tax expense that would result from applying the federal statutory rate to income before income taxes is as follows:

	Fiscal Year Ended
	February 1,		February 2,		February 4,
	2003		2002		2001
Provision for income taxes at statutory rate	$	28,225	$	15,663	$	22,738
State income taxes, net of federal income tax benefit		2,469		1,438		2,076
Other		273		85		399
	$	30,967	$	17,186	$	25,213

F-12

At February 1, 2003, the Company’s current net deferred tax asset was $4,975 and long-term net deferred tax liability was $3,015. At February 2, 2002, the Company’s current net deferred tax asset was $4,282 and long-term net deferred tax asset was $1,311. The major components of the Company’s overall net deferred tax asset of $1,960 and $5,593 at February 1, 2003, and February 2, 2002, respectively, are as follows:

	February 1,			February 2,
	2003			2002
Depreciation	$	(10,127	)	$	(5,097	)
Deferred rent		4,198			3,497
Reserve for store expansion/relocation and closing costs		1,745			1,393
State income taxes		468			121
Inventory cost capitalization		2,189			1,917
Deferred compensation		2,817			2,970
Other		670			792
	$	1,960		$	5,593

7. COMMITMENTS AND CONTINGENCIES

Operating Leases — The Company leases its retail stores, former corporate offices and distribution facilities, and certain equipment under operating lease agreements expiring at various dates through January 2015. Substantially all of the leases require the Company to pay maintenance, insurance, property taxes and percentage rent ranging from 5% to 7% based on sales volumes over certain minimum sales levels.

Minimum future annual rental commitments under noncancellable leases are as follows:

Fiscal year ending:
January 31, 2004	$	73,162
January 29, 2005		73,512
January 28, 2006		73,307
February 3, 2007		74,366
February 2, 2008		72,616
Thereafter		216,666
	$	583,629

Rental expense, including common area maintenance, was $117,847, $91,480 and $71,175, of which $2,151, $1,062 and $1,085 was paid as percentage rent based on sales volume for the fiscal years ended February 1, 2003, February 2, 2002, and February 4, 2001, respectively.

Capital Leases — During each of the fiscal years ended February 1, 2003, February 2, 2002, and February 4, 2001, the Company acquired computer equipment pursuant to capital lease obligations. The leases bear interest at average rates of 3.8%, 6.0% and 6.6%, respectively, and require monthly principal and interest payments of $90, $22 and $51, respectively, and expire at various dates through March 2006. The net book value of capital lease assets was $4,356 and $1,804, respectively, at February 1, 2003, and February 2, 2002. Future commitments under the capital lease obligation are as follows:

Fiscal year ending:
January 31, 2004	$	1,660
January 29, 2005		1,077
January 28, 2006		1,077
February 3, 2007		179
Total payments		3,993
Less interest portion		(236	)
	$	3,757

F-13

Letters of Credit — The Company was contingently liable for $10.3 million in open letters of credit with foreign suppliers at February 1, 2003.

Other Long-Term Debt Obligations — During the year ended February 1, 2003, the Company purchased a prepaid three-year computer maintenance agreement under a long-term debt obligation for $2,413. The debt obligation bears interest at 6.2% and requires quarterly principal and interest payments of $231 through March 2005. Future commitments under this long-term debt obligation are as follows:

Fiscal year ending:
January 31, 2004	$	927
January 29, 2005		927
January 28, 2006		231
Total payments		2,085
Less interest portion		(154	)
	$	1,931

Litigation — On September 17, 2001 a former Pacific Sunwear employee filed a putative class action lawsuit against Pacific Sunwear which alleges that Pacific Sunwear has not properly paid wages to its California-based store managers, co-managers and assistant managers working in PacSun stores. The action, Auden v. Pacific Sunwear of California, Inc., Case No. 01CC00383, was filed in the California Superior Court for the County of Orange. The complaint in the action seeks both monetary and injunctive relief. Pacific Sunwear has filed an answer in the action denying the allegations and raising affirmative defenses. No class has been certified at this time.

On May 3, 2002 a former Pacific Sunwear employee filed a putative class action lawsuit against Pacific Sunwear in the California Superior Court for the County of Orange, alleging claims substantially similar to the claims alleged in the Auden case described above. In the case, Adams v. Pacific Sunwear of California, Inc., Case No. 02CC00120, the plaintiff alleges that Pacific Sunwear has not properly paid wages to its California store managers and co-managers working in d.e.m.o. stores. The complaint in the action seeks monetary and injunctive relief. Pacific Sunwear has filed an answer in the action denying the allegations and raising affirmative defenses. No class has been certified at this time.

The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the results of operations or financial condition of the Company.

Indemnities, Commitments, and Guarantees — During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include those given to various lessors in connection with facility leases for certain claims arising from such facility or lease and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of California. The Company has issued guarantees in the form of standby letters of credit as security for merchandise shipments from overseas. There were $10.3 million of these letters of credit outstanding at February 1, 2003. The Company has also issued a guarantee within a sublease on one of its store locations under which the Company remains secondarily liable on the sublease should the sublessee default on its lease payments. The term of the sublease ends December 31, 2014. The Company has recorded $.5 million in accrued liabilities to recognize the estimated fair value of this guarantee, assuming that another sublessee would be found within one year should the original sublessee default. The aggregate rental payments remaining on the master lease agreement at February 1, 2003 was $6.5 million. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets other than as noted.

The Company maintains a private label credit card through a third party to promote the PacSun brand image and lifestyle. The third party services the customer accounts and retains all risk and financial obligation associated with any outstanding balances on customer accounts. The Company has no financial obligation and does not provide any guarantee related to any outstanding balances resulting from the use of these private label credit cards by its customers.

F-14

8. COMMON STOCK

Stock Split — During the fiscal year ended February 1, 2003, the Company effected a three-for-two stock split. Shareholders’ equity has been restated to give retroactive recognition to the stock split in prior periods by reclassifying the par value ($164) of the additional shares arising from the split from additional paid-in capital to common stock. Additionally, all share and per share amounts have been restated to give effect to the stock split.

Shareholder Rights Plan — In December 1998, the Board of Directors approved the adoption of a Shareholder Rights Plan (“the Rights Plan”). The Rights Plan provides for the distribution to the Company’s shareholders of one preferred stock purchase “Right” for each outstanding share of the Company’s common stock. The Rights have an exercise price of $75 per Right, subject to subsequent adjustment. Initially, the Rights will trade with the Company’s common stock, and will not be exercisable until the occurrence of certain takeover-related events, as defined. The Rights Plan provides that if a person or group acquires more than 15% of the Company’s stock without prior approval of the Board of Directors, holders of the Rights will be entitled to purchase the Company’s stock at half of market value. The Rights Plan also provides that if the Company is acquired in a merger or other business combination after a person or group acquires more than 15% of the Company’s stock without prior approval of the Board of Directors, holders of the Rights will be entitled to purchase the acquirer’s stock at half of market value. The Rights were distributed to holders of the Company’s common stock of record on December 29, 1998, as a dividend, and will expire, unless earlier redeemed, on December 29, 2008.

9. STOCK OPTION AND RETIREMENT PLANS

Under the Company’s stock option plans, incentive and nonqualified options have been granted to employees and directors to purchase common stock at prices equal to the fair value of the Company’s shares at the grant dates.

At February 1, 2003, outstanding incentive and nonqualified options had exercise prices ranging from $1.00 to $23.88 per share, with an average exercise price of $12.84, and generally begin vesting one year after the grant date. On the initial vesting date, 25% of the options vest and, thereafter, options generally continue to vest at 2.08% each calendar month. The options generally expire ten years from the date of grant or 90 days after employment or services are terminated.

At February 1, 2003, incentive and nonqualified options to purchase 5,793,031 shares were outstanding and 804,277 shares were available for future grant under the Company’s stock option plans. During the years ended February 1, 2003, February 2, 2002, and February 4, 2001, the Company recognized tax benefits of $1,038, $2,708 and $4,816, respectively, resulting from the exercise of certain nonqualified stock options.

Stock option (incentive and nonqualified) activity for each of the three fiscal years ended February 1, 2003, was as follows:

		Fiscal 2002			Fiscal 2001			Fiscal 2000
Beginning options outstanding			4,798,684			4,129,734			4,792,199
	Options granted		1,525,058			1,638,750			857,250
	Options canceled		(236,188	)		(517,029	)		(223,860	)
	Options exercised		(294,523	)		(452,771	)		(1,295,855	)
Ending options outstanding			5,793,031			4,798,684			4,129,734
Ending options exercisable			3,051,233			2,325,670			2,026,509
Beginning weighted average exercise price		$	11.97		$	11.68		$	9.05
	Options granted		15.34			12.81			15.87
	Options canceled		14.86			15.57			13.21
	Options exercised		10.02			8.25			4.45
Ending weighted average exercise price		$	12.84		$	11.97		$	11.68
Ending weighted average exercise price of exercisable options		$	11.39		$	10.34		$	9.25
Weighted average fair value of options granted during the fiscal year		$	15.34		$	7.86		$	12.33

F-15

Additional information regarding options outstanding as of February 1, 2003, is as follows:

					Options Outstanding						Options Exercisable
					Number						Number
					Outstanding		Weighted Average		Weighted		Exercisable		Weighted
Range of					as of Feb. 1,		Remaining		Average		as of Feb. 1,		Average
Exercise Prices					2003		Contractual Life		Exercise Price		2003		Exercise Price
$	1.00	-	$	9.89		1,313,503		4.72	$	7.24		1,286,647	$	7.20
	10.03	-		11.32		1,312,090		8.11		11.09		566,564		10.90
	11.40	-		14.23		1,229,628		8.43		13.91		230,628		13.59
	14.24	-		17.21		1,187,936		7.21		16.04		805,044		16.04
	17.27	-		23.88		749,874		9.09		18.89		162,350		20.13
$	1.00	-	$	23.88		5,793,031		7.35	$	12.84		3,051,233	$	11.39

During the year ended February 1, 1998, the Company granted a restricted stock award of 284,761 shares with a purchase price of $0.01 per share to its Chief Executive Officer. The 284,761 share award began vesting on March 31, 1999, with 25% of the shares vested at such time, and thereafter vested at 25% on each of March 31, 2000, 2001 and 2002, as, in each instance, at the applicable vesting date, certain cumulative earnings per share growth targets had been satisfied. The Company recorded $40, $240 and $240, respectively, of deferred compensation expense associated with this award during the years ended February 1, 2003, February 2, 2002 and February 4, 2001, respectively.

During the year ended January 30, 2000, the Company granted a restricted stock award of 75,000 shares with a purchase price of $0.01 per share to its Chief Executive Officer. The 75,000 share award began vesting on September 17, 2001, with 25% of the shares vested at such time, and thereafter will vest at 25% on each of September 17, 2002, 2003 and 2004, if, in each instance, at the applicable vesting date, certain cumulative earnings per share growth targets have been satisfied. The Company recorded $229 of deferred compensation expense associated with this award during the year ended February 4, 2001. During fiscal 2001, the Company reversed all previously recognized expenses of $317 associated with this award because the cumulative earnings per share growth targets had not been satisfied. No additional expenses have been recognized in association with this award because the cumulative earnings per share growth targets have not been met as of February 1, 2003.

During the year ended February 4, 2001, the Company granted a restricted stock award of 112,500 shares with a purchase price of $0.01 per share to its Chief Executive Officer. The 112,500 share award begins vesting on March 15, 2002, with 25% of the shares vested at such time, and thereafter will vest at 25% on each of March 15, 2003, 2004 and 2005, if, in each instance, at the applicable vesting date, certain cumulative earnings per share growth targets have been satisfied. The Company recorded $38 of deferred compensation expense associated with this award during the year ended February 4, 2001. During fiscal 2001, the Company reversed the previously recognized expense of $38 associated with this award because the cumulative earnings per share growth targets had not been satisfied. No additional expenses have been recognized in association with this award because the cumulative earnings per share growth targets have not been met as of February 1, 2003.

The Company accounts for its stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements, other than described above.

In fiscal 1997, the Company established the Pacific Sunwear of California, Inc. Employee Stock Purchase Plan (the “ESPP”), which provides a method for employees of the Company whereby they may voluntarily purchase common stock at a 10% discount from fair market value as of the beginning or the end of each purchasing period of six months, whichever is lower. The ESPP covers substantially all employees, except officers, who have three months of service with the Company. The ESPP is intended to constitute an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended, and therefore the Company does not recognize compensation expense related to the ESPP. In fiscal 2002 and fiscal 2001, 39,394 and 40,830 shares were issued at an average price of $12.54 and $12.81, respectively, under the ESPP.

In fiscal 1995, the Company established the Pacific Sunwear of California, Inc. Executive Deferred Compensation Plan (the “Executive Plan”). The Executive Plan covers officers of the Company, and is funded by participant contributions and periodic discretionary contributions from the Company. For each of the three fiscal years in the period ended February 1, 2003, the Company made contributions of $206, $175 and $137, respectively, to the Executive Plan.

F-16

In fiscal 1992, the Company established the Pacific Sunwear of California, Inc. Employee Savings Plan (“the 401(k) Plan”). The 401(k) Plan is a defined contribution plan (401(k)) covering substantially all employees who have reached age 21 and have one year of service with the Company. The 401(k) Plan is funded by employee contributions and periodic discretionary contributions from the Company, which are subject to approval by the Company’s Board of Directors. For each of the three fiscal years in the period ended February 1, 2003, the Company made contributions, net of forfeitures, of $328, $364 and $310, respectively, to the 401(k) Plan.

10. CORPORATE RELOCATION-RELATED CHARGES

During fiscal 2001, the Company recorded a non-cash charge of $2.5 million after tax ($4.2 million pre-tax), or $.08 per basic and diluted share, related to the disposal of most of the materials handling equipment in the Company’s former distribution center as part of its relocation to its new distribution facility in Anaheim, California at the end of fiscal 2001. The $4.2 million pre-tax charge is included in selling, general and administrative expenses.

During fiscal 2001, the Company recorded a $1.4 million charge to accrue for rent expense associated with the Company’s former corporate offices, which remain unused at the end of fiscal 2002. The current accrual of $1.3 million is approximately the amount of rent expense for one year, within which time the Company currently believes a tenant will be identified to sublease the premises. To the extent management’s estimates relating to the Company’s ability to sublease these premises within one year changes, additional charges may be recorded in the future up to the net remaining obligation under the lease depending on the facts and circumstances in existence at the time. As of February 1, 2003, the aggregate net remaining obligation under this lease is approximately $6.7 million.

11. QUARTERLY FINANCIAL DATA (UNAUDITED)

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Fiscal year ended February 1, 2003:
Net sales	$	161,710	$	190,854	$	228,239	$	265,590
Gross margin		49,166		60,605		78,915		94,997
Operating income		5,453		12,151		25,956		37,677
Net income		3,269		7,296		15,902		23,209
Net income per share, basic	$	0.07	$	0.15	$	0.32	$	0.47
Net income per share, diluted	$	0.07	$	0.15	$	0.32	$	0.46
Wtd. avg. shares outstanding, basic (Note 1)		49,197,137		49,257,374		49,303,737		49,392,438
Wtd. avg. shares outstanding, diluted (Note 1)		50,117,441		49,844,660		49,949,165		50,510,547
Fiscal year ended February 2, 2002:
Net sales	$	137,698	$	156,509	$	183,028	$	207,605
Gross margin		41,957		48,178		60,786		69,259
Operating income		1,355		5,741		14,321		22,865
Net income		979		3,544		8,885		14,157
Net income per share, basic	$	0.02	$	0.07	$	0.18	$	0.29
Net income per share, diluted	$	0.02	$	0.07	$	0.18	$	0.28
Wtd. avg. shares outstanding, basic (Note 1)		48,778,221		49,079,099		49,104,816		49,126,325
Wtd. avg. shares outstanding, diluted (Note 1)		49,796,586		49,652,723		49,351,130		49,682,930

Earnings per basic and diluted shares outstanding are computed independently for each of the quarters presented and, therefore, may not sum to the totals for the year.

F-17

INDEX TO EXHIBITS

Exhibit Number		Description of Exhibit
	3.1	Third Amended and Restated Articles of Incorporation of the Company (1)
	3.2	Certificate of Amendment, dated December 17, 2002, of Third Amended and Restated Articles of Incorporation of the Company
	3.3	Certificate of Correction, dated February 28, 2003, of Third Amended and Restated Articles of Incorporation of the Company
	3.4	Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of the Company (4)
	3.5	Second Amended and Restated Bylaws of the Company (1)
	3.6	Amendment, dated March 25, 2003, to the Second Amended and Restated Bylaws of the Company
	4.1	Specimen stock certificate (1)
	10.1	Form of Indemnity Agreement between the Company and each of its executive officers and directors (1) *
	10.2	1986-87 Stock Option Plan dated as of December 11, 1986, as amended (the “Option Plan”) (1) *
	10.3	Amended and Restated 1992 Stock Award Plan dated June 8, 1999 (the “Award Plan”) (8) *
	10.4	Amended and Restated 1999 Stock Award Plan dated December 31, 2002 *
	10.5	Pacific Sunwear of California, Inc. Executive Deferred Compensation Plan and Trust Agreement (2) *
	10.6	Amended and Restated Pacific Sunwear of California, Inc. Employee Stock Purchase Plan dated December 31, 2002 *
	10.7	Restricted Stock Award Agreement dated September 18, 1996, by and between the Company and Greg H. Weaver (8) *
	10.8	Restricted Stock Award Agreement dated September 17, 1999, by and between the Company and Greg H. Weaver (7) *
	10.9	Restricted Stock Award Agreement dated January 3, 2001, by and between the Company and Greg H. Weaver (8) *
	10.10	Amended and Restated Employment Agreement dated February 5, 2001, between the Company and Greg H. Weaver (8) *
	10.11	Severance Agreements, dated October 27, 1997, and November 6, 1996, by and between Pacific Sunwear of California, Inc. and Timothy M. Harmon and Carl W. Womack, respectively (3) *

1

Exhibit Number		Description of Exhibit
	10.12	Standard Industrial Lease — Net, dated September 30, 1997, between the Company and Bank of America National Trust and Savings Association, as amended, and Standard Industrial Lease - - Net, dated January 12, 1998 between the Company and The Realty Associates Fund IV, L.P., a Delaware limited partnership, as amended for the Company’s former corporate headquarters and distribution center located in Anaheim, California (3)
	10.13	Standard Sublease — dated December 22, 1998, between the Company and Bekins Moving and Storage Company, LLC (6)
	10.14	Rights Agreement, dated as of December 16, 1998, between the Company and U.S. Stock Transfer Corporation (5)
	10.15	Business Loan Agreement, dated April 3, 2001, between the Company and Bank of America N.A. (9)
	10.16	First Amendment to Business Loan Agreement, dated as of April 17, 2001, between the Company and Bank of America N.A. (9)
	10.17	Master Continuing and Unconditional Guaranty to Bank of America N.A. from Pacific Sunwear Stores Corp. and ShopPacSun.com Corp. (9)
	10.18	Second Amendment to Business Loan Agreement, dated as of August 1, 2001, between the Company and Bank of America N.A. (10)
	10.19	Third Amendment to Business Loan Agreement, dated as of August 19, 2002, between the Company and Bank of America N.A. (11)
	10.20	Fourth Amendment to Business Loan Agreement, dated as of January 14, 2003, between the Company and Bank of America N.A
	21	Subsidiaries of the Registrant
	23.1	Consent of Deloitte & Touche LLP
	99.1	Sarbanes-Oxley Act Section 906 Certifications

(1)	Incorporated by reference from the Company’s Form S-1 Registration Statement (No. 33-57860) as filed with the Securities and Exchange Commission on February 4, 1993.
(2)	Incorporated by reference from the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 17, 1995.
(3)	Incorporated by reference from the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 9, 1998.
(4)	Incorporated by reference from the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on December 24, 1998.
(5)	Incorporated by reference from the Company’s Form 8-A Registration Statement as filed with the Securities and Exchange Commission on December 24, 1998.
(6)	Incorporated by reference from the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 8, 1999.
(7)	Incorporated by reference from the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 6, 2000.

2

(8)	Incorporated by reference from the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 30, 2001.
(9)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on June 8, 2001.
(10)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on September 14, 2001.
(11)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on September 11, 2002.
*	Management contract or compensatory plan or arrangement.

3 EX-3.2 3 a88399exv3w2.txt EXHIBIT 3.2 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PACIFIC SUNWEAR OF CALIFORNIA, INC. Greg H. Weaver and Carl W. Womack certify that: 1. They are the Chief Executive Officer and the Secretary, respectively, of Pacific Sunwear of California, Inc., a California corporation (the "Corporation"). 2. Article THIRD of the Third Amended and Restated Articles of Incorporation of the Corporation is amended to read in its entirety as follows: THIRD: The total number of shares of all classes of stock which the corporation shall have authority to issue is 118,906,250 shares, consisting of 5,000,000 shares of Preferred Stock, $.01 par value (the "Preferred Stock"), and 113,906,250 shares of Common Stock, $.01 par value (the "Common Stock"). The Board of Directors of the corporation shall have the full authority permitted by law to fix by resolution full, limited, multiple, fractional, or no voting rights, and such designation, preferences, and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, of any series that may be desired in respect of the Preferred Stock. Upon the filing of this amendment of this Article THIRD to read as herein set forth, each outstanding share of Common Stock is split and divided into one and one-half (1 1/2) shares of Common Stock and each shareholder of record on the date of filing of this amendment holding any outstanding shares of Common Stock is entitled to receive a stock certificate or certificates to evidence and represent the additional shares of Common Stock to which such person is entitled by reason of such stock split on the basis of one-half (1/2) additional share for each share so held of record. No fractional shares shall be paid and instead each shareholder of record entitled to a fractional share shall receive a cash payment for such fractional interest based on the closing price of the corporation's Common Stock as reported by the National Association of Securities Dealers Automated Quotation System on the record date (as adjusted for the stock split). 3. The foregoing amendment of the Articles of Incorporation has been duly approved by the Board of Directors of the Corporation. 4. The Corporation has only Common Stock outstanding. Pursuant to section 902(c) of the California General Corporation Law, the foregoing amendment effecting a stock split (including an increase in the authorized number of shares in proportion thereto) may be adopted with approval by the Board of Directors alone. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment on December 17, 2002. /s/ Greg H. Weaver ---------------------------------------- Greg H. Weaver Chief Executive Officer /s/ Carl W. Womack ---------------------------------------- Carl W. Womack Secretary EX-3.3 4 a88399exv3w3.txt EXHIBIT 3.3 EXHIBIT 3.3 CERTIFICATE OF CORRECTION OF THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION OF PACIFIC SUNWEAR OF CALIFORNIA, INC. Greg H. Weaver and Carl W. Womack hereby certify that: 1. We are the duly elected and acting Chairman of the Board and Chief Executive Officer, and Chief Financial Officer and Secretary, respectively, of Pacific Sunwear of California, Inc. 2. The name of the corporation is Pacific Sunwear of California, Inc. 3. The Third Amended and Restated Articles of Incorporation were filed with the Secretary of State of the State of California on April 20, 1993, as amended by the Certificate of Amendment to Third Amended and Restated Articles of Incorporation filed with the Secretary of State of California on December 18, 2002. 4. The first paragraph of Article THIRD of the Third Amended and Restated Articles of Incorporation of the Corporation, as corrected, should read as follows: THIRD: The total number of shares of all classes of stock which the corporation shall have the authority to issue is 118,906,250 shares, consisting of 5,000,000 shares of Preferred Stock, $.01 par value (the "Preferred Stock"), and 113,906,250 shares of Common Stock, $.01 par value (the "Common Stock"). The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock, to determine the designation of any series of Preferred Stock and to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock. 5. This certificate does not alter the wording of any resolution or written consent adopted by the board or the shareholders. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated: February 28, 2003 /s/ Greg H. Weaver ---------------------------------------- Greg H. Weaver Chairman of the Board and Chief Executive Officer /s/ Carl W. Womack ---------------------------------------- Carl W. Womack Chief Financial Officer and Secretary EX-3.6 5 a88399exv3w6.txt EXHIBIT 3.6 EXHIBIT 3.6 AMENDMENT TO ARTICLE III, SECTION 2 OF THE BYLAWS OF PACIFIC SUNWEAR OF CALIFORNIA, INC., A CALIFORNIA CORPORATION SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of directors shall be not less than five nor more than nine until changed by Amendment of the Articles of Incorporation or by a Bylaw duly adopted by approval of the outstanding shares. The exact number of directors shall be fixed, within the limits specified, by amendment of the next sentence duly adopted either by the Board of Directors or the shareholders. The exact number of directors shall be seven until changed as provided in this Section 2. EX-10.4 6 a88399exv10w4.txt EXHIBIT 10.4 EXHIBIT 10.4 PACIFIC SUNWEAR OF CALIFORNIA, INC. 1999 STOCK AWARD PLAN (Composite Plan Document Reflecting Amendment 2001-I and Stock Splits Through December 31, 2002) TABLE OF CONTENTS

PAGE ---- I. THE PLAN.....................................................................1 1.1 Purpose...............................................................1 1.2 Administration........................................................1 1.3 Participation.........................................................2 1.4 Stock Subject to the Plan.............................................3 1.5 Grant of Awards.......................................................3 1.6 Exercise of Awards....................................................3 1.7 No Transferability; Limited Exception to Transfer Restrictions........4 II. OPTIONS......................................................................5 2.1 Grants................................................................5 2.2 Option Price..........................................................5 2.3 Option Period.........................................................5 2.4 Exercise of Options...................................................5 2.5 Limitations on Grant of Incentive Stock Options.......................6 2.6 Non-Employee Director Awards..........................................6 2.7 Options and Rights in Substitution for Stock Options Granted by Other Corporations....................................................8 2.8 Adjustments, No Repricing Without Prior Shareholder Approval..........8 III. STOCK APPRECIATION RIGHTS....................................................8 3.1 Grants................................................................8 3.2 Exercise of Stock Appreciation Rights.................................9 3.3 Payment...............................................................9 IV. RESTRICTED STOCK AWARDS.....................................................10 4.1 Grants...............................................................10 4.2 Restrictions.........................................................10 4.3 Return to the Corporation............................................10 V. PERFORMANCE SHARE AWARDS....................................................11 5.1 Grants...............................................................11 5.2 Special Performance-Based Share Awards...............................11

-i- TABLE OF CONTENTS (CONTINUED)

PAGE ---- VI. OTHER PROVISIONS............................................................12 6.1 Rights of Eligible Employees, Participants and Beneficiaries.........12 6.2 Adjustments Upon Changes in Capitalization...........................13 6.3 Termination of Employment............................................14 6.4 Acceleration of Awards...............................................15 6.5 Government Regulations...............................................15 6.6 Tax Withholding......................................................16 6.7 Amendment, Termination and Suspension................................16 6.8 Privileges of Stock Ownership; Nondistributive Intent................17 6.9 Effective Date of the Plan...........................................17 6.10 Term of the Plan.....................................................17 6.11 Governing Law........................................................18 6.12 Plan Construction....................................................18 6.13 Captions.............................................................18 6.14 Non-Exclusivity of Plan..............................................18 6.15 No Corporate Action Restriction......................................18 6.16 Other Company Benefit and Compensation Program.......................19 VII. DEFINITIONS.................................................................19 7.1 Definitions..........................................................19

-ii- PACIFIC SUNWEAR OF CALIFORNIA, INC. 1999 STOCK AWARD PLAN (Composite Plan Document Reflecting Amendment 2001-I and Stock Splits Through December 31, 2002) I. THE PLAN. 1.1 Purpose. The purpose of this Plan is to promote the success of the Company by providing an additional means to attract, motivate, retain and reward key personnel through the grant of Options and other Awards that provide added long term incentives for high levels of performance and for significant efforts to improve the financial performance of the Company. The purpose of this Plan is also to attract, motivate and retain experienced and knowledgeable independent directors through the Option grants provided under Section 2.6. 1.2 Administration. (a) This Plan shall be administered and all Awards (other than those under Section 2.6) shall be authorized by the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or the unanimous written consent of its members. In the event action by the Committee is taken by written consent, the action shall be deemed to have been taken at the time specified in the consent or, if none is specified, at the time of the last signature. The Committee may delegate administrative functions to individuals who are officers or employees of the Company. (b) Subject to the express provisions of this Plan, the Committee shall have the authority: (i) to grant Awards to Eligible Employees, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards shall become exercisable or shall vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion of such Awards; (ii) to approve the forms of Award Agreements (which need not be identical either as to type of award or among Participants); (iii) to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Participants under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (iv) to cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Employees, subject to any required consent under Section 6.7; (v) to accelerate or extend the exercisability or extend the term of any or all such outstanding Awards within the maximum ten-year term of Awards; and (vi) to make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. Notwithstanding the foregoing, the provisions of Section 2.6 relating to Non-Employee Director Options shall be automatic and, to the maximum extent possible, self-effectuating. (c) Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan and within its authority hereunder or under applicable law shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. Neither the Board nor any Committee, nor any member thereof or person acting at the direction thereof, shall be liable for any act, omission, interpretation, construction or determination made in good faith in connection with this Plan (or any Award made under this Plan), and all such persons shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including, without limitation, attorneys' fees) arising or resulting therefrom to the fullest extent permitted by law and/or under any directors and officers liability insurance coverage that may be in effect from time to time. (d) Subject to the requirements of Section 7.1, the Board, at any time it so desires, may increase or decrease the number of members of the Committee, may remove from membership on the Committee all or any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation or otherwise. (e) In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Company. No director, officer or agent of the Company shall be liable for any such action or determination taken or made or omitted in good faith. 1.3 Participation. Awards may be granted only to Eligible Employees. An Eligible Employee who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. Except as provided in Section 2.6 below, members of the Board who are not officers or employees of the Company shall not be eligible to receive Awards. 2 1.4 Stock Subject to the Plan. (a) Subject to Section 6.2, the stock to be offered under this Plan shall be shares of the Company's authorized but unissued Common Stock. The aggregate amount of Common Stock that may be issued or transferred pursuant to Awards (including Incentive Stock Options) granted under this Plan shall not exceed 4,800,000 shares, subject to adjustment as set forth in Section 6.2. In no event shall more than 900,000 shares of Common Stock (subject to adjustment under Section 6.2) be available for Awards issued (or reissued) under this Plan as time-based Restricted Stock for nominal or no consideration other than the par value thereof. This limit on Restricted Stock does not apply to shares issued principally for past services, in respect of compensation earned but deferred, or as Performance-Based Awards under Section 5.2. The aggregate number of shares of Common Stock subject to Awards that may be granted to any employee in any twelve month period may not exceed 900,000, subject to adjustment as set forth in Section 6.2. (b) No Award may be granted under this Plan unless, on the date of grant, the sum of (i) the maximum number of shares issuable at any time pursuant to such Award, plus (ii) the number of shares that have previously been issued pursuant to Awards granted under this Plan, other than reacquired shares available for reissue consistent with any applicable legal limitations, plus (iii) the maximum number of shares that may be issued at any time after such date of grant pursuant to Awards that are outstanding on such date, does not exceed the share limit set forth in Section 1.4(a). Shares that are subject to or underlie Awards which expire or for any reason are cancelled or terminated, are forfeited, fail to vest, or for any other reason are not paid or delivered under this Plan, as well as reacquired shares, shall again, except to the extent prohibited by law, be available for subsequent Awards under the Plan. 1.5 Grant of Awards. Subject to the express provisions of this Plan, the Committee shall determine from the class of Eligible Employees those individuals to whom Awards under this Plan shall be granted, the number of shares of Common Stock subject to each Award, the price (if any) to be paid for the shares or the Award and, in the case of performance share awards, in addition to matters addressed in Section 1.2(b), the specific objectives, goals and performance criteria (such as an increase in sales, market value, earnings or book value over a base period, the years of service before vesting, the relevant job classification or level of responsibility or other factors) that further define the terms of the performance share award. Each Award shall be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. The Award Agreement shall set forth the material terms and conditions of the Award established by the Committee consistent with the specific provisions of this Plan. The grant of an Award is made on the Award Date. 1.6 Exercise of Awards. An Option or Stock Appreciation Right shall be deemed to be exercised when the Secretary of the Company receives written notice of such exercise from the Participant, together with payment of the purchase price made in accordance with Section 2.2(a), 3 except to the extent payment may be permitted to be made following delivery of written notice of exercise in accordance with Section 2.2(b). Notwithstanding any other provision of this Plan, the Committee may impose, by rule and in Award Agreements, such conditions upon the exercise of Awards (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory requirements. 1.7 No Transferability; Limited Exception to Transfer Restrictions. (a) Limit On Exercise and Transfer. Unless otherwise expressly provided in (or pursuant to) this Section 1.7, by applicable law and by the Award Agreement, as the same may be amended, (i) all Awards are non-transferable and shall not be subject in any manner to sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or charge; Awards shall be exercised only by the Participant; and (ii) amounts payable or shares issuable pursuant to an Award shall be delivered only to (or for the account of) the Participant. (b) Exceptions. The Committee may permit Awards to be exercised by and paid to certain persons or entities related to the Participant, including but not limited to members of the Participant's immediate family, charitable institutions, or trusts or other entities whose beneficiaries or beneficial owners are members of the Participant's immediate family and/or charitable institutions, pursuant to such conditions and procedures as the Committee may establish. Any permitted transfer shall be subject to the condition that the Committee receive evidence satisfactory to it that the transfer is being made for estate and/or tax planning purposes on a gratuitous or donative basis and without consideration (other than nominal consideration). Notwithstanding the foregoing or Section 1.7(c), Incentive Stock Options and Restricted Stock Awards shall be subject to any and all additional transfer restrictions under the Code. (c) Further Exceptions to Limits On Transfer. The exercise and transfer restrictions in Section 1.7(a) shall not apply to: (i) transfers to the Company, (ii) the designation of a beneficiary to receive benefits in the event of the Participant's death or, if the Participant has died, transfers to or exercise by the Participant's beneficiary, or, in the absence of a validly designated beneficiary, transfers by will or the laws of descent and distribution, (iii) transfers pursuant to a QDRO order if approved or ratified by the Committee, (iv) if the Participant has suffered a disability, permitted transfers or exercises on behalf of the Participant by his or her legal representative, or (v) the authorization by the Committee of "cashless exercise" procedures with third parties who provide financing for the purpose of (or who otherwise facilitate) the exercise of Awards consistent with applicable laws and the express authorization of the Committee. 4 II. OPTIONS. 2.1 Grants. One or more Options may be granted to any Eligible Employee. Each Option so granted shall be designated by the Committee in the applicable Award Agreement as either a Nonqualified Stock Option or an Incentive Stock Option. 2.2 Option Price. (a) The purchase price per share of Common Stock covered by each Option shall be determined by the Committee, but shall not be less than 100% (110% in the case of an Incentive Stock Option grant to a Participant who owns more than 10% of the total combined voting power of all classes of stock of the Company) of the Fair Market Value of the Common Stock on the date the Option is granted. The purchase price of any shares purchased shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by check payable to the order of the Company, (ii) if authorized by the Committee or specified in the Option being exercised, by a promissory note made by the Participant in favor of the Company, upon the terms and conditions determined by the Committee, and secured by the Common Stock issuable upon exercise in compliance with applicable law (including, without limitation, state corporate law and federal margin requirements), or (iii) if authorized by the Committee or specified in the Option being exercised, by shares of Common Stock of the Company already owned by the Participant; provided, however, that the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by means other than cash or check, and provided further that any shares delivered which were initially acquired upon exercise of a stock option must have been owned by the Participant at least six months as of the date of delivery. Shares of Common Stock used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. (b) In addition to the payment methods described in subsection (a), the Option may provide that the Option can be exercised and payment made by delivering a properly executed exercise notice together with irrevocable instructions to a bank or broker to promptly deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price and, unless otherwise allowed by the Committee, any applicable tax withholding under Section 6.6. The Company shall not be obligated to deliver certificates for the shares unless and until it receives full payment of the exercise price therefor. 2.3 Option Period. Each Option and all rights or obligations thereunder shall expire on such date as shall be determined by the Committee, but not later than 10 years after the Award Date, and shall be subject to earlier termination as hereinafter provided. 2.4 Exercise of Options. Except as otherwise provided in Section 6.3 and 6.4, an Option may become exercisable, in whole or in part, on the date or dates specified in the Award Agreement 5 and thereafter shall remain exercisable until the expiration or earlier termination of the Option. No Option shall be exercisable for at least six months after the Award Date, except in the case of death or Total Disability. The Committee may, at any time after grant of the Option and from time to time, increase the number of shares exercisable at any time so long as the total number of shares subject to the Option is not increased. No Option shall be exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not less than 10 shares of Common Stock may be purchased at one time unless the number purchased is the total number at the time available for purchase under the terms of the Option. 2.5 Limitations on Grant of Incentive Stock Options. (a) To the extent that the aggregate fair market value of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company, such options shall be treated as nonqualified stock options. For purposes of determining whether the $100,000 limit is exceeded, the fair market value of stock subject to options shall be determined as of the date the options are awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Company may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (b) There shall be imposed in any Award Agreement relating to Incentive Stock Options such terms and conditions as are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. (c) No Incentive Stock Option may be granted to any person who, at the time the Incentive Stock Option is granted, owns shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 2.6 Non-Employee Director Awards. (a) Participation. Awards under this Section 2.6 shall be made only to Non-Employee Directors. (b) Option Grants. Effective on the day after the Company's 1999 annual meeting, as and when any person who is not then an officer or employee of the Company shall become a director of the Company, there shall be granted automatically (without any action by the Board or the Committee) a Nonqualified Stock Option (the grant or award date of which shall be the date such person takes office) to such person to purchase 9,000 shares of Common Stock. 6 (c) Subsequent Annual Options. In each calendar year during the term of the Plan, commencing with the 2000 annual meeting, there shall be granted automatically (without any action by the Committee or the Board) a Nonqualified Stock Option to purchase 9,000 shares of Common Stock to each Non-Employee Director who is re-elected as a director of the Company or who continues as a director (the grant or award date of which shall be the date of the annual meeting of shareholders in each such year). (d) Option Price. The purchase price per share of the Common Stock covered by each Option granted pursuant to this Section 2.6 shall be one hundred percent of the Fair Market Value of the Common Stock on the Award Date. The purchase price of any shares purchased shall be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at their Fair Market Value on the business day next preceding the date of exercise of the Option, or partly in such shares and partly in cash. (e) Option Period. Each Option granted under this Section 2.6 and all rights or obligations thereunder shall expire on the fifth anniversary of the Award Date and shall be subject to earlier termination as provided below. (f) Exercise of Options. Except as otherwise provided in Sections 2.6(g) and 2.6(h), each Option granted under this Section 2.6 shall become exercisable (i) as to one-quarter of the covered shares on the earlier of (A) the first anniversary of the Award Date, or (B) the day immediately preceding the first regularly scheduled Annual Meeting of shareholders first occurring after the Award Date; and (ii) as to an additional 1/48th of the covered shares in each of the 36 months thereafter (using the Award Date as the date of monthly vesting). (g) Termination of Directorship. If a Non-Employee Director Participant's services as a member of the Board terminate, each Option granted pursuant to Section 2.6(b) or (c) hereof held by such Non-Employee Director Participant which is not then exercisable shall terminate; provided, however, that if a Non-Employee Director Participant's services as a member of the Board terminate by reason of death or Total Disability, the Committee may, in its discretion, consider to be exercisable a greater portion of any such Option than would otherwise be exercisable, upon such terms as the Committee shall determine. If a Non-Employee Director Participant's services as a member of the Board terminate by reason of death or Total Disability, any portion of any such Option which is then exercisable may be exercised for one year after the date of such termination or the balance of such Option's term, whichever period is shorter. If a Non-Employee Director Participant's services as a member of the Board terminate for any other reason, any portion of any such Option which is then exercisable may be exercised for three months after the date of such termination or the balance of such Option's term, whichever period is shorter. (h) Acceleration Upon an Event. Immediately prior to the occurrence of an Event, in order to protect the holders of Options granted under this Section 2.6, each Option granted under Section 2.6(b) or (c) hereof shall become exercisable in full. (i) Adjustments. The specific numbers of shares stated in the foregoing provisions of Section 2.6(b) and (c) hereof and the consideration payable for such shares 7 shall be subject to adjustment in certain events as provided in Section 6.2 of this Plan; provided, however, that the specific number of shares stated in Section 2.6(b) and in Section 2.6(c) shall not be adjusted, unless such adjustment is approved by the Board, in connection with a split or reverse split of the Common Stock. 2.7 Options and Rights in Substitution for Stock Options Granted by Other Corporations. Options and Stock Appreciation Rights may be granted to Eligible Employees under this Plan in substitution for employee stock options granted by other entities to persons who are or who will become Eligible Employees in respect of the Company, in connection with a distribution, merger or reorganization by or with the granting entity or an affiliated entity, or the acquisition by the Company, directly or indirectly, of all or a substantial part of the stock or assets of the other entity. 2.8 Adjustments, No Repricing Without Prior Shareholder Approval. Subject to Section 1.4 and Section 6.7 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Employee any adjustment in the exercise or repurchase price (except as set forth below), vesting schedule, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Article by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid means. Such amendment or other action may result among other changes in an exercise or purchase price which is higher or lower than the exercise or purchase price of the original or prior Award (except as set forth below), provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. Notwithstanding the foregoing, in no case shall the per share exercise price of any Option or related Stock Appreciation Right be reduced (by amendment, substitution, cancellation and regrant or other means) without stockholder approval to a price less than the Fair Market Value of a share of Common Stock on the related Award Date. III. STOCK APPRECIATION RIGHTS. 3.1 Grants. In its discretion, the Committee may grant Stock Appreciation Rights concurrently with the grant of Options. A Stock Appreciation Right shall extend to all or a portion of the shares covered by the related Option. A Stock Appreciation Right shall entitle the Participant who holds the related Option, upon exercise of the Stock Appreciation Right and surrender of the related Option, or portion thereof, to the extent the Stock Appreciation Right and related Option each were previously unexercised, to receive payment of an amount determined pursuant to Section 3.3. Any Stock Appreciation Right granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder. In its discretion, the Committee may also grant Stock Appreciation Rights independently of any Option subject to such conditions as the Committee may in its absolute discretion provide. 8 3.2 Exercise of Stock Appreciation Rights. (a) A Stock Appreciation Right granted concurrently with an Option shall be exercisable only at such time or times, and to the extent, that the related Option shall be exercisable and only when the Fair Market Value of the stock subject to the related Option exceeds the exercise price of the related Option. (b) In the event that a Stock Appreciation Right granted concurrently with an Option is exercised, the number of shares of Common Stock subject to the related Option shall be charged against the maximum amount of Common Stock that may be issued or transferred pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant shall also be reduced by such number of shares. (c) If a Stock Appreciation Right granted concurrently with an Option extends to less than all the shares covered by the related Option and if a portion of the related Option is thereafter exercised, the number of shares subject to the unexercised Stock Appreciation Right shall be reduced only if and to the extent that the remaining number of shares covered by such related Option is less than the remaining number of shares subject to such Stock Appreciation Right. (d) A Stock Appreciation Right granted independently of any Option shall be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.3 Payment. (a) Upon exercise of a Stock Appreciation Right and surrender of an exercisable portion of the related Option, the Participant shall be entitled to receive payment of an amount determined by multiplying (i) the difference obtained by subtracting the exercise price per share of Common Stock under the related Option from the Fair Market Value of a share of Common Stock on the date of exercise of the Stock Appreciation Right, by (ii) the number of shares with respect to which the Stock Appreciation Right shall have been exercised. (b) The Committee, in its sole discretion, may settle the amount determined under paragraph (a) above solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. In any event, cash shall be paid in lieu of fractional shares. Absent a determination to the contrary, all Stock Appreciation Rights shall be settled in cash as soon as practicable after exercise. The exercise price for the Stock Appreciation Right shall be the exercise price of the related Option. Notwithstanding the foregoing, the Committee may, in the Award Agreement, determine the maximum amount of cash or stock or a combination thereof which may be delivered upon exercise of a Stock Appreciation Right. 9 (c) Upon exercise of a Stock Appreciation Right granted independently of any Option, the Participant shall be entitled to receive payment of an amount based on a percentage, specified in the Award Agreement, of the difference obtained by subtracting the Fair Market Value per share of Common Stock on the Award Date from the Fair Market Value per share of Common Stock on the date of exercise of the Stock Appreciation Right. Such amount shall be paid as described in paragraph (b) above. IV. RESTRICTED STOCK AWARDS. 4.1 Grants. Subject to Section 1.4, the Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock Award agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the price, if any, to be paid for such shares by the Participant and the restrictions imposed on such shares, which restrictions shall not terminate earlier than six months after the Award Date. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions shall bear a legend making appropriate reference to the restrictions imposed hereunder and shall be held by the Corporation or by a third party designated by the Committee until the restrictions on such shares shall have lapsed and the shares shall have vested in accordance with the provisions of the Award. Upon issuance of the Restricted Stock Award, the Participant may be required to provide such further assurance and documents as the Committee may require to enforce the restrictions. 4.2 Restrictions. (a) Shares of Common Stock included in Restricted Stock Awards may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until such shares have vested. (b) Unless otherwise provided in the applicable Award Agreement, Participants receiving Restricted Stock shall be entitled to dividend and voting rights for the shares issued even though they are not vested, provided that such rights shall terminate immediately as to any forfeited Restricted Stock. (c) In the event that the Participant shall have paid cash in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to what extent such cash shall be returned upon a forfeiture (with or without an earnings factor). 4.3 Return to the Corporation. Unless the Committee otherwise expressly provides, shares of Restricted Stock that remain subject to restrictions at the time of termination of employment or are subject to other conditions to vesting that have not been satisfied by the time specified in the applicable Award Agreement shall not vest and shall be returned to the Corporation in such manner and on such terms as the Committee shall therein provide. 10 V. PERFORMANCE SHARE AWARDS. 5.1 Grants. The Committee may, in its discretion, grant Performance Share Awards to Eligible Employees based upon such factors as the Committee shall determine. A Performance Share Award agreement shall specify the number of shares of Common Stock subject to the Performance Share Award, the price, if any, to be paid for such shares by the Participant and the conditions upon which issuance to the Participant shall be based, which issuance shall not be earlier than six months after the Award Date. 5.2 Special Performance-Based Share Awards. Without limiting the generality of the foregoing, and in addition to options granted under other provisions of this Plan, other performance-based awards within the meaning of Section 162(m) of the Code ("Performance-Based Awards"), whether in the form of restricted stock, performance stock, phantom stock, or other rights, the vesting or payment of which depends on the degree of achievement of the Performance Goals relative to pre-established targeted levels for the Company and/or one or more of its Subsidiaries or divisions, may be granted under this Plan. An award that is intended to satisfy the requirements of this Section 5.2 shall be designated as a Performance-Based Award at the time of grant. (a) Eligible Class. The eligible class of persons for Performance-Based Awards under this Section shall be the executive officers of the Company. (b) Performance Goal Alternatives. The specific performance goals for Performance-Based Awards granted under this Section shall be, on an absolute or relative basis, one or more of the Performance Goals, as selected by the Committee in its sole discretion. The Committee shall establish in the applicable Award Agreement the specific performance target(s) relative to the Performance Goal(s) which must be attained before the compensation under the Performance-Based Award becomes payable. The specific targets shall be determined within the time period permitted under Section 162(m) of the Code (and any regulations issued thereunder) so that such targets are considered to be pre-established and so that the attainment of such targets is substantially uncertain at the time of their establishment. The applicable performance measurement period may not be less than one nor more than 10 years. (c) Maximum Performance-Based Award. Notwithstanding any other provision of the Plan to the contrary, the maximum number of shares which may be delivered pursuant to awards that are granted as Performance-Based Awards under this Section 5.2 to any Participant in any calendar year shall not exceed 900,000 shares, either individually or in the aggregate, subject to adjustment as provided in Section 6.2. Awards that are cancelled during the year shall be counted against this limit to the extent required by Section 162(m) of the Code. (d) Committee Certification. Before any Performance-Based Award under this Section 5.2 is paid, the Committee must certify in writing that the Performance Goal(s) and any other material terms of the Performance-Based Award were satisfied; 11 provided, however, that a Performance-Based Award may be paid without regard to the satisfaction of the applicable Performance Goal in the event of a change in control event in accordance with Section 162(m) of the Code and Section 6.2. (e) Terms and Conditions of Awards. The Committee will have the discretion to determine the restrictions or other limitations of the individual awards granted under this Section 5.2 including the authority to reduce awards, payouts or vesting or to pay no awards, in its sole discretion, if the Committee preserves such authority at the time of grant by language to this effect in its authorizing resolutions or otherwise. (f) Adjustments for Changes in Capitalization and other Material Changes. In the event of a change in corporate capitalization, such as a stock split or stock dividend, or a corporate transaction, such as a merger, consolidation, spinoff, reorganization or similar event, or any partial or complete liquidation of the Company, or any similar event consistent with regulations issued under Section 162(m) of the Code including, without limitation, any material change in accounting policies or practices affecting the Company and/or the Performance Goals or targets, then the Committee may make adjustments to the Performance Goals and targets relating to outstanding Performance-Based Awards to the extent such adjustments are made to reflect the occurrence of such an event; provided, however, that adjustments described in this subsection may be made only to the extent that the occurrence of an event described herein was unforeseen at the time the targets for a Performance-Based Award were established by the Committee. VI. OTHER PROVISIONS. 6.1 Rights of Eligible Employees, Participants and Beneficiaries. (a) Status as an Eligible Employee shall not be construed as a commitment that any Award will be made under this Plan to any Eligible Employee generally. (b) Nothing contained in this Plan (or in Award Agreements or in any other documents related to this Plan or to Awards) shall confer upon any Eligible Employee or Participant any right to continue in the service or employ of the Company or constitute any contract or agreement of service or employment, or interfere in any way with the right of the Company to reduce such person's compensation or other benefits or to terminate the services or employment of such Eligible Employee or Participant, with or without cause, but nothing contained in this Plan or any document related thereto shall affect any other contractual right of any Eligible Employee or Participant. (c) No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock) of the Company by reason of any Award granted hereunder. Neither the provisions of this Plan (or of any documents related hereto), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive an Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 12 6.2 Adjustments Upon Changes in Capitalization. (a) If the outstanding shares of Common Stock are changed into or exchanged for cash or a different number or kind of shares or securities of the Company or of another issuer, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger to which the Company is a party, or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate adjustment shall be made in the number and kind of shares or other consideration that is subject to or may be delivered under this Plan and pursuant to outstanding Awards. A corresponding adjustment to the consideration payable with respect to Awards granted prior to any such change and to the price, if any, paid in connection with Restricted Stock Awards or Performance Share Awards or Performance-Based Awards shall also be made. Any such adjustment, however, shall be made without change in the total payment, if any, applicable to the portion of the Award not exercised but with a corresponding adjustment in the price for each share. Corresponding adjustments shall be made with respect to Stock Appreciation Rights based upon the adjustments made to the Options to which they are related or, in the case of Stock Appreciation Rights granted independently of any Option, based upon the adjustments made to Common Stock. (b) Upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, the Plan and outstanding Awards shall terminate. Notwithstanding the foregoing, the Committee may provide in writing in connection with, or in contemplation of, any such transaction for any or all of the following alternatives (separately or in combinations): (i) for the assumption by the successor corporation of the Awards theretofore granted or the substitution by such corporation for such Awards of awards covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and prices; (ii) for the continuance of this Plan by such successor corporation in which event this Plan and the Awards shall continue in the manner and under the terms so provided; or (iii) for the payment in cash or shares of Common Stock in lieu of and in complete satisfaction of such Awards. (c) In adjusting Awards to reflect the changes described in this Section 6.2, or in determining that no such adjustment is necessary, the Committee may rely upon the advice of independent counsel and accountants of the Company, and the determination of the Committee shall be conclusive. No fractional shares of stock shall be issued under this Plan on account of any such adjustment. (d) In any of such events, the Committee may take such action prior to such event to the extent that the Committee deems the action necessary to permit the Participant to realize the benefits intended to be conveyed with respect to the underlying shares in the same manner as is or will be available to shareholders generally. 13 6.3 Termination of Employment. (a) If the Participant's service to or employment by the Company terminates for any reason other than Retirement, death or Total Disability, the Participant shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, three months or such shorter period as is provided in the Award Agreements from the date of termination of services or employment to exercise any Option to the extent it shall have become exercisable on the date of termination of employment, and any Option not exercisable on that date shall terminate. Notwithstanding the preceding sentence, in the event the Participant is discharged for cause as determined by the Committee in its sole discretion, all Options shall lapse immediately upon such termination of services or employment. (b) If the Participant's service to or employment by the Company terminates as a result of Retirement or Total Disability, the Participant or Participant's Personal Representative, as the case may be, shall have, subject to earlier termination pursuant to or as contemplated by Section 2.3, 12 months (or, in the case of Incentive Stock Options where the Participant terminates as a result of Retirement, three months) or such shorter period as is provided in the Award Agreements from the date of termination of services or employment to exercise any Option to the extent it shall have become exercisable by the date of termination of services or employment and any Option not exercisable on that date shall terminate. (c) If the Participant's service to or employment by the Company terminates as a result of death while the Participant is rendering services to the Company or is employed by the Company or during the 12 month period (or, in the case of Incentive Stock Options where the Participant has terminated as a result of Retirement, three month period) referred to in subsection (b) above, the Participant's Option shall be exercisable by the Participant's Beneficiary, subject to earlier termination pursuant to or as contemplated by Section 2.3, during the 12 month period or such shorter period as is provided in the Award Agreements following the Participant's death, as to all or any part of the shares of Common Stock covered thereby to the extent exercisable on the date of death (or earlier termination). (d) Each Stock Appreciation Right granted concurrently with an Option shall have the same termination provisions and exercisability periods as the Option to which it relates. The termination provisions and exercisability periods of any Stock Appreciation Right granted independently of an Option shall be established in accordance with Section 3.2(d). The exercisability period of a Stock Appreciation Right shall not exceed that provided in Section 2.3 or in the related Award Agreement and the Stock Appreciation Right shall expire at the end of such exercisability period. (e) In the event of termination of services to or employment with the Company for any reason, (i) shares of Common Stock subject to the Participant's Restricted Stock Award shall be forfeited in accordance with the provisions of the related Award Agreement to the extent such shares have not become vested on that date; and (ii) shares of Common Stock subject to the Participant's Performance Share Award or Performance-Based Award shall be forfeited in accordance with the provisions of the 14 related Award Agreement to the extent such shares have not been issued or become issuable on that date. (f) In the event of termination of services to or employment with the Company for any reason, other than discharge for cause, the Committee may, in its discretion, increase the portion of the Participant's Award available to the Participant, or Participant's Beneficiary or Personal Representative, as the case may be, upon such terms as the Committee shall determine. (g) If an entity ceases to be a Subsidiary, such action shall be deemed for purposes of this Section 6.3 to be a termination of services or employment of each consultant or employee of that entity who does not continue as a consultant or as an employee of another entity within the Company. (h) Upon forfeiture of a Restricted Stock Award pursuant to this Section 6.3, the Participant, or his or her Beneficiary or Personal Representative, as the case may be, shall transfer to the Company the portion of the Restricted Stock Award not vested at the date of termination of services or employment, without payment of any consideration by the Company for such transfer unless the Participant paid a purchase price in which case repayment, if any, of that price shall be governed by the Award Agreement. Notwithstanding any such transfer to the Company, or failure, refusal or neglect to transfer, by the Participant, or his or her Beneficiary or Personal Representative, as the case may be, such nonvested portion of any Restricted Stock Award shall be deemed transferred automatically to the Company on the date of termination of services or employment. The Participant's original acceptance of the Restricted Stock Award shall constitute his or her appointment of the Company and each of its authorized representatives as attorney(s)-in-fact to effect such transfer and to execute such documents as the Company or such representatives deem necessary or advisable in connection with such transfer. 6.4 Acceleration of Awards. Unless prior to an Event the Board determines that, upon its occurrence, there shall be no acceleration of Awards or determines those Awards which shall be accelerated and the extent to which they shall be accelerated, upon the occurrence of an Event (i) each Option and each related Stock Appreciation Right shall become immediately exercisable to the full extent theretofore not exercisable, (ii) Restricted Stock shall immediately vest free of restrictions and (iii) the number of shares covered by each Performance Share Award or Performance-Based Award shall be issued to the Participant; subject, however, to compliance with applicable regulatory requirements, including without limitation and Section 422 of the Code. For purposes of this section only, the Board shall mean the Board as constituted immediately prior to the Event. 6.5 Government Regulations. This Plan, the granting of Awards under this Plan and the issuance or transfer of shares of Common Stock (and/or the payment of money) pursuant thereto are subject to all applicable federal and state laws, rules and regulations and to such approvals by any regulatory or governmental agency (including without limitation "no action" positions of 15 the Commission) which may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Without limiting the generality of the foregoing, no Awards may be granted under this Plan, and no shares shall be issued by the Company, nor cash payments made by the Company, pursuant to or in connection with any such Award, unless and until, in each such case, all legal requirements applicable to the issuance or payment have, in the opinion of counsel to the Company, been complied with. In connection with any stock issuance or transfer, the person acquiring the shares shall, if requested by the Company, give assurances satisfactory to counsel to the Company in respect of such matters as the Company may deem desirable to assure compliance with all applicable legal requirements. 6.6 Tax Withholding. (a) Upon the disposition by a Participant or other person of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to satisfaction of the holding period requirements of Section 422 of the Code, or upon the exercise of a Nonqualified Stock Option, the exercise of a Stock Appreciation Right, the vesting of a Restricted Stock Award or the payment of a Performance Share Award or Performance-Based Award, the Company shall have the right to (i) require such Participant or such other person to pay by cash or check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such transactions or (ii) deduct from amounts paid in cash the amount of any taxes which the Company may be required to withhold with respect to such cash amounts. The above notwithstanding, in any case where a tax is required to be withheld in connection with the issuance or transfer of shares of Common Stock under this Plan, the Participant may elect, pursuant to such rules as the Committee may establish, to have the Company reduce the number of such shares issued or transferred by the appropriate number of shares to accomplish such withholding; provided, the Committee may impose such conditions on the payment of any withholding obligation as may be required to satisfy applicable regulatory requirements. (b) The Committee may, in its discretion, permit a loan from the Company to a Participant in the amount of any taxes which the Company may be required to withhold with respect to shares of Common Stock received pursuant to a transaction described in subsection (a) above. Such a loan will be for a term, at a rate of interest and pursuant to such other terms and rules as the Committee may establish. 6.7 Amendment, Termination and Suspension. (a) The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan (or any part hereof). No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee shall retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. (b) To the extent then required under Sections 162, 422 or 424 of the Code or any other applicable law, or deemed necessary or advisable by the Board, any amendment to this Plan shall be subject to shareholder approval. 16 (c) Without limiting any other express authority of the Committee under (but subject to) the express limits of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Participants that the Committee in the prior exercise of its discretion has imposed, without the consent of a Participant, and may make other changes to the terms and conditions of Awards that do not affect in any manner materially adverse to the Participant, the Participant's rights and benefits under an Award. (d) No amendment, suspension or termination of this Plan or change of or affecting any outstanding Award shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Company under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 6.2 shall not be deemed to constitute changes or amendments for purposes of this Section 6.7. 6.8 Privileges of Stock Ownership; Nondistributive Intent. A Participant shall not be entitled to the privilege of stock ownership as to any shares of Common Stock not actually issued to him or her. Upon the issuance and transfer of shares to the Participant, unless a registration statement is in effect under the Securities Act and applicable state securities law, relating to such issued and transferred Common Stock and there is available for delivery a prospectus meeting the requirements of Section 10 of the Securities Act, the Common Stock may be issued and transferred to the Participant only if he or she represents and warrants in writing to the Company that the shares are being acquired for investment and not with a view to the resale or distribution thereof. No shares shall be issued and transferred unless and until there shall have been full compliance with any then applicable regulatory requirements (including those of exchanges upon which any Common Stock of the Company may be listed). 6.9 Effective Date of the Plan. This Plan shall be effective upon its approval by the Board (the "Effective Date"), subject to approval by the shareholders of the Company within twelve months from the date of such Board approval. 6.10 Term of the Plan. Unless previously terminated by the Board, this Plan shall terminate at the close of business on the day before the tenth anniversary of the Effective Date, and no Awards shall be granted under it thereafter, but such termination shall not affect any Award theretofore granted. Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award granted prior to the Plan's termination date may extend beyond such date, and all authority of the Committee with respect to Awards hereunder, including the authority to amend an Award, shall continue during any suspension of this Plan and in respect of Awards outstanding on the termination date. 17 6.11 Governing Law. This Plan and the documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with, the laws of the State of California. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue to be fully effective. 6.12 Plan Construction. (a) Rule 16b-3. It is the intent of the Company that the Awards and transactions permitted by Awards generally satisfy and be interpreted in a manner that, in the case of Participants who are or may be subject to Section 16 of the Exchange Act, satisfies the applicable requirements of Rule 16b-3 promulgated thereunder so that such persons (unless they otherwise agree) will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act in respect of those transactions and will not be subjected to avoidable liability. (b) Section 162(m). It is the further intent of the Company that (to the extent the Company or Awards under this Plan may be or become subject to limitations on deductibility under Section 162(m) of the Code), Options or SARs granted with an exercise or base price not less than Fair Market Value on the date of grant and Performance-Based Awards under Section 5.2 of this Plan that are granted to or held by a person subject to Section 162(m) of the Code will qualify as performance-based compensation or otherwise be exempt from deductibility limitations under Section 162(m) of the Code, to the extent that the Committee authorizing the Award (or the payment thereof, as the case may be) satisfies any applicable administrative requirements thereof. 6.13 Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof. 6.14 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. 6.15 No Corporate Action Restriction. The existence of the Plan, the Award Agreements and the Awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board or the shareholders of the Corporation to make or authorize: (a) any adjustment, recapitalization, reorganization or other change in the Corporation's or any Subsidiary's capital structure or its business, (b) any merger, amalgamation, consolidation or change 18 in the ownership of the Corporation or any subsidiary, (c) any issue of bonds, debentures, capital, preferred or prior preference stock ahead of or affecting the Corporation's or any Subsidiary's capital stock or the rights thereof, (d) any dissolution or liquidation of the Corporation or any Subsidiary, (e) any sale or transfer of all or any part of the Corporation or any Subsidiary's assets or business, or (f) any other corporate act or proceeding by the Corporation or any Subsidiary. No participant, beneficiary or any other person shall have any claim under any Award or Award Agreement against any member of the Board or the Committee, or the Corporation or any employees, officers or agents of the Corporation or any Subsidiary, as a result of any such action. 6.16 Other Company Benefit and Compensation Program. Payments and other benefits received by a Participant under an Award made pursuant to this Plan shall not be deemed a part of a Participant's compensation for purposes of the determination of benefits under any other employee welfare or benefit plans or arrangements, if any, provided by the Corporation or any Subsidiary, except where the Committee or the Board expressly otherwise provides or authorizes in writing. Awards under this Plan may be made in addition to, in combination with, as alternatives to or in payment of grants, awards or commitments under any other plans or arrangements of the Company or the Subsidiaries. VII. DEFINITIONS. 7.1 Definitions. (a) "Award" means an Option, which may be designated as a Nonqualified Stock Option or an Incentive Stock Option, a Stock Appreciation Right, a Restricted Stock Award, Performance Share Award or Performance-Based Award, in each case granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms of an Award. (c) "Award Date" means the date upon which the Committee took the action granting an Award or such later date as is prescribed by the Committee or, in the case of Options granted under Section 2.6, the date specified in such Section 2.6. (d) "Beneficiary" means the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is designated and able to act under the circumstances. (e) "Board" means the Board of Directors of the Company. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Commission" means the Securities and Exchange Commission. 19 (h) "Committee" means the Board or a committee appointed by the Board to administer this Plan, which committee shall be comprised only of two or more directors or such greater number of directors as may be required under applicable law, each of whom (i) in respect of any transaction at a time when the affected Participant may be subject to Section 162(m) of the Code, shall be an "outside director" within the meaning of Section 162(m) of the Code and (ii) in respect of any transaction at a time when the affected Participant may be subject to Section 16 of the Exchange Act, shall be a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Exchange Act. (i) "Common Stock" means the Common Stock of the Company. (j) "Company" means Pacific Sunwear of California, Inc., a California corporation, and its successors. (k) "Eligible Employee" means an officer or key employee of the Company and consultants to the Company whether or not such consultants are employees. (l) "Event" means any of the following: (i) Approval by the shareholders of the Company of the dissolution or liquidation of the Company; (ii) Approval by the shareholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities other than Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Company; or (iii) Approval by the shareholders of the Company of the sale of substantially all of the Company's business assets to a person or entity which is not a Subsidiary. (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (n) "Fair Market Value" means (i) if the stock is listed or admitted to trade on a national securities exchange, the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; (ii) if the stock is not listed or admitted to trade on a national securities exchange, the last price for the stock on such date, as furnished by the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market Reporting System or a similar organization if the NASD is no longer reporting such information; (iii) if the stock is not listed or admitted to trade on a national securities exchange and is not reported on the National Market Reporting System, the mean between the bid and asked price for the stock on such date, as furnished by the NASD; or (iv) if the stock is not listed or admitted to trade on a national securities exchange, is not reported on the National Market Reporting System and if bid and asked prices for the 20 stock are not furnished by the NASD or a similar organization, the values established by the Committee for purposes of the Plan. (o) "Incentive Stock Option" means an option which is designated as an incentive stock option within the meaning of Section 422 of the Code, the award of which contains such provisions as are necessary to comply with that section. (p) "Non-Employee Director" means a member of the Board who is not an officer or employee of the Company. (q) "Non-Employee Director Participant" means a Non-Employee Director who has been granted an Option under Section 2.6. (r) "Nonqualified Stock Option" means an option which is designated as a Nonqualified Stock Option and shall include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. (s) "Option" means an option to purchase Common Stock under this Plan. An Option shall be designated by the Committee as a Nonqualified Stock Option or an Incentive Stock Option. (t) "Participant" means an Eligible Employee who has been granted an Award and a Non-Employee Director who has received an Option under Section 2.6. (u) "Performance Goal" means any one or more of the criteria set forth on Exhibit A hereto. (v) "Performance-Based Awards" shall mean an Award of a right to receive shares of Common Stock or other compensation (including cash) under Section 5.2, the issuance or payment of which is contingent upon, among other conditions, the attainment of performance objectives specified by the Committee. (w) "Performance Share Award" means an award of shares of Common Stock under Section 5.1, the issuance of which is contingent upon attainment of performance objectives specified by the Committee. (x) "Personal Representative" means the person or persons who, upon the disability or incompetence of a Participant, shall have acquired on behalf of the Participant by legal proceeding or otherwise the power to exercise the rights and receive the benefits specified in this Plan. (y) "Plan" means the Pacific Sunwear of California, Inc. 1999 Stock Award Plan, as it may be amended from time to time. (z) "QDRO" shall mean an order requiring the transfer of an Award or portion thereof pursuant to a state domestic relations law to the spouse, former spouse, child or other dependent of a Participant. Such order must be in a form substantially identical to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. 21 (aa) "Restricted Stock" means those shares of Common Stock issued pursuant to a Restricted Stock Award which are subject to the restrictions set forth in the related Award Agreement. (bb) "Restricted Stock Award" means an award of a fixed number of shares of Common Stock to the Participant subject, however, to payment of such consideration, if any, and such forfeiture provisions, as are set forth in the Award Agreement. (cc) "Retirement" means retirement from employment by or providing services to the Company or any Subsidiary after age 65 and, in the case of employees, in accordance with the retirement policies of the Company then in effect. (dd) "Securities Act" means the Securities Act of 1933, as amended. (ee) "Stock Appreciation Right" means a right to receive a number of shares of Common Stock or an amount of cash, or a combination of shares and cash, determined as provided in Section 3.3(a). (ff) "Subsidiary" means any corporation or other entity a majority or more of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. (gg) "Total Disability" means a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code and, in the case of Awards other than Incentive Stock Options, such other disabilities, infirmities, afflictions or conditions as the Committee by rule may include. 22 EXHIBIT A PERFORMANCE GOALS The Performance Targets shall mean any one or a combination of the following. EBIT. "EBIT" means Net Income before interest expense and taxes. EBITDA. "EBITDA" means Net Income before interest expense, taxes, depreciation and amortization. EPS. "EPS" means Net Income divided by the weighted average number of common shares outstanding. Unless otherwise provided by the Committee in the related Award Agreement, common shares outstanding shall be adjusted to include the dilutive effect of stock options, restricted stock and other dilutive financial instruments. EXPENSE REDUCTION. "Expense Reduction" means reduction in actual expense or an improvement in the expense to Net Sales ratio compared to a target or prior year actual expense to Sales ratio. DEBT TO EBITDA. "Debt to EBITDA" means the ratio of debt to EBITDA. INTEREST COVERAGE. "Interest Coverage" means the ratio of EBITDA to interest expense. INVENTORY TURNS. "Inventory Turns" means the ratio of total cost of goods sold on a historical basis to average net inventory. NET INCOME. "Net Income" means the difference between total Net Sales and total costs and expenses, including income taxes. NET SALES. "Net Sales" means net sales. OPERATING CASH FLOW. "Operating Cash Flow" means the net cash provided by operating activities less net cash used by operations and investing activities as shown on the statement of cash flows. PRE-TAX MARGIN. "Pre-Tax Margin" means the ratio of earnings before income taxes to Net Sales. RETURN ON ASSETS. "Return on Assets" means the ratio of Net Income to total average assets including goodwill. RETURN ON CAPITAL. "Return on Capital" means the ratio of Net Income to average total capital. Total capital includes working capital, and other long term assets such as PP&E, goodwill and intangibles, and leased assets. Unless otherwise provided by the Committee in the related Award Agreement, cash, deferred tax assets and debt shall not be included in capital for calculation purposes. RETURN ON EQUITY. "Return on Equity" means Net Income divided by average total equity. A-1 STOCK PRICE APPRECIATION. "Stock Price Appreciation" means an increase, or an average annualized increase, in the stock price or market value of the Common Stock of the Company after the date of grant of an Award or above a specified price. WORKING CAPITAL IMPROVEMENT. "Working Capital Improvement" means the net change in current assets less current liabilities over the applicable period or the reduction in the current ratio (current assets divided by current liabilities), excluding changes in cash and cash equivalents, and current and deferred income taxes. A-2 An extra section break has been inserted above this paragraph. Do not delete this section break if you plan to add text after the Table of Contents/Authorities. Deleting this break will cause Table of Contents/Authorities headers and footers to appear on any pages following the Table of Contents/Authorities. EX-10.6 7 a88399exv10w6.txt EXHIBIT 10.6 EXHIBIT 10.6 PACIFIC SUNWEAR OF CALIFORNIA, INC. EMPLOYEE STOCK PURCHASE PLAN (Composite Plan Document Reflecting Stock Splits Through December 31, 2002) TABLE OF CONTENTS

Page ---- 1. PURPOSE.............................................................................4 2. DEFINITIONS.........................................................................4 3. ELIGIBILITY.........................................................................6 4. STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS.......................................7 5. OFFERING PERIODS....................................................................7 6. PARTICIPATION.......................................................................7 7. METHOD OF PAYMENT OF CONTRIBUTIONS..................................................7 8. GRANT OF OPTION.....................................................................8 9. EXERCISE OF OPTION..................................................................8 10. DELIVERY............................................................................9 11. TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS................................9 12. ADMINISTRATION......................................................................9 13. DESIGNATION OF BENEFICIARY.........................................................10 14. TRANSFERABILITY....................................................................11 15. USE OF FUNDS; INTEREST.............................................................11 16. REPORTS............................................................................11 17. ADJUSTMENTS OF AND CHANGES IN THE STOCK............................................11 18. POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS.....................................12 19. TERM OF PLAN; AMENDMENT OR TERMINATION.............................................12 20. NOTICES............................................................................12 21. CONDITIONS UPON ISSUANCE OF SHARES.................................................13 22. PLAN CONSTRUCTION..................................................................13 23. EMPLOYEES' RIGHTS..................................................................13 24. MISCELLANEOUS......................................................................14

2 PACIFIC SUNWEAR OF CALIFORNIA, INC. EMPLOYEE STOCK PURCHASE PLAN (Composite Plan Document Reflecting Stock Splits Through December 31, 2002) The following constitute the provisions of the Pacific Sunwear of California, Inc. Employee Stock Purchase Plan (this "Plan"). 1. PURPOSE The purpose of this Plan is to provide Eligible Employees with an incentive to advance the best interests of the Corporation (and those Subsidiaries which may be designated by the Committee as "Participating Corporations") by providing a method whereby they may voluntarily purchase Common Stock at a favorable price and upon favorable terms. 2. DEFINITIONS Capitalized terms used herein which are not otherwise defined shall have the following meanings. "Account" shall mean the bookkeeping account maintained by the Corporation, or by a recordkeeper on behalf of the Corporation, for a Participant pursuant to Section 7(a). "Board" shall mean the Board of Directors of the Corporation. "Change in Control" shall mean any of the following: a. Approval by the shareholders of the Corporation of the dissolution or liquidation of the Corporation; b. Approval by the shareholders of the Corporation of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities other than Subsidiaries, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are, or are to be, owned by former shareholders of the Corporation; c. Approval by the shareholders of the Corporation of the sale of substantially all of the Corporation's business assets to a person or entity that is not a Subsidiary. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean the committee appointed by the Board to administer this Plan pursuant to Section 12. 3 "Common Stock" shall mean the common stock of the Corporation. "Company" shall mean the Corporation and its Subsidiaries. "Compensation" shall mean an Eligible Employee's regular earnings, overtime pay, sick pay, shift differential, shift premium, vacation pay, incentive compensation, commissions and bonuses. Compensation also includes any amounts contributed as salary reduction contributions to a plan qualifying under Section 401(k), 125 or 129 of the Code. Any other form of remuneration is excluded from Compensation, including (but not limited to) the following: prizes, awards, housing allowances, stock option exercises, stock appreciation rights, restricted stock exercises, performance awards, auto allowances, tuition reimbursement and other forms of imputed income. Notwithstanding the foregoing, Compensation shall not include any amounts deferred under or paid from the Corporation's Executive Deferred Compensation Plan. "Contributions" shall mean all bookkeeping amounts credited to the Account of a Participant pursuant to Section 7(a). "Corporation" shall mean Pacific Sunwear of California, Inc., a California corporation. "Eligible Employee" shall mean any employee of the Corporation, or of any Subsidiary which has been designated in writing by the Committee as a "Participating Corporation" (including any Subsidiaries which have become such after the date that this Plan is approved by shareholders). Notwithstanding the foregoing, "Eligible Employee" shall not include any employee who (i) has not as of the Grant Date completed at least three months of continuous full-time employment with the Company, (ii) whose customary employment is for 20 hours per week or less; or (iii) whose customary employment is for not more than five months in a calendar year. In addition, no Officer shall be an Eligible Employee. "Effective Date" shall mean January 1, 1998. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exercise Date" shall mean, with respect to an Offering Period, the last day of that Offering Period. "Fair Market Value" shall mean the closing price of a Share on The New York Stock Exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal or, in the event the Common Stock is not listed on The New York Stock Exchange, the "Fair Market Value" shall be the closing price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation ("NASDAQ") or, if such price is not reported, the mean of the bid and asked 4 prices per Share as reported by NASDAQ or, if such prices are not so listed or reported, as determined by the Committee (or its delegate), in its discretion. "Grant Date" shall mean the first day of each Offering Period. "Offering Period" shall mean the six-consecutive month periods commencing on each January 1 and July 1. "Officer" shall mean (i) any individual who is a named officer of the Corporation pursuant to the Corporation's By-Laws, and (ii) any other individual who the Committee determines, in its sole discretion, to be (A) a highly compensated employee (within the meaning of Section 414(q) of the Code) and (B) an officer of the Company for purposes of this Plan. "Option" shall mean the stock option to acquire Shares granted to a Participant pursuant to Section 8. "Option Price" shall mean the per share exercise price of an Option as determined in accordance with Section 8(b). "Participant" shall mean an Eligible Employee who has elected to participate in this Plan and who has filed a valid and effective Subscription Agreement to make Contributions pursuant to Section 6. "Plan" shall mean this Pacific Sunwear of California, Inc. Employee Stock Purchase Plan, as amended from time to time. "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16. "Section 16" shall mean Section 16 of the Exchange Act. "Share" shall mean a share of Common Stock. "Subscription Agreement" shall mean the written agreement filed by an Eligible Employee with the Corporation pursuant to Section 6 to participate in this Plan. "Subsidiary" shall mean any corporation in an unbroken chain of corporations (beginning with the Corporation) in which each corporation (other than the last corporation) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one or more of the other corporations in the chain. 3. ELIGIBILITY Any person employed as an Eligible Employee as of a Grant Date shall be eligible to participate in this Plan during the Offering Period in which such Grant Date occurs, subject to the Eligible Employee satisfying the requirements of Section 6. 5 4. STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS The total number of Shares to be made available under this Plan is 405,000 authorized and unissued or treasury shares of Common Stock, or Shares repurchased on the open market, subject to adjustments pursuant to Section 17. In the event that all of the Shares made available under this Plan are subscribed prior to the expiration of this Plan, this Plan may be terminated in accordance with Section 19. 5. OFFERING PERIODS During the term of this Plan, the Corporation will offer Options to purchase Shares to all Participants during each Offering Period. Each Option shall become effective on the Grant Date. The term of each Option shall be six months and shall end on the Exercise Date. The first Offering Period shall commence on or after the Effective Date. Offering Periods shall continue until this Plan is terminated in accordance with Section 18 or 19, or, if earlier, until no Shares remain available for Options pursuant to Section 4. 6. PARTICIPATION An Eligible Employee may become a participant in this Plan by completing a Subscription Agreement on a form approved by and in a manner prescribed by the Committee (or its delegate). To become effective, a Subscription Agreement must be filed with the Corporation prior to the start of the Offering Period with respect to which it is to become effective and must set forth the percentage of the Eligible Employee's Compensation (which shall be a whole percentage point not less than 1% and not more than 10%) to be credited to the Participant's Account as Contributions each pay period. Subscription Agreements shall contain the Eligible Employee's authorization and consent to the Corporation's withholding from his or her Compensation the amount of his or her Contributions. Subscription Agreements shall remain valid for all Offering Periods until (i) an Eligible Employee's participation terminates pursuant to the terms hereof, or (ii) until a new Subscription Agreement becomes effective. 7. METHOD OF PAYMENT OF CONTRIBUTIONS (a) The Corporation shall maintain on its books, or cause to be maintained by a recordkeeper, an Account in the name of each Participant. The percentage of Compensation elected to be applied as Contributions by a Participant shall be deducted from such Participant's Compensation on each payday during the period for payroll deductions set forth below and such payroll deductions shall be credited to that Participant's Account as soon as administratively practicable after such date. A Participant may not make any additional payments to his or her Account. A Participant's Account shall be reduced by any amounts used to pay the Option Price of Shares acquired, or by any other amounts distributed pursuant to the terms hereof. (b) Payroll deductions with respect to an Offering Period shall commence as of the first day of the payroll period which coincides with or immediately follows the applicable Grant Date and shall end on the last day of the payroll period which coincides with or 6 immediately precedes the applicable Exercise Date, unless sooner terminated by the Participant as provided in this Section or until his or her participation terminates pursuant to Section 11. (c) A Participant may terminate his or her Contributions during an Offering Period by completing and filing with the Corporation, in such form and on such terms as the Committee (or its delegate) may prescribe, a written withdrawal form which shall be signed by the Participant. Such termination shall be effective as soon as administratively practicable after its receipt by the Corporation. (d) A Participant may discontinue or otherwise change the level of his or her Contributions (within Plan limits) effective as of the next Grant Date by completing and filing with the Corporation, on such terms as the Committee (or its delegate) may prescribe, a new Subscription Agreement. 8. GRANT OF OPTION (a) On each Grant Date, each Eligible Employee who is a participant during that Offering Period shall be granted an Option to purchase a number of Shares. The Option shall be exercised on the Exercise Date. The number of Shares subject to the Option shall be determined by dividing the Participant's Account balance as of the applicable Exercise Date by the Option Price. (b) The Option Price per Share of the Shares subject to an Option shall be the lesser of: (i) 90% of the Fair Market Value of a Share on the applicable Grant Date; or (ii) 90% of the Fair Market Value of a Share on the applicable Exercise Date. (c) Notwithstanding anything else contained herein, a person who is otherwise an Eligible Employee shall not be granted any Option or other right to purchase Shares under this Plan to the extent (i) it would, if exercised, cause the person to own "stock" (as such term is defined for purposes of Section 423(b)(3) of the Code) possessing 5% or more of the total combined voting power or value of all classes of stock of the Corporation, or any Subsidiary, or (ii) such Option causes such individual to have rights to purchase stock under this Plan and any other plan of the Company qualified under Section 423 of the Code which accrue at a rate which exceeds $25,000 of the fair market value of the stock of the Corporation or of a Subsidiary (determined at the time the right to purchase such Stock is granted) for each calendar year in which such right is outstanding. For this purpose a right to purchase Shares accrues when it first become exercisable during the calendar year. In determining whether the stock ownership of an Eligible Employee equals or exceeds the 5% limit set forth above, the rules of Section 424(d) of the Code (relating to attribution of stock ownership) shall apply. 9. EXERCISE OF OPTION Unless a Participant's Plan participation is terminated as provided in Section 11, his or her Option for the purchase of Shares shall be exercised automatically on the Exercise Date for that Offering Period, without any further action on the Participant's part, and the 7 maximum number of whole Shares subject to such Option shall be purchased at the Option Price with the balance of such Participant's Account. If any amount (which is not sufficient to purchase a whole Share) remains in a Participant's Account after the exercise of his or her Option on the Exercise Date: (i) such amount shall be credited to such Participant's Account for the next Offering Period, if he or she is then a Participant; or (ii) if such Participant is not a Participant in the next Offering Period, or if the Committee so elects, such amount shall be refunded to such Participant as soon as administratively practicable after such date. 10. DELIVERY As soon as administratively practicable after the Exercise Date, the Corporation shall deliver to each Participant a certificate representing the Shares purchased upon exercise of his or her Option. The Corporation may make available an alternative arrangement for delivery of Shares to a recordkeeping service. The Committee (or its delegate), in its discretion, may either require or permit the Participant to elect that such certificates be delivered to such recordkeeping service. In the event the Corporation is required to obtain from any commission or agency authority to issue any such certificate, the Corporation will seek to obtain such authority. Inability of the Corporation to obtain from any such commission or agency authority which counsel for the Corporation deems necessary for the lawful issuance of any such certificate shall relieve the Corporation from liability to any Participant except to return to the Participant the amount of the balance in his or her Account. 11. TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS (a) Upon a Participant's termination from employment with the Company for any reason or in the event that a Participant is no longer an Eligible Employee or if the Participant elects to terminate Contributions pursuant to Section 7(c), at any time prior to the last day of an Offering Period in which he or she participates, such Participant's Account shall be paid to him or her or in cash, or, in the event of such Participant's death, paid to the person or persons entitled thereto under Section 13, and such Participant's Option and participation in the Plan shall be automatically terminated. (b) A Participant's termination from Plan participation precludes the Participant from again participating in this Plan during that Offering Period. However, such termination shall not have any effect upon his or her ability to participate in any succeeding Offering Period, provided that the applicable eligibility and participation requirements are again then met. A Participant's termination from Plan participation shall be deemed to be a revocation of that Participant's Subscription Agreement and such Participant must file a new Subscription Agreement to resume Plan participation in any succeeding Offering Period. 12. ADMINISTRATION (a) The Board shall appoint the Committee, which shall be composed of not less than two members of the Board. Each member of the Committee, in respect of any transaction 8 at a time when an affected Participant may be subject to Section 16 of the Exchange Act, shall be a "non-employee director" within the meaning of Rule 16b-3 promulgated under Section 16. The Board may, at any time, increase or decrease the number of members of the Committee, may remove from membership on the Committee all or any portion of its members, and may appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal, resignation, or otherwise. The Board may also, at any time, assume or change the administration of this Plan. (b) The Committee shall supervise and administer this Plan and shall have full power and discretion to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of this Plan and not inconsistent with the terms of this Plan, and to make all other determinations necessary or advisable for the administration of this Plan. The Committee shall act by majority vote or by unanimous written consent. No member of the Committee shall be entitled to act on or decide any matter relating solely to himself or herself or any of his or her rights or benefits under this Plan. The Committee shall have full power and discretionary authority to construe and interpret the terms and conditions of this Plan, which construction or interpretation shall be final and binding on all parties including the Corporation, Participants and beneficiaries. The Committee may delegate ministerial non-discretionary functions to third parties, including officers of the Corporation. (c) Any action taken by, or inaction of, the Corporation, the Board or the Committee relating to this Plan shall be within the absolute discretion of that entity or body. No member of the Board or Committee, or officer of the Corporation shall be liable for any such action or inaction. 13. DESIGNATION OF BENEFICIARY (a) A Participant may file, in a manner prescribed by the Committee (or its delegate), a written designation of a beneficiary who is to receive any Shares or cash from such Participant's Account under this Plan in the event of such Participant's death. If a Participant's death occurs subsequent to the end of an Offering Period but prior to the delivery to him or her of any Shares deliverable under the terms of this Plan, such Shares and any remaining balance of such Participant's Account shall be paid to such beneficiary (or such other person as set forth in Section 13(b)) as soon as administratively practicable after the Corporation receives notice of such Participant's death and any outstanding unexercised Option shall terminate. If a Participant's death occurs at any other time, the balance of such Participant's Account shall be paid to such beneficiary (or such other person as set forth in Section 13(b)) in cash as soon as administratively practicable after the Corporation receives notice of such Participant's death and such Participant's Option shall terminate. If a Participant is married and the designated beneficiary is not his or her spouse, spousal consent shall be required for such designation to be effective. (b) Beneficiary designations may be changed by the Participant (and his or her spouse, if required) at any time on forms provided and in the manner prescribed by the Committee (or its delegate). If a Participant dies with no validly designated beneficiary 9 under this Plan who is living at the time of such Participant's death, the Corporation shall deliver all Shares and/or cash payable pursuant to the terms hereof to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed, the Corporation, in its discretion, may deliver such Shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Corporation, then to such other person as the Corporation may designate. 14. TRANSFERABILITY Neither Contributions credited to a Participant's Account nor any Options or rights with respect to the exercise of Options or right to receive Shares under this Plan may be anticipated, alienated, encumbered, assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 13) by the Participant. Any such attempt at anticipation, alienation, encumbrance, assignment, transfer, pledge or other disposition shall be without effect and all amounts shall be paid and all shares shall be delivered in accordance with the provisions of this Plan. Amounts payable or Shares deliverable pursuant to this Plan shall be paid or delivered only to the Participant or, in the event of the Participant's death, to the Participant's beneficiary pursuant to Section 13. 15. USE OF FUNDS; INTEREST All Contributions received or held by the Corporation under this Plan will be included in the general assets of the Corporation and may be used for any corporate purpose. No interest will be paid to any Participant or credited to his or her Account under this Plan. 16. REPORTS Statements shall be provided to Participants as soon as administratively practicable following each Exercise Date. Each Participant's statement shall set forth, as of such Exercise Date, that Participant's Account balance immediately prior to the exercise of his or her Option, the Fair Market Value of a Share, the Option Price, the number of whole Shares purchased and his or her remaining Account balance, if any. 17. ADJUSTMENTS OF AND CHANGES IN THE STOCK In the event that the Shares shall be changed into or exchanged for a different number or kind of shares of stock or other securities of the Corporation or of another corporation (whether by reason of merger, consolidation, recapitalization, stock split, combination of shares, or otherwise), or if the number of Shares shall be increased through a stock split or the payment of a stock dividend, then there shall be substituted for or added to each Share theretofore reserved for sale under this Plan, the number and kind of shares of stock or other securities into which each outstanding Share shall be so changed, or for which each such Share shall be exchanged, or to which each such Share is entitled, as the case may be, or the number or kind of securities which may be sold under this Plan and the purchase price per Share shall be appropriately adjusted consistent with such change 10 in such manner as the Committee (or its delegate) may deem equitable to prevent substantial dilution or enlargement of rights granted to, or available for, Eligible Employees under this Plan. 18. POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS Upon a dissolution of the Corporation, an event described in Section 17 that the Corporation does not survive, or the occurrence of a Change in Control, the Plan and, if prior to the last day of an Offering Period, any outstanding Option granted with respect to that Offering Period shall terminate, subject to any provision that has been expressly made by the Committee through a plan or reorganization approved by the Board or otherwise for the survival, substitution, assumption, exchange or other settlement of the Plan and Options. In the event a Participant's Option is terminated pursuant to this Section 18, such Participant's Account shall be paid to him or her in cash without interest. 19. TERM OF PLAN; AMENDMENT OR TERMINATION (a) This Plan shall become effective as of the Effective Date. No new Offering Periods shall commence on or after the tenth anniversary of the Effective Date and this Plan shall terminate on such date unless sooner terminated pursuant to Section 18 or this Section 19. (b) The Board may amend, modify or terminate this Plan at any time without notice. Shareholder approval for any amendment or modification shall not be required, except to the extent required by Section 423 of the Code or other applicable law, or deemed necessary or advisable by the Board. No amendment, modification, or termination pursuant to this Section 18(b) shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of such Participant or obligations of the Corporation under any Option granted under this Plan prior to the effective date of such change. Changes contemplated by Section 17 shall not be deemed to constitute changes or amendments requiring Participant consent. Notwithstanding the foregoing, the Committee shall have the right to designate from time to time the Subsidiaries whose employees may be eligible to participate in this Plan and such designation shall not constitute any amendment to this Plan requiring shareholder approval. 20. NOTICES All notices or other communications by a Participant to the Corporation contemplated by this Plan shall be deemed to have been duly given when received in the form and manner specified by the Committee (or its delegate) at the location, or by the person, designated by the Committee (or its delegate) for that purpose. 11 21. CONDITIONS UPON ISSUANCE OF SHARES Shares shall not be issued with respect to an Option unless the exercise of such Option and the issuance and delivery of such Shares complies with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, any applicable state securities laws, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed. As a condition precedent to the exercise of any Option, if, in the opinion of counsel for the Corporation such a representation is required under applicable law, the Corporation may require any person exercising such Option to represent and warrant that the Shares subject thereto are being acquired only for investment and without any present intention to sell or distribute such Shares. 22. PLAN CONSTRUCTION (a) It is the intent of the Corporation that transactions in and affecting Options in the case of Participants who are or may be subject to the prohibitions of Section 16 satisfy any then applicable requirements of Rule 16b-3 so that such persons (unless they otherwise agree) will be entitled to the exemptive relief of Rule 16b-3 in respect of those transactions and will not be subject to avoidable liability thereunder. Accordingly, this Plan shall be deemed to contain and the Shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 with respect to Plan transactions. (b) This Plan and Options are intended to qualify under Section 423 of the Code. (c) If any provision of this Plan or of any Option would otherwise frustrate or conflict with the intents expressed above, that provision to the extent possible shall be interpreted so as to avoid such conflict. If the conflict remains irreconcilable, the Committee may disregard the provision if it concludes that to do so furthers the interest of the Corporation and is consistent with the purposes of this Plan as to such persons in the circumstances. 23. EMPLOYEES' RIGHTS Nothing in this Plan (or in any agreement related to this Plan) shall confer upon any Eligible Employee or Participant any right to continue in the service or employ of the Company or constitute any contract or agreement of service or employment, or interfere in any way with the right of the Company to reduce such person's compensation or other benefits or to terminate the services or employment or such Eligible Employee or Participant, with or without cause, but nothing contained in this Plan or any document related hereto shall affect any other contractual right of any Eligible Employee or Participant. No Participant shall have any rights as a shareholder until a certificate for Shares has been issued in the Participant's name following exercise of his or her Option. No adjustment will be made for dividends or other rights as a shareholder for which a 12 a record date is prior to the issuance of such Share certificate. Nothing in this Plan shall be deemed to create any fiduciary relationship between the Corporation and any Participant. 24. MISCELLANEOUS (a) This Plan and related documents shall be governed by, and construed in accordance with, the laws of the State of California. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue to be fully effective. (b) Captions and headings are given to the sections of this Plan solely as a convenience to facilitate reference. Such captions and headings shall not be deemed in any way material or relevant to the construction of interpretation of this Plan or any provision hereof. (c) The adoption of this Plan shall not affect any other compensation or incentive plans in effect for the Company. Nothing in this Plan shall be construed to limit the right of the Company (i) to establish any other forms of incentives or compensation for employees of the Company, or (ii) to grant or assume options (outside the scope of and in addition to those contemplated by this Plan) in connection with any proper corporate purpose. 25. EFFECTIVE DATE This Plan shall be effective on the Effective Date, subject, however, to the approval of this Plan by the shareholders of the Company within twelve months after the date on which the Board approved this Plan. Notwithstanding anything else contained herein to the contrary, no Shares shall be issued or delivered under this Plan until such shareholder approval is obtained and, if such shareholder approval is not obtained within such 12-month period of time, all Contributions credited to a Participant's Account hereunder shall be refunded to such Participant (without interest) as soon as practicable after the end of such 12-month period. 13 EX-10.20 8 a88399exv10w20.txt EXHIBIT 10.20 EXHIBIT 10.20 FOURTH AMENDMENT TO BUSINESS LOAN AGREEMENT This Fourth Amendment to Business Loan Agreement (the "Amendment") is made as of January 14, 2003, between Bank of America, N. A.("Bank"), and Pacific Sunwear of California, Inc., a California corporation (the "Borrower"). RECITALS A. Borrower and Bank entered into that certain Business Loan Agreement dated as of April 3, 2001, as previously amended (the "Agreement"). B. Borrower and Bank desire to further amend certain terms and provisions of the Agreement. AGREEMENT 1. Definitions. Capitalized terms used but not defined in this Amendment shall have the meaning given to them in the Agreement. 2. Amendments. The Agreement is hereby amended as follows: 2.1 In Section 9.7 (f) of the Agreement, the words "Five Million Dollars ($5,000,000.00)" are hereby deleted in its entirety and replaced with "Ten Million Dollars ($10,000,000.00)". 3. Representations and Warranties. Borrower hereby represents and warrants to Bank that: (i) no default specified in the Agreement and no event which with notice or lapse of time or both would become such a default has occurred and is continuing and has not been previously waived, (ii) the representations and warranties of Borrower pursuant to the Agreement are true on and as of the date hereof as if made on and as of said date, (iii) the making and performance by Borrower of this Amendment have been duly authorized by all necessary action, and (iv) no consent, approval, authorization, permit or license is required in connection with the making or performance of the Agreement as amended hereby. 4. Conditions. This Amendment will be effective when the Bank receives the following items, in form and content acceptable to the Bank: 4.1 This Amendment duly executed by all parties hereto. 4.2 Payment of all out-of-pocket expenses, including attorneys' fees, incurred by the Bank in connection with the preparation of this Amendment. 1 5. Effect of Amendment. Except as provided in this Amendment, the Agreement shall remain in full force and effect and shall be performed by the parties hereto according to its terms and provisions. IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first above written. BANK OF AMERICA, N.A. By: /s/ C.K. Goodfellow ------------------------------------- Name: Cynthia K. Goodfellow ----------------------------------- Title: Vice President ------------------------------------- PACIFIC SUNWEAR OF CALIFORNIA, INC. By: /s/ Carl W. Womack ------------------------------------- Name: Carl W. Womack ----------------------------------- Title: Chief Financial Officer ------------------------------------- By: /s/ Greg H. Weaver ------------------------------------- Name: Greg H. Weaver ----------------------------------- Title: Chief Executive Officer ------------------------------------- 2 EX-21 9 a88399exv21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT ------------------------------ Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- 1. Pacific Sunwear Stores Corp. California 2. ShopPacSun.com Corp California EX-23.1 10 a88399exv23w1.htm EXHIBIT 23.1

EXHIBIT 23.1

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statement Nos. 333-101569, 333-86595, 333-65721, 333-40697, 333-34677, 33-65412, 33-97512, 33-65414, and 33-88114, of Pacific Sunwear of California, Inc. on Form S-8 of our report dated March 11, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to a change in accounting for goodwill and other intangible assets during the year ended February 1, 2003), appearing in this Annual Report on Form 10-K of Pacific Sunwear of California, Inc. for the year ended February 1, 2003.

/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP

Costa Mesa, California
March 27, 2003

EX-99.1 11 a88399exv99w1.htm EXHIBIT 99.1

EXHIBIT 99.1

WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350

     The undersigned, Greg H. Weaver, the Chairman of the Board and Chief Executive Officer of Pacific Sunwear of California, Inc. (the “Company”), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(i)	the Annual Report of the Company, on Form 10-K for the period ended February 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and
(ii)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 27, 2003

/s/ Greg H. Weaver

Greg H. Weaver
Chairman of the Board and Chief Executive Officer
Pacific Sunwear of California, Inc.

This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to Pacific Sunwear of California, Inc. and will be retained by Pacific Sunwear of California, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

WRITTEN STATEMENT
PURSUANT TO
18 U.S.C. SECTION 1350

     The undersigned, Carl W. Womack, the Senior Vice President, Chief Financial Officer and Secretary of Pacific Sunwear of California, Inc. (the “Company”), pursuant to 18 U.S.C. Section 1350, hereby certifies that:

(iii)	the Annual Report of the Company, on Form 10-K for the period ended February 1, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of section 13(a) and 15(d) of the Securities Exchange Act of 1934; and
(iv)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 27, 2003

/s/ Carl W. Womack

Carl W. Womack
Senior Vice President, Chief Financial Officer and Secretary
Pacific Sunwear of California, Inc.

This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906 has been provided to Pacific Sunwear of California, Inc. and will be retained by Pacific Sunwear of California, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

-----END PRIVACY-ENHANCED MESSAGE-----

EX-3.2

                                                                     EXHIBIT 3.2

                           CERTIFICATE OF AMENDMENT OF
              THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION
                                       OF
                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                Greg H. Weaver and Carl W. Womack certify that:

                1. They are the Chief Executive Officer and the Secretary,
respectively, of Pacific Sunwear of California, Inc., a California corporation
(the "Corporation").

                2. Article THIRD of the Third Amended and Restated Articles of
Incorporation of the Corporation is amended to read in its entirety as follows:

                THIRD: The total number of shares of all classes of stock which
        the corporation shall have authority to issue is 118,906,250 shares,
        consisting of 5,000,000 shares of Preferred Stock, $.01 par value (the
        "Preferred Stock"), and 113,906,250 shares of Common Stock, $.01 par
        value (the "Common Stock"). The Board of Directors of the corporation
        shall have the full authority permitted by law to fix by resolution
        full, limited, multiple, fractional, or no voting rights, and such
        designation, preferences, and relative, participating, optional or other
        special rights, qualifications, limitations or restrictions thereof, of
        any series that may be desired in respect of the Preferred Stock.

                Upon the filing of this amendment of this Article THIRD to read
        as herein set forth, each outstanding share of Common Stock is split and
        divided into one and one-half (1 1/2) shares of Common Stock and each
        shareholder of record on the date of filing of this amendment holding
        any outstanding shares of Common Stock is entitled to receive a stock
        certificate or certificates to evidence and represent the additional
        shares of Common Stock to which such person is entitled by reason of
        such stock split on the basis of one-half (1/2) additional share for
        each share so held of record. No fractional shares shall be paid and
        instead each shareholder of record entitled to a fractional share shall
        receive a cash payment for such fractional interest based on the closing
        price of the corporation's Common Stock as reported by the National
        Association of Securities Dealers Automated Quotation System on the
        record date (as adjusted for the stock split).

                3. The foregoing amendment of the Articles of Incorporation has
        been duly approved by the Board of Directors of the Corporation.

                4. The Corporation has only Common Stock outstanding. Pursuant
        to section 902(c) of the California General Corporation Law, the
        foregoing amendment effecting a stock split (including an increase in
        the authorized number of shares in proportion thereto) may be adopted
        with approval by the Board of Directors alone.

                We further declare under penalty of perjury under the laws of
        the State of California that the matters set forth in this certificate
        are true and correct of our own knowledge.





                IN WITNESS WHEREOF, the undersigned have executed this
Certificate of Amendment on December 17, 2002.

                                        /s/ Greg H. Weaver
                                        ----------------------------------------
                                        Greg H. Weaver
                                        Chief Executive Officer

                                        /s/ Carl W. Womack
                                        ----------------------------------------
                                        Carl W. Womack
                                        Secretary

EX-3.3

                                                                     EXHIBIT 3.3

                            CERTIFICATE OF CORRECTION
                                       OF
              THIRD AMENDED AND RESTATED ARTICLES OF INCORPORATION
                                       OF
                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

        Greg H. Weaver and Carl W. Womack hereby certify that:

        1. We are the duly elected and acting Chairman of the Board and Chief
Executive Officer, and Chief Financial Officer and Secretary, respectively, of
Pacific Sunwear of California, Inc.

        2. The name of the corporation is Pacific Sunwear of California, Inc.

        3. The Third Amended and Restated Articles of Incorporation were filed
with the Secretary of State of the State of California on April 20, 1993, as
amended by the Certificate of Amendment to Third Amended and Restated Articles
of Incorporation filed with the Secretary of State of California on December 18,
2002.

        4. The first paragraph of Article THIRD of the Third Amended and
Restated Articles of Incorporation of the Corporation, as corrected, should read
as follows:

                THIRD: The total number of shares of all classes of stock which
        the corporation shall have the authority to issue is 118,906,250 shares,
        consisting of 5,000,000 shares of Preferred Stock, $.01 par value (the
        "Preferred Stock"), and 113,906,250 shares of Common Stock, $.01 par
        value (the "Common Stock"). The Preferred Stock may be issued from time
        to time in one or more series. The Board of Directors is authorized to
        fix the number of shares of any series of Preferred Stock, to determine
        the designation of any series of Preferred Stock and to determine or
        alter the rights, preferences, privileges and restrictions granted to or
        imposed upon any wholly unissued series of Preferred Stock.

        5. This certificate does not alter the wording of any resolution or
written consent adopted by the board or the shareholders.

        We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.


Dated: February 28, 2003                /s/ Greg H. Weaver
                                        ----------------------------------------
                                        Greg H. Weaver
                                        Chairman of the Board and
                                        Chief Executive Officer


                                        /s/ Carl W. Womack
                                        ----------------------------------------
                                        Carl W. Womack
                                        Chief Financial Officer and Secretary

EX-3.6

                                                                     EXHIBIT 3.6

                     AMENDMENT TO ARTICLE III, SECTION 2 OF
               THE BYLAWS OF PACIFIC SUNWEAR OF CALIFORNIA, INC.,
                            A CALIFORNIA CORPORATION

        SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number
of directors shall be not less than five nor more than nine until changed by
Amendment of the Articles of Incorporation or by a Bylaw duly adopted by
approval of the outstanding shares. The exact number of directors shall be
fixed, within the limits specified, by amendment of the next sentence duly
adopted either by the Board of Directors or the shareholders. The exact number
of directors shall be seven until changed as provided in this Section 2.

EX-10.4

                                                                    EXHIBIT 10.4


                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                              1999 STOCK AWARD PLAN

              (Composite Plan Document Reflecting Amendment 2001-I
                   and Stock Splits Through December 31, 2002)





                               TABLE OF CONTENTS



                                                                                   PAGE
                                                                                   ----
                                                                                
I.      THE PLAN.....................................................................1

        1.1    Purpose...............................................................1

        1.2    Administration........................................................1

        1.3    Participation.........................................................2

        1.4    Stock Subject to the Plan.............................................3

        1.5    Grant of Awards.......................................................3

        1.6    Exercise of Awards....................................................3

        1.7    No Transferability; Limited Exception to Transfer Restrictions........4

II.     OPTIONS......................................................................5

        2.1    Grants................................................................5

        2.2    Option Price..........................................................5

        2.3    Option Period.........................................................5

        2.4    Exercise of Options...................................................5

        2.5    Limitations on Grant of Incentive Stock Options.......................6

        2.6    Non-Employee Director Awards..........................................6

        2.7    Options and Rights in Substitution for Stock Options Granted by
               Other Corporations....................................................8

        2.8    Adjustments, No Repricing Without Prior Shareholder Approval..........8

III.    STOCK APPRECIATION RIGHTS....................................................8

        3.1    Grants................................................................8

        3.2    Exercise of Stock Appreciation Rights.................................9

        3.3    Payment...............................................................9

IV.     RESTRICTED STOCK AWARDS.....................................................10

        4.1    Grants...............................................................10

        4.2    Restrictions.........................................................10

        4.3    Return to the Corporation............................................10

V.      PERFORMANCE SHARE AWARDS....................................................11

        5.1    Grants...............................................................11

        5.2    Special Performance-Based Share Awards...............................11




                                      -i-



                               TABLE OF CONTENTS
                                  (CONTINUED)



                                                                                   PAGE
                                                                                   ----
                                                                                
VI.     OTHER PROVISIONS............................................................12

        6.1    Rights of Eligible Employees, Participants and Beneficiaries.........12

        6.2    Adjustments Upon Changes in Capitalization...........................13

        6.3    Termination of Employment............................................14

        6.4    Acceleration of Awards...............................................15

        6.5    Government Regulations...............................................15

        6.6    Tax Withholding......................................................16

        6.7    Amendment, Termination and Suspension................................16

        6.8    Privileges of Stock Ownership; Nondistributive Intent................17

        6.9    Effective Date of the Plan...........................................17

        6.10   Term of the Plan.....................................................17

        6.11   Governing Law........................................................18

        6.12   Plan Construction....................................................18

        6.13   Captions.............................................................18

        6.14   Non-Exclusivity of Plan..............................................18

        6.15   No Corporate Action Restriction......................................18

        6.16   Other Company Benefit and Compensation Program.......................19

VII.    DEFINITIONS.................................................................19

        7.1    Definitions..........................................................19




                                      -ii-



                       PACIFIC SUNWEAR OF CALIFORNIA, INC.
                              1999 STOCK AWARD PLAN

              (Composite Plan Document Reflecting Amendment 2001-I
                   and Stock Splits Through December 31, 2002)

I. THE PLAN.

        1.1 Purpose.

        The purpose of this Plan is to promote the success of the Company by
providing an additional means to attract, motivate, retain and reward key
personnel through the grant of Options and other Awards that provide added long
term incentives for high levels of performance and for significant efforts to
improve the financial performance of the Company. The purpose of this Plan is
also to attract, motivate and retain experienced and knowledgeable independent
directors through the Option grants provided under Section 2.6.

        1.2 Administration.

        (a) This Plan shall be administered and all Awards (other than those
under Section 2.6) shall be authorized by the Committee. Action of the Committee
with respect to the administration of this Plan shall be taken pursuant to a
majority vote or the unanimous written consent of its members. In the event
action by the Committee is taken by written consent, the action shall be deemed
to have been taken at the time specified in the consent or, if none is
specified, at the time of the last signature. The Committee may delegate
administrative functions to individuals who are officers or employees of the
Company.

        (b) Subject to the express provisions of this Plan, the Committee shall
have the authority:

                (i) to grant Awards to Eligible Employees, determine the price
        at which securities will be offered or awarded and the amount of
        securities to be offered or awarded to any of such persons, and
        determine the other specific terms and conditions of such Awards
        consistent with the express limits of this Plan, and establish the
        installments (if any) in which such Awards shall become exercisable or
        shall vest, or determine that no delayed exercisability or vesting is
        required, and establish the events of termination or reversion of such
        Awards;

                (ii) to approve the forms of Award Agreements (which need not be
        identical either as to type of award or among Participants);

                (iii) to construe and interpret this Plan and any agreements
        defining the rights and obligations of the Company and Participants
        under this Plan, further define the terms used in this Plan, and
        prescribe, amend and rescind rules and regulations relating to the
        administration of this Plan;





                (iv) to cancel, modify, or waive the Corporation's rights with
        respect to, or modify, discontinue, suspend, or terminate any or all
        outstanding Awards held by Eligible Employees, subject to any required
        consent under Section 6.7;

                (v) to accelerate or extend the exercisability or extend the
        term of any or all such outstanding Awards within the maximum ten-year
        term of Awards; and

                (vi) to make all other determinations and take such other action
        as contemplated by this Plan or as may be necessary or advisable for the
        administration of this Plan and the effectuation of its purposes.

Notwithstanding the foregoing, the provisions of Section 2.6 relating to
Non-Employee Director Options shall be automatic and, to the maximum extent
possible, self-effectuating.

        (c) Any action taken by, or inaction of, the Corporation, any
Subsidiary, the Board or the Committee relating or pursuant to this Plan and
within its authority hereunder or under applicable law shall be within the
absolute discretion of that entity or body and shall be conclusive and binding
upon all persons. Neither the Board nor any Committee, nor any member thereof or
person acting at the direction thereof, shall be liable for any act, omission,
interpretation, construction or determination made in good faith in connection
with this Plan (or any Award made under this Plan), and all such persons shall
be entitled to indemnification and reimbursement by the Company in respect of
any claim, loss, damage or expense (including, without limitation, attorneys'
fees) arising or resulting therefrom to the fullest extent permitted by law
and/or under any directors and officers liability insurance coverage that may be
in effect from time to time.

        (d) Subject to the requirements of Section 7.1, the Board, at any time
it so desires, may increase or decrease the number of members of the Committee,
may remove from membership on the Committee all or any portion of its members,
and may appoint such person or persons as it desires to fill any vacancy
existing on the Committee, whether caused by removal, resignation or otherwise.

        (e) In making any determination or in taking or not taking any action
under this Plan, the Committee or the Board, as the case may be, may obtain and
may rely upon the advice of experts, including professional advisors to the
Company. No director, officer or agent of the Company shall be liable for any
such action or determination taken or made or omitted in good faith.

        1.3 Participation.

        Awards may be granted only to Eligible Employees. An Eligible Employee
who has been granted an Award may, if otherwise eligible, be granted additional
Awards if the Committee shall so determine. Except as provided in Section 2.6
below, members of the Board who are not officers or employees of the Company
shall not be eligible to receive Awards.



                                       2


        1.4 Stock Subject to the Plan.

        (a) Subject to Section 6.2, the stock to be offered under this Plan
shall be shares of the Company's authorized but unissued Common Stock. The
aggregate amount of Common Stock that may be issued or transferred pursuant to
Awards (including Incentive Stock Options) granted under this Plan shall not
exceed 4,800,000 shares, subject to adjustment as set forth in Section 6.2. In
no event shall more than 900,000 shares of Common Stock (subject to adjustment
under Section 6.2) be available for Awards issued (or reissued) under this Plan
as time-based Restricted Stock for nominal or no consideration other than the
par value thereof. This limit on Restricted Stock does not apply to shares
issued principally for past services, in respect of compensation earned but
deferred, or as Performance-Based Awards under Section 5.2. The aggregate number
of shares of Common Stock subject to Awards that may be granted to any employee
in any twelve month period may not exceed 900,000, subject to adjustment as set
forth in Section 6.2.

        (b) No Award may be granted under this Plan unless, on the date of
grant, the sum of (i) the maximum number of shares issuable at any time pursuant
to such Award, plus (ii) the number of shares that have previously been issued
pursuant to Awards granted under this Plan, other than reacquired shares
available for reissue consistent with any applicable legal limitations, plus
(iii) the maximum number of shares that may be issued at any time after such
date of grant pursuant to Awards that are outstanding on such date, does not
exceed the share limit set forth in Section 1.4(a). Shares that are subject to
or underlie Awards which expire or for any reason are cancelled or terminated,
are forfeited, fail to vest, or for any other reason are not paid or delivered
under this Plan, as well as reacquired shares, shall again, except to the extent
prohibited by law, be available for subsequent Awards under the Plan.

        1.5 Grant of Awards.

        Subject to the express provisions of this Plan, the Committee shall
determine from the class of Eligible Employees those individuals to whom Awards
under this Plan shall be granted, the number of shares of Common Stock subject
to each Award, the price (if any) to be paid for the shares or the Award and, in
the case of performance share awards, in addition to matters addressed in
Section 1.2(b), the specific objectives, goals and performance criteria (such as
an increase in sales, market value, earnings or book value over a base period,
the years of service before vesting, the relevant job classification or level of
responsibility or other factors) that further define the terms of the
performance share award. Each Award shall be evidenced by an Award Agreement
signed by the Corporation and, if required by the Committee, by the Participant.
The Award Agreement shall set forth the material terms and conditions of the
Award established by the Committee consistent with the specific provisions of
this Plan. The grant of an Award is made on the Award Date.

        1.6 Exercise of Awards.

        An Option or Stock Appreciation Right shall be deemed to be exercised
when the Secretary of the Company receives written notice of such exercise from
the Participant, together with payment of the purchase price made in accordance
with Section 2.2(a),



                                       3


except to the extent payment may be permitted to be made following delivery of
written notice of exercise in accordance with Section 2.2(b). Notwithstanding
any other provision of this Plan, the Committee may impose, by rule and in Award
Agreements, such conditions upon the exercise of Awards (including, without
limitation, conditions limiting the time of exercise to specified periods) as
may be required to satisfy applicable regulatory requirements.

        1.7 No Transferability; Limited Exception to Transfer Restrictions.

        (a) Limit On Exercise and Transfer. Unless otherwise expressly provided
in (or pursuant to) this Section 1.7, by applicable law and by the Award
Agreement, as the same may be amended, (i) all Awards are non-transferable and
shall not be subject in any manner to sale, transfer, anticipation, alienation,
assignment, pledge, encumbrance or charge; Awards shall be exercised only by the
Participant; and (ii) amounts payable or shares issuable pursuant to an Award
shall be delivered only to (or for the account of) the Participant.

        (b) Exceptions. The Committee may permit Awards to be exercised by and
paid to certain persons or entities related to the Participant, including but
not limited to members of the Participant's immediate family, charitable
institutions, or trusts or other entities whose beneficiaries or beneficial
owners are members of the Participant's immediate family and/or charitable
institutions, pursuant to such conditions and procedures as the Committee may
establish. Any permitted transfer shall be subject to the condition that the
Committee receive evidence satisfactory to it that the transfer is being made
for estate and/or tax planning purposes on a gratuitous or donative basis and
without consideration (other than nominal consideration). Notwithstanding the
foregoing or Section 1.7(c), Incentive Stock Options and Restricted Stock Awards
shall be subject to any and all additional transfer restrictions under the Code.

        (c) Further Exceptions to Limits On Transfer. The exercise and transfer
restrictions in Section 1.7(a) shall not apply to:

                (i) transfers to the Company,

                (ii) the designation of a beneficiary to receive benefits in the
        event of the Participant's death or, if the Participant has died,
        transfers to or exercise by the Participant's beneficiary, or, in the
        absence of a validly designated beneficiary, transfers by will or the
        laws of descent and distribution,

                (iii) transfers pursuant to a QDRO order if approved or ratified
        by the Committee,

                (iv) if the Participant has suffered a disability, permitted
        transfers or exercises on behalf of the Participant by his or her legal
        representative, or

                (v) the authorization by the Committee of "cashless exercise"
        procedures with third parties who provide financing for the purpose of
        (or who otherwise facilitate) the exercise of Awards consistent with
        applicable laws and the express authorization of the Committee.



                                       4


II. OPTIONS.

        2.1 Grants.

        One or more Options may be granted to any Eligible Employee. Each Option
so granted shall be designated by the Committee in the applicable Award
Agreement as either a Nonqualified Stock Option or an Incentive Stock Option.

        2.2 Option Price.

        (a) The purchase price per share of Common Stock covered by each Option
shall be determined by the Committee, but shall not be less than 100% (110% in
the case of an Incentive Stock Option grant to a Participant who owns more than
10% of the total combined voting power of all classes of stock of the Company)
of the Fair Market Value of the Common Stock on the date the Option is granted.
The purchase price of any shares purchased shall be paid in full at the time of
each purchase in one or a combination of the following methods: (i) in cash or
by check payable to the order of the Company, (ii) if authorized by the
Committee or specified in the Option being exercised, by a promissory note made
by the Participant in favor of the Company, upon the terms and conditions
determined by the Committee, and secured by the Common Stock issuable upon
exercise in compliance with applicable law (including, without limitation, state
corporate law and federal margin requirements), or (iii) if authorized by the
Committee or specified in the Option being exercised, by shares of Common Stock
of the Company already owned by the Participant; provided, however, that the
Committee may in its absolute discretion limit the Participant's ability to
exercise an Award by means other than cash or check, and provided further that
any shares delivered which were initially acquired upon exercise of a stock
option must have been owned by the Participant at least six months as of the
date of delivery. Shares of Common Stock used to satisfy the exercise price of
an Option shall be valued at their Fair Market Value on the date of exercise.

        (b) In addition to the payment methods described in subsection (a), the
Option may provide that the Option can be exercised and payment made by
delivering a properly executed exercise notice together with irrevocable
instructions to a bank or broker to promptly deliver to the Company the amount
of sale or loan proceeds necessary to pay the exercise price and, unless
otherwise allowed by the Committee, any applicable tax withholding under Section
6.6. The Company shall not be obligated to deliver certificates for the shares
unless and until it receives full payment of the exercise price therefor.

        2.3 Option Period.

        Each Option and all rights or obligations thereunder shall expire on
such date as shall be determined by the Committee, but not later than 10 years
after the Award Date, and shall be subject to earlier termination as hereinafter
provided.

        2.4 Exercise of Options.

        Except as otherwise provided in Section 6.3 and 6.4, an Option may
become exercisable, in whole or in part, on the date or dates specified in the
Award Agreement



                                       5


and thereafter shall remain exercisable until the expiration or earlier
termination of the Option. No Option shall be exercisable for at least six
months after the Award Date, except in the case of death or Total Disability.
The Committee may, at any time after grant of the Option and from time to time,
increase the number of shares exercisable at any time so long as the total
number of shares subject to the Option is not increased. No Option shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded. Not less than 10 shares of Common Stock may be purchased
at one time unless the number purchased is the total number at the time
available for purchase under the terms of the Option.

        2.5 Limitations on Grant of Incentive Stock Options.

        (a) To the extent that the aggregate fair market value of stock with
respect to which incentive stock options first become exercisable by a
Participant in any calendar year exceeds $100,000, taking into account both
Common Stock subject to Incentive Stock Options under this Plan and stock
subject to incentive stock options under all other plans of the Company, such
options shall be treated as nonqualified stock options. For purposes of
determining whether the $100,000 limit is exceeded, the fair market value of
stock subject to options shall be determined as of the date the options are
awarded. In reducing the number of options treated as incentive stock options to
meet the $100,000 limit, the most recently granted options shall be reduced
first. To the extent a reduction of simultaneously granted options is necessary
to meet the $100,000 limit, the Company may, in the manner and to the extent
permitted by law, designate which shares of Common Stock are to be treated as
shares acquired pursuant to the exercise of an Incentive Stock Option.

        (b) There shall be imposed in any Award Agreement relating to Incentive
Stock Options such terms and conditions as are required in order that the Option
be an "incentive stock option" as that term is defined in Section 422 of the
Code.

        (c) No Incentive Stock Option may be granted to any person who, at the
time the Incentive Stock Option is granted, owns shares of outstanding Common
Stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company, unless the exercise price of such Option is at least
110% of the Fair Market Value of the stock subject to the Option and such Option
by its terms is not exercisable after the expiration of five years from the date
such Option is granted.

        2.6 Non-Employee Director Awards.

        (a) Participation. Awards under this Section 2.6 shall be made only to
Non-Employee Directors.

        (b) Option Grants. Effective on the day after the Company's 1999 annual
meeting, as and when any person who is not then an officer or employee of the
Company shall become a director of the Company, there shall be granted
automatically (without any action by the Board or the Committee) a Nonqualified
Stock Option (the grant or award date of which shall be the date such person
takes office) to such person to purchase 9,000 shares of Common Stock.



                                       6


        (c) Subsequent Annual Options. In each calendar year during the term of
the Plan, commencing with the 2000 annual meeting, there shall be granted
automatically (without any action by the Committee or the Board) a Nonqualified
Stock Option to purchase 9,000 shares of Common Stock to each Non-Employee
Director who is re-elected as a director of the Company or who continues as a
director (the grant or award date of which shall be the date of the annual
meeting of shareholders in each such year).

        (d) Option Price. The purchase price per share of the Common Stock
covered by each Option granted pursuant to this Section 2.6 shall be one hundred
percent of the Fair Market Value of the Common Stock on the Award Date. The
purchase price of any shares purchased shall be paid in full at the time of each
purchase in cash or by check or in shares of Common Stock valued at their Fair
Market Value on the business day next preceding the date of exercise of the
Option, or partly in such shares and partly in cash.

        (e) Option Period. Each Option granted under this Section 2.6 and all
rights or obligations thereunder shall expire on the fifth anniversary of the
Award Date and shall be subject to earlier termination as provided below.

        (f) Exercise of Options. Except as otherwise provided in Sections 2.6(g)
and 2.6(h), each Option granted under this Section 2.6 shall become exercisable
(i) as to one-quarter of the covered shares on the earlier of (A) the first
anniversary of the Award Date, or (B) the day immediately preceding the first
regularly scheduled Annual Meeting of shareholders first occurring after the
Award Date; and (ii) as to an additional 1/48th of the covered shares in each of
the 36 months thereafter (using the Award Date as the date of monthly vesting).

        (g) Termination of Directorship. If a Non-Employee Director
Participant's services as a member of the Board terminate, each Option granted
pursuant to Section 2.6(b) or (c) hereof held by such Non-Employee Director
Participant which is not then exercisable shall terminate; provided, however,
that if a Non-Employee Director Participant's services as a member of the Board
terminate by reason of death or Total Disability, the Committee may, in its
discretion, consider to be exercisable a greater portion of any such Option than
would otherwise be exercisable, upon such terms as the Committee shall
determine. If a Non-Employee Director Participant's services as a member of the
Board terminate by reason of death or Total Disability, any portion of any such
Option which is then exercisable may be exercised for one year after the date of
such termination or the balance of such Option's term, whichever period is
shorter. If a Non-Employee Director Participant's services as a member of the
Board terminate for any other reason, any portion of any such Option which is
then exercisable may be exercised for three months after the date of such
termination or the balance of such Option's term, whichever period is shorter.

        (h) Acceleration Upon an Event. Immediately prior to the occurrence of
an Event, in order to protect the holders of Options granted under this Section
2.6, each Option granted under Section 2.6(b) or (c) hereof shall become
exercisable in full.

        (i) Adjustments. The specific numbers of shares stated in the foregoing
provisions of Section 2.6(b) and (c) hereof and the consideration payable for
such shares



                                       7


shall be subject to adjustment in certain events as provided in Section 6.2 of
this Plan; provided, however, that the specific number of shares stated in
Section 2.6(b) and in Section 2.6(c) shall not be adjusted, unless such
adjustment is approved by the Board, in connection with a split or reverse split
of the Common Stock.

        2.7 Options and Rights in Substitution for Stock Options Granted by
Other Corporations.

        Options and Stock Appreciation Rights may be granted to Eligible
Employees under this Plan in substitution for employee stock options granted by
other entities to persons who are or who will become Eligible Employees in
respect of the Company, in connection with a distribution, merger or
reorganization by or with the granting entity or an affiliated entity, or the
acquisition by the Company, directly or indirectly, of all or a substantial part
of the stock or assets of the other entity.

        2.8 Adjustments, No Repricing Without Prior Shareholder Approval.

        Subject to Section 1.4 and Section 6.7 and the specific limitations on
Awards contained in this Plan, the Committee from time to time may authorize,
generally or in specific cases only, for the benefit of any Eligible Employee
any adjustment in the exercise or repurchase price (except as set forth below),
vesting schedule, the number of shares subject to, the restrictions upon or the
term of, an Award granted under this Article by cancellation of an outstanding
Award and a subsequent regranting of an Award, by amendment, by substitution of
an outstanding Award, by waiver or by other legally valid means. Such amendment
or other action may result among other changes in an exercise or purchase price
which is higher or lower than the exercise or purchase price of the original or
prior Award (except as set forth below), provide for a greater or lesser number
of shares subject to the Award, or provide for a longer or shorter vesting or
exercise period. Notwithstanding the foregoing, in no case shall the per share
exercise price of any Option or related Stock Appreciation Right be reduced (by
amendment, substitution, cancellation and regrant or other means) without
stockholder approval to a price less than the Fair Market Value of a share of
Common Stock on the related Award Date.

III. STOCK APPRECIATION RIGHTS.

        3.1 Grants.

        In its discretion, the Committee may grant Stock Appreciation Rights
concurrently with the grant of Options. A Stock Appreciation Right shall extend
to all or a portion of the shares covered by the related Option. A Stock
Appreciation Right shall entitle the Participant who holds the related Option,
upon exercise of the Stock Appreciation Right and surrender of the related
Option, or portion thereof, to the extent the Stock Appreciation Right and
related Option each were previously unexercised, to receive payment of an amount
determined pursuant to Section 3.3. Any Stock Appreciation Right granted in
connection with an Incentive Stock Option shall contain such terms as may be
required to comply with the provisions of Section 422 of the Code and the
regulations promulgated thereunder. In its discretion, the Committee may also
grant Stock Appreciation Rights independently of any Option subject to such
conditions as the Committee may in its absolute discretion provide.



                                       8


        3.2 Exercise of Stock Appreciation Rights.

        (a) A Stock Appreciation Right granted concurrently with an Option shall
be exercisable only at such time or times, and to the extent, that the related
Option shall be exercisable and only when the Fair Market Value of the stock
subject to the related Option exceeds the exercise price of the related Option.

        (b) In the event that a Stock Appreciation Right granted concurrently
with an Option is exercised, the number of shares of Common Stock subject to the
related Option shall be charged against the maximum amount of Common Stock that
may be issued or transferred pursuant to Awards under this Plan. The number of
shares subject to the Stock Appreciation Right and the related Option of the
Participant shall also be reduced by such number of shares.

        (c) If a Stock Appreciation Right granted concurrently with an Option
extends to less than all the shares covered by the related Option and if a
portion of the related Option is thereafter exercised, the number of shares
subject to the unexercised Stock Appreciation Right shall be reduced only if and
to the extent that the remaining number of shares covered by such related Option
is less than the remaining number of shares subject to such Stock Appreciation
Right.

        (d) A Stock Appreciation Right granted independently of any Option shall
be exercisable pursuant to the terms of the Award Agreement but in no event
earlier than six months after the Award Date, except in the case of death or
Total Disability.

        3.3 Payment.

        (a) Upon exercise of a Stock Appreciation Right and surrender of an
exercisable portion of the related Option, the Participant shall be entitled to
receive payment of an amount determined by multiplying

                (i) the difference obtained by subtracting the exercise price
        per share of Common Stock under the related Option from the Fair Market
        Value of a share of Common Stock on the date of exercise of the Stock
        Appreciation Right, by

                (ii) the number of shares with respect to which the Stock
        Appreciation Right shall have been exercised.

        (b) The Committee, in its sole discretion, may settle the amount
determined under paragraph (a) above solely in cash, solely in shares of Common
Stock (valued at Fair Market Value on the date of exercise of the Stock
Appreciation Right), or partly in such shares and partly in cash, provided that
the Committee shall have determined that such exercise and payment are
consistent with applicable law. In any event, cash shall be paid in lieu of
fractional shares. Absent a determination to the contrary, all Stock
Appreciation Rights shall be settled in cash as soon as practicable after
exercise. The exercise price for the Stock Appreciation Right shall be the
exercise price of the related Option. Notwithstanding the foregoing, the
Committee may, in the Award Agreement, determine the maximum amount of cash or
stock or a combination thereof which may be delivered upon exercise of a Stock
Appreciation Right.



                                       9


        (c) Upon exercise of a Stock Appreciation Right granted independently of
any Option, the Participant shall be entitled to receive payment of an amount
based on a percentage, specified in the Award Agreement, of the difference
obtained by subtracting the Fair Market Value per share of Common Stock on the
Award Date from the Fair Market Value per share of Common Stock on the date of
exercise of the Stock Appreciation Right. Such amount shall be paid as described
in paragraph (b) above.

IV. RESTRICTED STOCK AWARDS.

        4.1 Grants.

        Subject to Section 1.4, the Committee may, in its discretion, grant one
or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock
Award agreement shall specify the number of shares of Common Stock to be issued
to the Participant, the date of such issuance, the price, if any, to be paid for
such shares by the Participant and the restrictions imposed on such shares,
which restrictions shall not terminate earlier than six months after the Award
Date. Stock certificates evidencing shares of Restricted Stock pending the lapse
of the restrictions shall bear a legend making appropriate reference to the
restrictions imposed hereunder and shall be held by the Corporation or by a
third party designated by the Committee until the restrictions on such shares
shall have lapsed and the shares shall have vested in accordance with the
provisions of the Award. Upon issuance of the Restricted Stock Award, the
Participant may be required to provide such further assurance and documents as
the Committee may require to enforce the restrictions.

        4.2 Restrictions.

        (a) Shares of Common Stock included in Restricted Stock Awards may not
be sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until such shares have vested.

        (b) Unless otherwise provided in the applicable Award Agreement,
Participants receiving Restricted Stock shall be entitled to dividend and voting
rights for the shares issued even though they are not vested, provided that such
rights shall terminate immediately as to any forfeited Restricted Stock.

        (c) In the event that the Participant shall have paid cash in connection
with the Restricted Stock Award, the Award Agreement shall specify whether and
to what extent such cash shall be returned upon a forfeiture (with or without an
earnings factor).

        4.3 Return to the Corporation.

        Unless the Committee otherwise expressly provides, shares of Restricted
Stock that remain subject to restrictions at the time of termination of
employment or are subject to other conditions to vesting that have not been
satisfied by the time specified in the applicable Award Agreement shall not vest
and shall be returned to the Corporation in such manner and on such terms as the
Committee shall therein provide.



                                       10


V. PERFORMANCE SHARE AWARDS.

        5.1 Grants.

        The Committee may, in its discretion, grant Performance Share Awards to
Eligible Employees based upon such factors as the Committee shall determine. A
Performance Share Award agreement shall specify the number of shares of Common
Stock subject to the Performance Share Award, the price, if any, to be paid for
such shares by the Participant and the conditions upon which issuance to the
Participant shall be based, which issuance shall not be earlier than six months
after the Award Date.

        5.2 Special Performance-Based Share Awards.

        Without limiting the generality of the foregoing, and in addition to
options granted under other provisions of this Plan, other performance-based
awards within the meaning of Section 162(m) of the Code ("Performance-Based
Awards"), whether in the form of restricted stock, performance stock, phantom
stock, or other rights, the vesting or payment of which depends on the degree of
achievement of the Performance Goals relative to pre-established targeted levels
for the Company and/or one or more of its Subsidiaries or divisions, may be
granted under this Plan. An award that is intended to satisfy the requirements
of this Section 5.2 shall be designated as a Performance-Based Award at the time
of grant.

        (a) Eligible Class. The eligible class of persons for Performance-Based
Awards under this Section shall be the executive officers of the Company.

        (b) Performance Goal Alternatives. The specific performance goals for
Performance-Based Awards granted under this Section shall be, on an absolute or
relative basis, one or more of the Performance Goals, as selected by the
Committee in its sole discretion. The Committee shall establish in the
applicable Award Agreement the specific performance target(s) relative to the
Performance Goal(s) which must be attained before the compensation under the
Performance-Based Award becomes payable. The specific targets shall be
determined within the time period permitted under Section 162(m) of the Code
(and any regulations issued thereunder) so that such targets are considered to
be pre-established and so that the attainment of such targets is substantially
uncertain at the time of their establishment. The applicable performance
measurement period may not be less than one nor more than 10 years.

        (c) Maximum Performance-Based Award. Notwithstanding any other provision
of the Plan to the contrary, the maximum number of shares which may be delivered
pursuant to awards that are granted as Performance-Based Awards under this
Section 5.2 to any Participant in any calendar year shall not exceed 900,000
shares, either individually or in the aggregate, subject to adjustment as
provided in Section 6.2. Awards that are cancelled during the year shall be
counted against this limit to the extent required by Section 162(m) of the Code.

        (d) Committee Certification. Before any Performance-Based Award under
this Section 5.2 is paid, the Committee must certify in writing that the
Performance Goal(s) and any other material terms of the Performance-Based Award
were satisfied;



                                       11


provided, however, that a Performance-Based Award may be paid without regard to
the satisfaction of the applicable Performance Goal in the event of a change in
control event in accordance with Section 162(m) of the Code and Section 6.2.

        (e) Terms and Conditions of Awards. The Committee will have the
discretion to determine the restrictions or other limitations of the individual
awards granted under this Section 5.2 including the authority to reduce awards,
payouts or vesting or to pay no awards, in its sole discretion, if the Committee
preserves such authority at the time of grant by language to this effect in its
authorizing resolutions or otherwise.

        (f) Adjustments for Changes in Capitalization and other Material
Changes. In the event of a change in corporate capitalization, such as a stock
split or stock dividend, or a corporate transaction, such as a merger,
consolidation, spinoff, reorganization or similar event, or any partial or
complete liquidation of the Company, or any similar event consistent with
regulations issued under Section 162(m) of the Code including, without
limitation, any material change in accounting policies or practices affecting
the Company and/or the Performance Goals or targets, then the Committee may make
adjustments to the Performance Goals and targets relating to outstanding
Performance-Based Awards to the extent such adjustments are made to reflect the
occurrence of such an event; provided, however, that adjustments described in
this subsection may be made only to the extent that the occurrence of an event
described herein was unforeseen at the time the targets for a Performance-Based
Award were established by the Committee.

VI. OTHER PROVISIONS.

        6.1 Rights of Eligible Employees, Participants and Beneficiaries.

        (a) Status as an Eligible Employee shall not be construed as a
commitment that any Award will be made under this Plan to any Eligible Employee
generally.

        (b) Nothing contained in this Plan (or in Award Agreements or in any
other documents related to this Plan or to Awards) shall confer upon any
Eligible Employee or Participant any right to continue in the service or employ
of the Company or constitute any contract or agreement of service or employment,
or interfere in any way with the right of the Company to reduce such person's
compensation or other benefits or to terminate the services or employment of
such Eligible Employee or Participant, with or without cause, but nothing
contained in this Plan or any document related thereto shall affect any other
contractual right of any Eligible Employee or Participant.

        (c) No Participant, Beneficiary or other person shall have any right,
title or interest in any fund or in any specific asset (including shares of
Common Stock) of the Company by reason of any Award granted hereunder. Neither
the provisions of this Plan (or of any documents related hereto), nor the
creation or adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan shall create, or be construed to create, a trust of any
kind or a fiduciary relationship between the Company and any Participant,
Beneficiary or other person. To the extent that a Participant, Beneficiary or
other person acquires a right to receive an Award hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Company.



                                       12


        6.2 Adjustments Upon Changes in Capitalization.

        (a) If the outstanding shares of Common Stock are changed into or
exchanged for cash or a different number or kind of shares or securities of the
Company or of another issuer, or if additional shares or new or different
securities are distributed with respect to the outstanding shares of the Common
Stock, through a reorganization or merger to which the Company is a party, or
through a combination, consolidation, recapitalization, reclassification, stock
split, stock dividend, reverse stock split, stock consolidation or other capital
change or adjustment, an appropriate adjustment shall be made in the number and
kind of shares or other consideration that is subject to or may be delivered
under this Plan and pursuant to outstanding Awards. A corresponding adjustment
to the consideration payable with respect to Awards granted prior to any such
change and to the price, if any, paid in connection with Restricted Stock Awards
or Performance Share Awards or Performance-Based Awards shall also be made. Any
such adjustment, however, shall be made without change in the total payment, if
any, applicable to the portion of the Award not exercised but with a
corresponding adjustment in the price for each share. Corresponding adjustments
shall be made with respect to Stock Appreciation Rights based upon the
adjustments made to the Options to which they are related or, in the case of
Stock Appreciation Rights granted independently of any Option, based upon the
adjustments made to Common Stock.

        (b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
the Plan and outstanding Awards shall terminate. Notwithstanding the foregoing,
the Committee may provide in writing in connection with, or in contemplation of,
any such transaction for any or all of the following alternatives (separately or
in combinations): (i) for the assumption by the successor corporation of the
Awards theretofore granted or the substitution by such corporation for such
Awards of awards covering the stock of the successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices; (ii) for the continuance of this Plan by such successor
corporation in which event this Plan and the Awards shall continue in the manner
and under the terms so provided; or (iii) for the payment in cash or shares of
Common Stock in lieu of and in complete satisfaction of such Awards.

        (c) In adjusting Awards to reflect the changes described in this Section
6.2, or in determining that no such adjustment is necessary, the Committee may
rely upon the advice of independent counsel and accountants of the Company, and
the determination of the Committee shall be conclusive. No fractional shares of
stock shall be issued under this Plan on account of any such adjustment.

        (d) In any of such events, the Committee may take such action prior to
such event to the extent that the Committee deems the action necessary to permit
the Participant to realize the benefits intended to be conveyed with respect to
the underlying shares in the same manner as is or will be available to
shareholders generally.



                                       13


        6.3 Termination of Employment.

        (a) If the Participant's service to or employment by the Company
terminates for any reason other than Retirement, death or Total Disability, the
Participant shall have, subject to earlier termination pursuant to or as
contemplated by Section 2.3, three months or such shorter period as is provided
in the Award Agreements from the date of termination of services or employment
to exercise any Option to the extent it shall have become exercisable on the
date of termination of employment, and any Option not exercisable on that date
shall terminate. Notwithstanding the preceding sentence, in the event the
Participant is discharged for cause as determined by the Committee in its sole
discretion, all Options shall lapse immediately upon such termination of
services or employment.

        (b) If the Participant's service to or employment by the Company
terminates as a result of Retirement or Total Disability, the Participant or
Participant's Personal Representative, as the case may be, shall have, subject
to earlier termination pursuant to or as contemplated by Section 2.3, 12 months
(or, in the case of Incentive Stock Options where the Participant terminates as
a result of Retirement, three months) or such shorter period as is provided in
the Award Agreements from the date of termination of services or employment to
exercise any Option to the extent it shall have become exercisable by the date
of termination of services or employment and any Option not exercisable on that
date shall terminate.

        (c) If the Participant's service to or employment by the Company
terminates as a result of death while the Participant is rendering services to
the Company or is employed by the Company or during the 12 month period (or, in
the case of Incentive Stock Options where the Participant has terminated as a
result of Retirement, three month period) referred to in subsection (b) above,
the Participant's Option shall be exercisable by the Participant's Beneficiary,
subject to earlier termination pursuant to or as contemplated by Section 2.3,
during the 12 month period or such shorter period as is provided in the Award
Agreements following the Participant's death, as to all or any part of the
shares of Common Stock covered thereby to the extent exercisable on the date of
death (or earlier termination).

        (d) Each Stock Appreciation Right granted concurrently with an Option
shall have the same termination provisions and exercisability periods as the
Option to which it relates. The termination provisions and exercisability
periods of any Stock Appreciation Right granted independently of an Option shall
be established in accordance with Section 3.2(d). The exercisability period of a
Stock Appreciation Right shall not exceed that provided in Section 2.3 or in the
related Award Agreement and the Stock Appreciation Right shall expire at the end
of such exercisability period.

        (e) In the event of termination of services to or employment with the
Company for any reason, (i) shares of Common Stock subject to the Participant's
Restricted Stock Award shall be forfeited in accordance with the provisions of
the related Award Agreement to the extent such shares have not become vested on
that date; and (ii) shares of Common Stock subject to the Participant's
Performance Share Award or Performance-Based Award shall be forfeited in
accordance with the provisions of the



                                       14


related Award Agreement to the extent such shares have not been issued or become
issuable on that date.

        (f) In the event of termination of services to or employment with the
Company for any reason, other than discharge for cause, the Committee may, in
its discretion, increase the portion of the Participant's Award available to the
Participant, or Participant's Beneficiary or Personal Representative, as the
case may be, upon such terms as the Committee shall determine.

        (g) If an entity ceases to be a Subsidiary, such action shall be deemed
for purposes of this Section 6.3 to be a termination of services or employment
of each consultant or employee of that entity who does not continue as a
consultant or as an employee of another entity within the Company.

        (h) Upon forfeiture of a Restricted Stock Award pursuant to this Section
6.3, the Participant, or his or her Beneficiary or Personal Representative, as
the case may be, shall transfer to the Company the portion of the Restricted
Stock Award not vested at the date of termination of services or employment,
without payment of any consideration by the Company for such transfer unless the
Participant paid a purchase price in which case repayment, if any, of that price
shall be governed by the Award Agreement. Notwithstanding any such transfer to
the Company, or failure, refusal or neglect to transfer, by the Participant, or
his or her Beneficiary or Personal Representative, as the case may be, such
nonvested portion of any Restricted Stock Award shall be deemed transferred
automatically to the Company on the date of termination of services or
employment. The Participant's original acceptance of the Restricted Stock Award
shall constitute his or her appointment of the Company and each of its
authorized representatives as attorney(s)-in-fact to effect such transfer and to
execute such documents as the Company or such representatives deem necessary or
advisable in connection with such transfer.

        6.4 Acceleration of Awards.

        Unless prior to an Event the Board determines that, upon its occurrence,
there shall be no acceleration of Awards or determines those Awards which shall
be accelerated and the extent to which they shall be accelerated, upon the
occurrence of an Event (i) each Option and each related Stock Appreciation Right
shall become immediately exercisable to the full extent theretofore not
exercisable, (ii) Restricted Stock shall immediately vest free of restrictions
and (iii) the number of shares covered by each Performance Share Award or
Performance-Based Award shall be issued to the Participant; subject, however, to
compliance with applicable regulatory requirements, including without limitation
and Section 422 of the Code. For purposes of this section only, the Board shall
mean the Board as constituted immediately prior to the Event.

        6.5 Government Regulations.

        This Plan, the granting of Awards under this Plan and the issuance or
transfer of shares of Common Stock (and/or the payment of money) pursuant
thereto are subject to all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or governmental agency
(including without limitation "no action" positions of




                                       15


the Commission) which may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Without limiting the generality
of the foregoing, no Awards may be granted under this Plan, and no shares shall
be issued by the Company, nor cash payments made by the Company, pursuant to or
in connection with any such Award, unless and until, in each such case, all
legal requirements applicable to the issuance or payment have, in the opinion of
counsel to the Company, been complied with. In connection with any stock
issuance or transfer, the person acquiring the shares shall, if requested by the
Company, give assurances satisfactory to counsel to the Company in respect of
such matters as the Company may deem desirable to assure compliance with all
applicable legal requirements.

        6.6 Tax Withholding.

        (a) Upon the disposition by a Participant or other person of shares of
Common Stock acquired pursuant to the exercise of an Incentive Stock Option
prior to satisfaction of the holding period requirements of Section 422 of the
Code, or upon the exercise of a Nonqualified Stock Option, the exercise of a
Stock Appreciation Right, the vesting of a Restricted Stock Award or the payment
of a Performance Share Award or Performance-Based Award, the Company shall have
the right to (i) require such Participant or such other person to pay by cash or
check payable to the Company, the amount of any taxes which the Company may be
required to withhold with respect to such transactions or (ii) deduct from
amounts paid in cash the amount of any taxes which the Company may be required
to withhold with respect to such cash amounts. The above notwithstanding, in any
case where a tax is required to be withheld in connection with the issuance or
transfer of shares of Common Stock under this Plan, the Participant may elect,
pursuant to such rules as the Committee may establish, to have the Company
reduce the number of such shares issued or transferred by the appropriate number
of shares to accomplish such withholding; provided, the Committee may impose
such conditions on the payment of any withholding obligation as may be required
to satisfy applicable regulatory requirements.

        (b) The Committee may, in its discretion, permit a loan from the Company
to a Participant in the amount of any taxes which the Company may be required to
withhold with respect to shares of Common Stock received pursuant to a
transaction described in subsection (a) above. Such a loan will be for a term,
at a rate of interest and pursuant to such other terms and rules as the
Committee may establish.

        6.7 Amendment, Termination and Suspension.

        (a) The Board may, at any time, terminate or, from time to time, amend,
modify or suspend this Plan (or any part hereof). No Awards may be granted
during any suspension of this Plan or after termination of this Plan, but the
Committee shall retain jurisdiction as to Awards then outstanding in accordance
with the terms of this Plan.

        (b) To the extent then required under Sections 162, 422 or 424 of the
Code or any other applicable law, or deemed necessary or advisable by the Board,
any amendment to this Plan shall be subject to shareholder approval.



                                       16


        (c) Without limiting any other express authority of the Committee under
(but subject to) the express limits of this Plan, the Committee by agreement or
resolution may waive conditions of or limitations on Awards to Participants that
the Committee in the prior exercise of its discretion has imposed, without the
consent of a Participant, and may make other changes to the terms and conditions
of Awards that do not affect in any manner materially adverse to the
Participant, the Participant's rights and benefits under an Award.

        (d) No amendment, suspension or termination of this Plan or change of or
affecting any outstanding Award shall, without written consent of the
Participant, affect in any manner materially adverse to the Participant any
rights or benefits of the Participant or obligations of the Company under any
Award granted under this Plan prior to the effective date of such change.
Changes contemplated by Section 6.2 shall not be deemed to constitute changes or
amendments for purposes of this Section 6.7.

        6.8 Privileges of Stock Ownership; Nondistributive Intent.

        A Participant shall not be entitled to the privilege of stock ownership
as to any shares of Common Stock not actually issued to him or her. Upon the
issuance and transfer of shares to the Participant, unless a registration
statement is in effect under the Securities Act and applicable state securities
law, relating to such issued and transferred Common Stock and there is available
for delivery a prospectus meeting the requirements of Section 10 of the
Securities Act, the Common Stock may be issued and transferred to the
Participant only if he or she represents and warrants in writing to the Company
that the shares are being acquired for investment and not with a view to the
resale or distribution thereof. No shares shall be issued and transferred unless
and until there shall have been full compliance with any then applicable
regulatory requirements (including those of exchanges upon which any Common
Stock of the Company may be listed).

        6.9 Effective Date of the Plan.

        This Plan shall be effective upon its approval by the Board (the
"Effective Date"), subject to approval by the shareholders of the Company within
twelve months from the date of such Board approval.

        6.10 Term of the Plan.

        Unless previously terminated by the Board, this Plan shall terminate at
the close of business on the day before the tenth anniversary of the Effective
Date, and no Awards shall be granted under it thereafter, but such termination
shall not affect any Award theretofore granted. Unless otherwise expressly
provided in this Plan or in an applicable Award Agreement, any Award granted
prior to the Plan's termination date may extend beyond such date, and all
authority of the Committee with respect to Awards hereunder, including the
authority to amend an Award, shall continue during any suspension of this Plan
and in respect of Awards outstanding on the termination date.



                                       17


        6.11 Governing Law.

        This Plan and the documents evidencing Awards and all other related
documents shall be governed by, and construed in accordance with, the laws of
the State of California. If any provision shall be held by a court of competent
jurisdiction to be invalid and unenforceable, the remaining provisions of this
Plan shall continue to be fully effective.

        6.12 Plan Construction.

        (a) Rule 16b-3. It is the intent of the Company that the Awards and
transactions permitted by Awards generally satisfy and be interpreted in a
manner that, in the case of Participants who are or may be subject to Section 16
of the Exchange Act, satisfies the applicable requirements of Rule 16b-3
promulgated thereunder so that such persons (unless they otherwise agree) will
be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section
16 of the Exchange Act in respect of those transactions and will not be
subjected to avoidable liability.

        (b) Section 162(m). It is the further intent of the Company that (to the
extent the Company or Awards under this Plan may be or become subject to
limitations on deductibility under Section 162(m) of the Code), Options or SARs
granted with an exercise or base price not less than Fair Market Value on the
date of grant and Performance-Based Awards under Section 5.2 of this Plan that
are granted to or held by a person subject to Section 162(m) of the Code will
qualify as performance-based compensation or otherwise be exempt from
deductibility limitations under Section 162(m) of the Code, to the extent that
the Committee authorizing the Award (or the payment thereof, as the case may be)
satisfies any applicable administrative requirements thereof.

        6.13 Captions.

        Captions and headings are given to the sections and subsections of this
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
this Plan or any provision thereof.

        6.14 Non-Exclusivity of Plan.

        Nothing in this Plan shall limit or be deemed to limit the authority of
the Board or the Committee to grant awards or authorize any other compensation,
with or without reference to the Common Stock, under any other plan or
authority.

        6.15 No Corporate Action Restriction.

        The existence of the Plan, the Award Agreements and the Awards granted
hereunder shall not limit, affect or restrict in any way the right or power of
the Board or the shareholders of the Corporation to make or authorize: (a) any
adjustment, recapitalization, reorganization or other change in the
Corporation's or any Subsidiary's capital structure or its business, (b) any
merger, amalgamation, consolidation or change



                                       18


in the ownership of the Corporation or any subsidiary, (c) any issue of bonds,
debentures, capital, preferred or prior preference stock ahead of or affecting
the Corporation's or any Subsidiary's capital stock or the rights thereof, (d)
any dissolution or liquidation of the Corporation or any Subsidiary, (e) any
sale or transfer of all or any part of the Corporation or any Subsidiary's
assets or business, or (f) any other corporate act or proceeding by the
Corporation or any Subsidiary. No participant, beneficiary or any other person
shall have any claim under any Award or Award Agreement against any member of
the Board or the Committee, or the Corporation or any employees, officers or
agents of the Corporation or any Subsidiary, as a result of any such action.

        6.16 Other Company Benefit and Compensation Program.

        Payments and other benefits received by a Participant under an Award
made pursuant to this Plan shall not be deemed a part of a Participant's
compensation for purposes of the determination of benefits under any other
employee welfare or benefit plans or arrangements, if any, provided by the
Corporation or any Subsidiary, except where the Committee or the Board expressly
otherwise provides or authorizes in writing. Awards under this Plan may be made
in addition to, in combination with, as alternatives to or in payment of grants,
awards or commitments under any other plans or arrangements of the Company or
the Subsidiaries.

VII. DEFINITIONS.

        7.1 Definitions.

        (a) "Award" means an Option, which may be designated as a Nonqualified
Stock Option or an Incentive Stock Option, a Stock Appreciation Right, a
Restricted Stock Award, Performance Share Award or Performance-Based Award, in
each case granted under this Plan.

        (b) "Award Agreement" means a written agreement setting forth the terms
of an Award.

        (c) "Award Date" means the date upon which the Committee took the action
granting an Award or such later date as is prescribed by the Committee or, in
the case of Options granted under Section 2.6, the date specified in such
Section 2.6.

        (d) "Beneficiary" means the person, persons, trust or trusts entitled by
will or the laws of descent and distribution to receive the benefits specified
under this Plan in the event of a Participant's death, and shall mean the
Participant's executor or administrator if no other Beneficiary is designated
and able to act under the circumstances.

        (e) "Board" means the Board of Directors of the Company.

        (f) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.

        (g) "Commission" means the Securities and Exchange Commission.



                                       19


        (h) "Committee" means the Board or a committee appointed by the Board to
administer this Plan, which committee shall be comprised only of two or more
directors or such greater number of directors as may be required under
applicable law, each of whom (i) in respect of any transaction at a time when
the affected Participant may be subject to Section 162(m) of the Code, shall be
an "outside director" within the meaning of Section 162(m) of the Code and (ii)
in respect of any transaction at a time when the affected Participant may be
subject to Section 16 of the Exchange Act, shall be a "Non-Employee Director"
within the meaning of Rule 16b-3(b)(3) under the Exchange Act.

        (i) "Common Stock" means the Common Stock of the Company.

        (j) "Company" means Pacific Sunwear of California, Inc., a California
corporation, and its successors.

        (k) "Eligible Employee" means an officer or key employee of the Company
and consultants to the Company whether or not such consultants are employees.

        (l) "Event" means any of the following:

                (i) Approval by the shareholders of the Company of the
        dissolution or liquidation of the Company;

                (ii) Approval by the shareholders of the Company of an agreement
        to merge or consolidate, or otherwise reorganize, with or into one or
        more entities other than Subsidiaries, as a result of which less than
        50% of the outstanding voting securities of the surviving or resulting
        entity are, or are to be, owned by former shareholders of the Company;
        or

                (iii) Approval by the shareholders of the Company of the sale of
        substantially all of the Company's business assets to a person or entity
        which is not a Subsidiary.

        (m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

        (n) "Fair Market Value" means (i) if the stock is listed or admitted to
trade on a national securities exchange, the closing price of the stock on the
Composite Tape, as published in the Western Edition of The Wall Street Journal,
of the principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date, then the closing price of the stock as quoted on such Composite Tape on
the next preceding date on which there was trading in such shares; (ii) if the
stock is not listed or admitted to trade on a national securities exchange, the
last price for the stock on such date, as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market
Reporting System or a similar organization if the NASD is no longer reporting
such information; (iii) if the stock is not listed or admitted to trade on a
national securities exchange and is not reported on the National Market
Reporting System, the mean between the bid and asked price for the stock on such
date, as furnished by the NASD; or (iv) if the stock is not listed or admitted
to trade on a national securities exchange, is not reported on the National
Market Reporting System and if bid and asked prices for the



                                       20


stock are not furnished by the NASD or a similar organization, the values
established by the Committee for purposes of the Plan.

        (o) "Incentive Stock Option" means an option which is designated as an
incentive stock option within the meaning of Section 422 of the Code, the award
of which contains such provisions as are necessary to comply with that section.

        (p) "Non-Employee Director" means a member of the Board who is not an
officer or employee of the Company.

        (q) "Non-Employee Director Participant" means a Non-Employee Director
who has been granted an Option under Section 2.6.

        (r) "Nonqualified Stock Option" means an option which is designated as a
Nonqualified Stock Option and shall include any Option intended as an Incentive
Stock Option that fails to meet the applicable legal requirements thereof.

        (s) "Option" means an option to purchase Common Stock under this Plan.
An Option shall be designated by the Committee as a Nonqualified Stock Option or
an Incentive Stock Option.

        (t) "Participant" means an Eligible Employee who has been granted an
Award and a Non-Employee Director who has received an Option under Section 2.6.

        (u) "Performance Goal" means any one or more of the criteria set forth
on Exhibit A hereto.

        (v) "Performance-Based Awards" shall mean an Award of a right to receive
shares of Common Stock or other compensation (including cash) under Section 5.2,
the issuance or payment of which is contingent upon, among other conditions, the
attainment of performance objectives specified by the Committee.

        (w) "Performance Share Award" means an award of shares of Common Stock
under Section 5.1, the issuance of which is contingent upon attainment of
performance objectives specified by the Committee.

        (x) "Personal Representative" means the person or persons who, upon the
disability or incompetence of a Participant, shall have acquired on behalf of
the Participant by legal proceeding or otherwise the power to exercise the
rights and receive the benefits specified in this Plan.

        (y) "Plan" means the Pacific Sunwear of California, Inc. 1999 Stock
Award Plan, as it may be amended from time to time.

        (z) "QDRO" shall mean an order requiring the transfer of an Award or
portion thereof pursuant to a state domestic relations law to the spouse, former
spouse, child or other dependent of a Participant. Such order must be in a form
substantially identical to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended.



                                       21


        (aa) "Restricted Stock" means those shares of Common Stock issued
pursuant to a Restricted Stock Award which are subject to the restrictions set
forth in the related Award Agreement.

        (bb) "Restricted Stock Award" means an award of a fixed number of shares
of Common Stock to the Participant subject, however, to payment of such
consideration, if any, and such forfeiture provisions, as are set forth in the
Award Agreement.

        (cc) "Retirement" means retirement from employment by or providing
services to the Company or any Subsidiary after age 65 and, in the case of
employees, in accordance with the retirement policies of the Company then in
effect.

        (dd) "Securities Act" means the Securities Act of 1933, as amended.

        (ee) "Stock Appreciation Right" means a right to receive a number of
shares of Common Stock or an amount of cash, or a combination of shares and
cash, determined as provided in Section 3.3(a).

        (ff) "Subsidiary" means any corporation or other entity a majority or
more of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.

        (gg) "Total Disability" means a "permanent and total disability" within
the meaning of Section 22(e)(3) of the Code and, in the case of Awards other
than Incentive Stock Options, such other disabilities, infirmities, afflictions
or conditions as the Committee by rule may include.



                                       22


                                    EXHIBIT A

                                PERFORMANCE GOALS

        The Performance Targets shall mean any one or a combination of the
following.

        EBIT. "EBIT" means Net Income before interest expense and taxes.

        EBITDA. "EBITDA" means Net Income before interest expense, taxes,
depreciation and amortization.

        EPS. "EPS" means Net Income divided by the weighted average number of
common shares outstanding. Unless otherwise provided by the Committee in the
related Award Agreement, common shares outstanding shall be adjusted to include
the dilutive effect of stock options, restricted stock and other dilutive
financial instruments.

        EXPENSE REDUCTION. "Expense Reduction" means reduction in actual expense
or an improvement in the expense to Net Sales ratio compared to a target or
prior year actual expense to Sales ratio.

        DEBT TO EBITDA. "Debt to EBITDA" means the ratio of debt to EBITDA.

        INTEREST COVERAGE. "Interest Coverage" means the ratio of EBITDA to
interest expense.

        INVENTORY TURNS. "Inventory Turns" means the ratio of total cost of
goods sold on a historical basis to average net inventory.

        NET INCOME. "Net Income" means the difference between total Net Sales
and total costs and expenses, including income taxes.

        NET SALES. "Net Sales" means net sales.

        OPERATING CASH FLOW. "Operating Cash Flow" means the net cash provided
by operating activities less net cash used by operations and investing
activities as shown on the statement of cash flows.

        PRE-TAX MARGIN. "Pre-Tax Margin" means the ratio of earnings before
income taxes to Net Sales.

        RETURN ON ASSETS. "Return on Assets" means the ratio of Net Income to
total average assets including goodwill.

        RETURN ON CAPITAL. "Return on Capital" means the ratio of Net Income to
average total capital. Total capital includes working capital, and other long
term assets such as PP&E, goodwill and intangibles, and leased assets. Unless
otherwise provided by the Committee in the related Award Agreement, cash,
deferred tax assets and debt shall not be included in capital for calculation
purposes.

        RETURN ON EQUITY. "Return on Equity" means Net Income divided by average
total equity.



                                      A-1


        STOCK PRICE APPRECIATION. "Stock Price Appreciation" means an increase,
or an average annualized increase, in the stock price or market value of the
Common Stock of the Company after the date of grant of an Award or above a
specified price.

        WORKING CAPITAL IMPROVEMENT. "Working Capital Improvement" means the net
change in current assets less current liabilities over the applicable period or
the reduction in the current ratio (current assets divided by current
liabilities), excluding changes in cash and cash equivalents, and current and
deferred income taxes.



                                      A-2




        An extra section break has been inserted above this paragraph. Do not
delete this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.

EX-10.6

                                                                    EXHIBIT 10.6

                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          EMPLOYEE STOCK PURCHASE PLAN

   (Composite Plan Document Reflecting Stock Splits Through December 31, 2002)





                                TABLE OF CONTENTS



                                                                                           Page
                                                                                           ----
                                                                                        
1.      PURPOSE.............................................................................4

2.      DEFINITIONS.........................................................................4

3.      ELIGIBILITY.........................................................................6

4.      STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS.......................................7

5.      OFFERING PERIODS....................................................................7

6.      PARTICIPATION.......................................................................7

7.      METHOD OF PAYMENT OF CONTRIBUTIONS..................................................7

8.      GRANT OF OPTION.....................................................................8

9.      EXERCISE OF OPTION..................................................................8

10.     DELIVERY............................................................................9

11.     TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS................................9

12.     ADMINISTRATION......................................................................9

13.     DESIGNATION OF BENEFICIARY.........................................................10

14.     TRANSFERABILITY....................................................................11

15.     USE OF FUNDS; INTEREST.............................................................11

16.     REPORTS............................................................................11

17.     ADJUSTMENTS OF AND CHANGES IN THE STOCK............................................11

18.     POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS.....................................12

19.     TERM OF PLAN; AMENDMENT OR TERMINATION.............................................12

20.     NOTICES............................................................................12

21.     CONDITIONS UPON ISSUANCE OF SHARES.................................................13

22.     PLAN CONSTRUCTION..................................................................13

23.     EMPLOYEES' RIGHTS..................................................................13

24.     MISCELLANEOUS......................................................................14




                                       2


                       PACIFIC SUNWEAR OF CALIFORNIA, INC.

                          EMPLOYEE STOCK PURCHASE PLAN

        (Composite Plan Document Reflecting Stock Splits Through December 31,
2002)

        The following constitute the provisions of the Pacific Sunwear of
California, Inc. Employee Stock Purchase Plan (this "Plan").

1.      PURPOSE

        The purpose of this Plan is to provide Eligible Employees with an
        incentive to advance the best interests of the Corporation (and those
        Subsidiaries which may be designated by the Committee as "Participating
        Corporations") by providing a method whereby they may voluntarily
        purchase Common Stock at a favorable price and upon favorable terms.

2.      DEFINITIONS

        Capitalized terms used herein which are not otherwise defined shall have
        the following meanings.

                "Account" shall mean the bookkeeping account maintained by the
                Corporation, or by a recordkeeper on behalf of the Corporation,
                for a Participant pursuant to Section 7(a).

                "Board" shall mean the Board of Directors of the Corporation.

                "Change in Control" shall mean any of the following:

                        a.      Approval by the shareholders of the Corporation
                                of the dissolution or liquidation of the
                                Corporation;

                        b.      Approval by the shareholders of the Corporation
                                of an agreement to merge or consolidate, or
                                otherwise reorganize, with or into one or more
                                entities other than Subsidiaries, as a result of
                                which less than 50% of the outstanding voting
                                securities of the surviving or resulting entity
                                are, or are to be, owned by former shareholders
                                of the Corporation;

                        c.      Approval by the shareholders of the Corporation
                                of the sale of substantially all of the
                                Corporation's business assets to a person or
                                entity that is not a Subsidiary.

                "Code" shall mean the Internal Revenue Code of 1986, as amended.

                "Committee" shall mean the committee appointed by the Board to
                administer this Plan pursuant to Section 12.



                                       3


                "Common Stock" shall mean the common stock of the Corporation.

                "Company" shall mean the Corporation and its Subsidiaries.

                "Compensation" shall mean an Eligible Employee's regular
                earnings, overtime pay, sick pay, shift differential, shift
                premium, vacation pay, incentive compensation, commissions and
                bonuses. Compensation also includes any amounts contributed as
                salary reduction contributions to a plan qualifying under
                Section 401(k), 125 or 129 of the Code. Any other form of
                remuneration is excluded from Compensation, including (but not
                limited to) the following: prizes, awards, housing allowances,
                stock option exercises, stock appreciation rights, restricted
                stock exercises, performance awards, auto allowances, tuition
                reimbursement and other forms of imputed income. Notwithstanding
                the foregoing, Compensation shall not include any amounts
                deferred under or paid from the Corporation's Executive Deferred
                Compensation Plan.

                "Contributions" shall mean all bookkeeping amounts credited to
                the Account of a Participant pursuant to Section 7(a).

                "Corporation" shall mean Pacific Sunwear of California, Inc., a
                California corporation.

                "Eligible Employee" shall mean any employee of the Corporation,
                or of any Subsidiary which has been designated in writing by the
                Committee as a "Participating Corporation" (including any
                Subsidiaries which have become such after the date that this
                Plan is approved by shareholders). Notwithstanding the
                foregoing, "Eligible Employee" shall not include any employee
                who (i) has not as of the Grant Date completed at least three
                months of continuous full-time employment with the Company, (ii)
                whose customary employment is for 20 hours per week or less; or
                (iii) whose customary employment is for not more than five
                months in a calendar year. In addition, no Officer shall be an
                Eligible Employee.

                "Effective Date" shall mean January 1, 1998.

                "Exchange Act" shall mean the Securities Exchange Act of 1934,
                as amended.

                "Exercise Date" shall mean, with respect to an Offering Period,
                the last day of that Offering Period.

                "Fair Market Value" shall mean the closing price of a Share on
                The New York Stock Exchange on such date (or, in the event that
                the Common Stock is not traded on such date, on the immediately
                preceding trading date), as reported in The Wall Street Journal
                or, in the event the Common Stock is not listed on The New York
                Stock Exchange, the "Fair Market Value" shall be the closing
                price of the Common Stock for such date (or, in the event that
                the Common Stock is not traded on such date, on the immediately
                preceding trading date), as reported by the National Association
                of Securities Dealers Automated Quotation ("NASDAQ") or, if such
                price is not reported, the mean of the bid and asked



                                       4


                prices per Share as reported by NASDAQ or, if such prices are
                not so listed or reported, as determined by the Committee (or
                its delegate), in its discretion.

                "Grant Date" shall mean the first day of each Offering Period.

                "Offering Period" shall mean the six-consecutive month periods
                commencing on each January 1 and July 1.

                "Officer" shall mean (i) any individual who is a named officer
                of the Corporation pursuant to the Corporation's By-Laws, and
                (ii) any other individual who the Committee determines, in its
                sole discretion, to be (A) a highly compensated employee (within
                the meaning of Section 414(q) of the Code) and (B) an officer of
                the Company for purposes of this Plan.

                "Option" shall mean the stock option to acquire Shares granted
                to a Participant pursuant to Section 8.

                "Option Price" shall mean the per share exercise price of an
                Option as determined in accordance with Section 8(b).

                "Participant" shall mean an Eligible Employee who has elected to
                participate in this Plan and who has filed a valid and effective
                Subscription Agreement to make Contributions pursuant to Section
                6.

                "Plan" shall mean this Pacific Sunwear of California, Inc.
                Employee Stock Purchase Plan, as amended from time to time.

                "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16.

                "Section 16" shall mean Section 16 of the Exchange Act.

                "Share" shall mean a share of Common Stock.

                "Subscription Agreement" shall mean the written agreement filed
                by an Eligible Employee with the Corporation pursuant to Section
                6 to participate in this Plan.

                "Subsidiary" shall mean any corporation in an unbroken chain of
                corporations (beginning with the Corporation) in which each
                corporation (other than the last corporation) owns stock
                possessing 50% or more of the total combined voting power of all
                classes of stock in one or more of the other corporations in the
                chain.

3.      ELIGIBILITY

        Any person employed as an Eligible Employee as of a Grant Date shall be
        eligible to participate in this Plan during the Offering Period in which
        such Grant Date occurs, subject to the Eligible Employee satisfying the
        requirements of Section 6.



                                       5


4.      STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS

        The total number of Shares to be made available under this Plan is
        405,000 authorized and unissued or treasury shares of Common Stock, or
        Shares repurchased on the open market, subject to adjustments pursuant
        to Section 17. In the event that all of the Shares made available under
        this Plan are subscribed prior to the expiration of this Plan, this Plan
        may be terminated in accordance with Section 19.

5.      OFFERING PERIODS

        During the term of this Plan, the Corporation will offer Options to
        purchase Shares to all Participants during each Offering Period. Each
        Option shall become effective on the Grant Date. The term of each Option
        shall be six months and shall end on the Exercise Date. The first
        Offering Period shall commence on or after the Effective Date. Offering
        Periods shall continue until this Plan is terminated in accordance with
        Section 18 or 19, or, if earlier, until no Shares remain available for
        Options pursuant to Section 4.

6.      PARTICIPATION

        An Eligible Employee may become a participant in this Plan by completing
        a Subscription Agreement on a form approved by and in a manner
        prescribed by the Committee (or its delegate). To become effective, a
        Subscription Agreement must be filed with the Corporation prior to the
        start of the Offering Period with respect to which it is to become
        effective and must set forth the percentage of the Eligible Employee's
        Compensation (which shall be a whole percentage point not less than 1%
        and not more than 10%) to be credited to the Participant's Account as
        Contributions each pay period. Subscription Agreements shall contain the
        Eligible Employee's authorization and consent to the Corporation's
        withholding from his or her Compensation the amount of his or her
        Contributions. Subscription Agreements shall remain valid for all
        Offering Periods until (i) an Eligible Employee's participation
        terminates pursuant to the terms hereof, or (ii) until a new
        Subscription Agreement becomes effective.

7.      METHOD OF PAYMENT OF CONTRIBUTIONS

        (a) The Corporation shall maintain on its books, or cause to be
        maintained by a recordkeeper, an Account in the name of each
        Participant. The percentage of Compensation elected to be applied as
        Contributions by a Participant shall be deducted from such Participant's
        Compensation on each payday during the period for payroll deductions set
        forth below and such payroll deductions shall be credited to that
        Participant's Account as soon as administratively practicable after such
        date. A Participant may not make any additional payments to his or her
        Account. A Participant's Account shall be reduced by any amounts used to
        pay the Option Price of Shares acquired, or by any other amounts
        distributed pursuant to the terms hereof.

        (b) Payroll deductions with respect to an Offering Period shall commence
        as of the first day of the payroll period which coincides with or
        immediately follows the applicable Grant Date and shall end on the last
        day of the payroll period which coincides with or



                                       6


        immediately precedes the applicable Exercise Date, unless sooner
        terminated by the Participant as provided in this Section or until his
        or her participation terminates pursuant to Section 11.

        (c) A Participant may terminate his or her Contributions during an
        Offering Period by completing and filing with the Corporation, in such
        form and on such terms as the Committee (or its delegate) may prescribe,
        a written withdrawal form which shall be signed by the Participant. Such
        termination shall be effective as soon as administratively practicable
        after its receipt by the Corporation.

        (d) A Participant may discontinue or otherwise change the level of his
        or her Contributions (within Plan limits) effective as of the next Grant
        Date by completing and filing with the Corporation, on such terms as the
        Committee (or its delegate) may prescribe, a new Subscription Agreement.

8.      GRANT OF OPTION

        (a) On each Grant Date, each Eligible Employee who is a participant
        during that Offering Period shall be granted an Option to purchase a
        number of Shares. The Option shall be exercised on the Exercise Date.
        The number of Shares subject to the Option shall be determined by
        dividing the Participant's Account balance as of the applicable Exercise
        Date by the Option Price.

        (b) The Option Price per Share of the Shares subject to an Option shall
        be the lesser of: (i) 90% of the Fair Market Value of a Share on the
        applicable Grant Date; or (ii) 90% of the Fair Market Value of a Share
        on the applicable Exercise Date.

        (c) Notwithstanding anything else contained herein, a person who is
        otherwise an Eligible Employee shall not be granted any Option or other
        right to purchase Shares under this Plan to the extent (i) it would, if
        exercised, cause the person to own "stock" (as such term is defined for
        purposes of Section 423(b)(3) of the Code) possessing 5% or more of the
        total combined voting power or value of all classes of stock of the
        Corporation, or any Subsidiary, or (ii) such Option causes such
        individual to have rights to purchase stock under this Plan and any
        other plan of the Company qualified under Section 423 of the Code which
        accrue at a rate which exceeds $25,000 of the fair market value of the
        stock of the Corporation or of a Subsidiary (determined at the time the
        right to purchase such Stock is granted) for each calendar year in which
        such right is outstanding. For this purpose a right to purchase Shares
        accrues when it first become exercisable during the calendar year. In
        determining whether the stock ownership of an Eligible Employee equals
        or exceeds the 5% limit set forth above, the rules of Section 424(d) of
        the Code (relating to attribution of stock ownership) shall apply.

9.      EXERCISE OF OPTION

        Unless a Participant's Plan participation is terminated as provided in
        Section 11, his or her Option for the purchase of Shares shall be
        exercised automatically on the Exercise Date for that Offering Period,
        without any further action on the Participant's part, and the



                                       7


        maximum number of whole Shares subject to such Option shall be purchased
        at the Option Price with the balance of such Participant's Account. If
        any amount (which is not sufficient to purchase a whole Share) remains
        in a Participant's Account after the exercise of his or her Option on
        the Exercise Date: (i) such amount shall be credited to such
        Participant's Account for the next Offering Period, if he or she is then
        a Participant; or (ii) if such Participant is not a Participant in the
        next Offering Period, or if the Committee so elects, such amount shall
        be refunded to such Participant as soon as administratively practicable
        after such date.

10.     DELIVERY

        As soon as administratively practicable after the Exercise Date, the
        Corporation shall deliver to each Participant a certificate representing
        the Shares purchased upon exercise of his or her Option. The Corporation
        may make available an alternative arrangement for delivery of Shares to
        a recordkeeping service. The Committee (or its delegate), in its
        discretion, may either require or permit the Participant to elect that
        such certificates be delivered to such recordkeeping service. In the
        event the Corporation is required to obtain from any commission or
        agency authority to issue any such certificate, the Corporation will
        seek to obtain such authority. Inability of the Corporation to obtain
        from any such commission or agency authority which counsel for the
        Corporation deems necessary for the lawful issuance of any such
        certificate shall relieve the Corporation from liability to any
        Participant except to return to the Participant the amount of the
        balance in his or her Account.

11.     TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS

        (a) Upon a Participant's termination from employment with the Company
        for any reason or in the event that a Participant is no longer an
        Eligible Employee or if the Participant elects to terminate
        Contributions pursuant to Section 7(c), at any time prior to the last
        day of an Offering Period in which he or she participates, such
        Participant's Account shall be paid to him or her or in cash, or, in the
        event of such Participant's death, paid to the person or persons
        entitled thereto under Section 13, and such Participant's Option and
        participation in the Plan shall be automatically terminated.

        (b) A Participant's termination from Plan participation precludes the
        Participant from again participating in this Plan during that Offering
        Period. However, such termination shall not have any effect upon his or
        her ability to participate in any succeeding Offering Period, provided
        that the applicable eligibility and participation requirements are again
        then met. A Participant's termination from Plan participation shall be
        deemed to be a revocation of that Participant's Subscription Agreement
        and such Participant must file a new Subscription Agreement to resume
        Plan participation in any succeeding Offering Period.

12.     ADMINISTRATION

        (a) The Board shall appoint the Committee, which shall be composed of
        not less than two members of the Board. Each member of the Committee, in
        respect of any transaction



                                       8


        at a time when an affected Participant may be subject to Section 16 of
        the Exchange Act, shall be a "non-employee director" within the meaning
        of Rule 16b-3 promulgated under Section 16. The Board may, at any time,
        increase or decrease the number of members of the Committee, may remove
        from membership on the Committee all or any portion of its members, and
        may appoint such person or persons as it desires to fill any vacancy
        existing on the Committee, whether caused by removal, resignation, or
        otherwise. The Board may also, at any time, assume or change the
        administration of this Plan.

        (b) The Committee shall supervise and administer this Plan and shall
        have full power and discretion to adopt, amend and rescind any rules
        deemed desirable and appropriate for the administration of this Plan and
        not inconsistent with the terms of this Plan, and to make all other
        determinations necessary or advisable for the administration of this
        Plan. The Committee shall act by majority vote or by unanimous written
        consent. No member of the Committee shall be entitled to act on or
        decide any matter relating solely to himself or herself or any of his or
        her rights or benefits under this Plan. The Committee shall have full
        power and discretionary authority to construe and interpret the terms
        and conditions of this Plan, which construction or interpretation shall
        be final and binding on all parties including the Corporation,
        Participants and beneficiaries. The Committee may delegate ministerial
        non-discretionary functions to third parties, including officers of the
        Corporation.

        (c) Any action taken by, or inaction of, the Corporation, the Board or
        the Committee relating to this Plan shall be within the absolute
        discretion of that entity or body. No member of the Board or Committee,
        or officer of the Corporation shall be liable for any such action or
        inaction.

13.     DESIGNATION OF BENEFICIARY

        (a) A Participant may file, in a manner prescribed by the Committee (or
        its delegate), a written designation of a beneficiary who is to receive
        any Shares or cash from such Participant's Account under this Plan in
        the event of such Participant's death. If a Participant's death occurs
        subsequent to the end of an Offering Period but prior to the delivery to
        him or her of any Shares deliverable under the terms of this Plan, such
        Shares and any remaining balance of such Participant's Account shall be
        paid to such beneficiary (or such other person as set forth in Section
        13(b)) as soon as administratively practicable after the Corporation
        receives notice of such Participant's death and any outstanding
        unexercised Option shall terminate. If a Participant's death occurs at
        any other time, the balance of such Participant's Account shall be paid
        to such beneficiary (or such other person as set forth in Section 13(b))
        in cash as soon as administratively practicable after the Corporation
        receives notice of such Participant's death and such Participant's
        Option shall terminate. If a Participant is married and the designated
        beneficiary is not his or her spouse, spousal consent shall be required
        for such designation to be effective.

        (b) Beneficiary designations may be changed by the Participant (and his
        or her spouse, if required) at any time on forms provided and in the
        manner prescribed by the Committee (or its delegate). If a Participant
        dies with no validly designated beneficiary



                                       9


        under this Plan who is living at the time of such Participant's death,
        the Corporation shall deliver all Shares and/or cash payable pursuant to
        the terms hereof to the executor or administrator of the estate of the
        Participant, or if no such executor or administrator has been appointed,
        the Corporation, in its discretion, may deliver such Shares and/or cash
        to the spouse or to any one or more dependents or relatives of the
        Participant, or if no spouse, dependent or relative is known to the
        Corporation, then to such other person as the Corporation may designate.

14.     TRANSFERABILITY

        Neither Contributions credited to a Participant's Account nor any
        Options or rights with respect to the exercise of Options or right to
        receive Shares under this Plan may be anticipated, alienated,
        encumbered, assigned, transferred, pledged or otherwise disposed of in
        any way (other than by will, the laws of descent and distribution, or as
        provided in Section 13) by the Participant. Any such attempt at
        anticipation, alienation, encumbrance, assignment, transfer, pledge or
        other disposition shall be without effect and all amounts shall be paid
        and all shares shall be delivered in accordance with the provisions of
        this Plan. Amounts payable or Shares deliverable pursuant to this Plan
        shall be paid or delivered only to the Participant or, in the event of
        the Participant's death, to the Participant's beneficiary pursuant to
        Section 13.

15.     USE OF FUNDS; INTEREST

        All Contributions received or held by the Corporation under this Plan
        will be included in the general assets of the Corporation and may be
        used for any corporate purpose. No interest will be paid to any
        Participant or credited to his or her Account under this Plan.

16.     REPORTS

        Statements shall be provided to Participants as soon as administratively
        practicable following each Exercise Date. Each Participant's statement
        shall set forth, as of such Exercise Date, that Participant's Account
        balance immediately prior to the exercise of his or her Option, the Fair
        Market Value of a Share, the Option Price, the number of whole Shares
        purchased and his or her remaining Account balance, if any.

17.     ADJUSTMENTS OF AND CHANGES IN THE STOCK

        In the event that the Shares shall be changed into or exchanged for a
        different number or kind of shares of stock or other securities of the
        Corporation or of another corporation (whether by reason of merger,
        consolidation, recapitalization, stock split, combination of shares, or
        otherwise), or if the number of Shares shall be increased through a
        stock split or the payment of a stock dividend, then there shall be
        substituted for or added to each Share theretofore reserved for sale
        under this Plan, the number and kind of shares of stock or other
        securities into which each outstanding Share shall be so changed, or for
        which each such Share shall be exchanged, or to which each such Share is
        entitled, as the case may be, or the number or kind of securities which
        may be sold under this Plan and the purchase price per Share shall be
        appropriately adjusted consistent with such change



                                       10


        in such manner as the Committee (or its delegate) may deem equitable to
        prevent substantial dilution or enlargement of rights granted to, or
        available for, Eligible Employees under this Plan.

18.     POSSIBLE EARLY TERMINATION OF PLAN AND OPTIONS

        Upon a dissolution of the Corporation, an event described in Section 17
        that the Corporation does not survive, or the occurrence of a Change in
        Control, the Plan and, if prior to the last day of an Offering Period,
        any outstanding Option granted with respect to that Offering Period
        shall terminate, subject to any provision that has been expressly made
        by the Committee through a plan or reorganization approved by the Board
        or otherwise for the survival, substitution, assumption, exchange or
        other settlement of the Plan and Options. In the event a Participant's
        Option is terminated pursuant to this Section 18, such Participant's
        Account shall be paid to him or her in cash without interest.

19.     TERM OF PLAN; AMENDMENT OR TERMINATION

        (a) This Plan shall become effective as of the Effective Date. No new
        Offering Periods shall commence on or after the tenth anniversary of the
        Effective Date and this Plan shall terminate on such date unless sooner
        terminated pursuant to Section 18 or this Section 19.

        (b) The Board may amend, modify or terminate this Plan at any time
        without notice. Shareholder approval for any amendment or modification
        shall not be required, except to the extent required by Section 423 of
        the Code or other applicable law, or deemed necessary or advisable by
        the Board. No amendment, modification, or termination pursuant to this
        Section 18(b) shall, without written consent of the Participant, affect
        in any manner materially adverse to the Participant any rights or
        benefits of such Participant or obligations of the Corporation under any
        Option granted under this Plan prior to the effective date of such
        change. Changes contemplated by Section 17 shall not be deemed to
        constitute changes or amendments requiring Participant consent.
        Notwithstanding the foregoing, the Committee shall have the right to
        designate from time to time the Subsidiaries whose employees may be
        eligible to participate in this Plan and such designation shall not
        constitute any amendment to this Plan requiring shareholder approval.

20.     NOTICES

        All notices or other communications by a Participant to the Corporation
        contemplated by this Plan shall be deemed to have been duly given when
        received in the form and manner specified by the Committee (or its
        delegate) at the location, or by the person, designated by the Committee
        (or its delegate) for that purpose.




                                       11

21.     CONDITIONS UPON ISSUANCE OF SHARES

        Shares shall not be issued with respect to an Option unless the exercise
        of such Option and the issuance and delivery of such Shares complies
        with all applicable provisions of law, domestic or foreign, including,
        without limitation, the Securities Act of 1933, as amended, the Exchange
        Act, any applicable state securities laws, the rules and regulations
        promulgated thereunder, and the requirements of any stock exchange upon
        which the Shares may then be listed.

        As a condition precedent to the exercise of any Option, if, in the
        opinion of counsel for the Corporation such a representation is required
        under applicable law, the Corporation may require any person exercising
        such Option to represent and warrant that the Shares subject thereto are
        being acquired only for investment and without any present intention to
        sell or distribute such Shares.

22.     PLAN CONSTRUCTION

        (a) It is the intent of the Corporation that transactions in and
        affecting Options in the case of Participants who are or may be subject
        to the prohibitions of Section 16 satisfy any then applicable
        requirements of Rule 16b-3 so that such persons (unless they otherwise
        agree) will be entitled to the exemptive relief of Rule 16b-3 in respect
        of those transactions and will not be subject to avoidable liability
        thereunder. Accordingly, this Plan shall be deemed to contain and the
        Shares issued upon exercise thereof shall be subject to, such additional
        conditions and restrictions as may be required by Rule 16b-3 to qualify
        for the maximum exemption from Section 16 with respect to Plan
        transactions.

(b)     This Plan and Options are intended to qualify under Section 423 of the
        Code.

        (c) If any provision of this Plan or of any Option would otherwise
        frustrate or conflict with the intents expressed above, that provision
        to the extent possible shall be interpreted so as to avoid such
        conflict. If the conflict remains irreconcilable, the Committee may
        disregard the provision if it concludes that to do so furthers the
        interest of the Corporation and is consistent with the purposes of this
        Plan as to such persons in the circumstances.

23.     EMPLOYEES' RIGHTS

        Nothing in this Plan (or in any agreement related to this Plan) shall
        confer upon any Eligible Employee or Participant any right to continue
        in the service or employ of the Company or constitute any contract or
        agreement of service or employment, or interfere in any way with the
        right of the Company to reduce such person's compensation or other
        benefits or to terminate the services or employment or such Eligible
        Employee or Participant, with or without cause, but nothing contained in
        this Plan or any document related hereto shall affect any other
        contractual right of any Eligible Employee or Participant. No
        Participant shall have any rights as a shareholder until a certificate
        for Shares has been issued in the Participant's name following exercise
        of his or her Option. No adjustment will be made for dividends or other
        rights as a shareholder for which a



                                       12

        a record date is prior to the issuance of such Share certificate.
        Nothing in this Plan shall be deemed to create any fiduciary
        relationship between the Corporation and any Participant.

24.     MISCELLANEOUS

        (a) This Plan and related documents shall be governed by, and construed
        in accordance with, the laws of the State of California. If any
        provision shall be held by a court of competent jurisdiction to be
        invalid and unenforceable, the remaining provisions of this Plan shall
        continue to be fully effective.

        (b) Captions and headings are given to the sections of this Plan solely
        as a convenience to facilitate reference. Such captions and headings
        shall not be deemed in any way material or relevant to the construction
        of interpretation of this Plan or any provision hereof.

        (c) The adoption of this Plan shall not affect any other compensation or
        incentive plans in effect for the Company. Nothing in this Plan shall be
        construed to limit the right of the Company (i) to establish any other
        forms of incentives or compensation for employees of the Company, or
        (ii) to grant or assume options (outside the scope of and in addition to
        those contemplated by this Plan) in connection with any proper corporate
        purpose.

25.     EFFECTIVE DATE

        This Plan shall be effective on the Effective Date, subject, however, to
        the approval of this Plan by the shareholders of the Company within
        twelve months after the date on which the Board approved this Plan.
        Notwithstanding anything else contained herein to the contrary, no
        Shares shall be issued or delivered under this Plan until such
        shareholder approval is obtained and, if such shareholder approval is
        not obtained within such 12-month period of time, all Contributions
        credited to a Participant's Account hereunder shall be refunded to such
        Participant (without interest) as soon as practicable after the end of
        such 12-month period.



                                       13

EX-10.20

                                                                   EXHIBIT 10.20

                   FOURTH AMENDMENT TO BUSINESS LOAN AGREEMENT

                This Fourth Amendment to Business Loan Agreement (the
"Amendment") is made as of January 14, 2003, between Bank of America, N.
A.("Bank"), and Pacific Sunwear of California, Inc., a California corporation
(the "Borrower").

                                    RECITALS

        A. Borrower and Bank entered into that certain Business Loan Agreement
dated as of April 3, 2001, as previously amended (the "Agreement").

        B. Borrower and Bank desire to further amend certain terms and
provisions of the Agreement.

                                    AGREEMENT

        1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.

        2. Amendments. The Agreement is hereby amended as follows:

                2.1 In Section 9.7 (f) of the Agreement, the words "Five Million
                Dollars ($5,000,000.00)" are hereby deleted in its entirety and
                replaced with "Ten Million Dollars ($10,000,000.00)".

        3. Representations and Warranties. Borrower hereby represents and
warrants to Bank that: (i) no default specified in the Agreement and no event
which with notice or lapse of time or both would become such a default has
occurred and is continuing and has not been previously waived, (ii) the
representations and warranties of Borrower pursuant to the Agreement are true on
and as of the date hereof as if made on and as of said date, (iii) the making
and performance by Borrower of this Amendment have been duly authorized by all
necessary action, and (iv) no consent, approval, authorization, permit or
license is required in connection with the making or performance of the
Agreement as amended hereby.

        4. Conditions. This Amendment will be effective when the Bank receives
the following items, in form and content acceptable to the Bank:

                4.1 This Amendment duly executed by all parties hereto.

                4.2 Payment of all out-of-pocket expenses, including attorneys'
        fees, incurred by the Bank in connection with the preparation of this
        Amendment.



                                       1


        5. Effect of Amendment. Except as provided in this Amendment, the
Agreement shall remain in full force and effect and shall be performed by the
parties hereto according to its terms and provisions.


        IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the date first above written.


                                        BANK OF AMERICA, N.A.


                                        By: /s/ C.K. Goodfellow
                                           -------------------------------------
                                        Name: Cynthia K. Goodfellow
                                             -----------------------------------
                                        Title: Vice President
                                           -------------------------------------


                                        PACIFIC SUNWEAR OF CALIFORNIA, INC.


                                        By: /s/ Carl W. Womack
                                           -------------------------------------
                                        Name: Carl W. Womack
                                             -----------------------------------
                                        Title: Chief Financial Officer
                                           -------------------------------------


                                        By: /s/ Greg H. Weaver
                                           -------------------------------------
                                        Name: Greg H. Weaver
                                             -----------------------------------
                                        Title: Chief Executive Officer
                                           -------------------------------------




                                       2

EX-21

                                                                      EXHIBIT 21

               SUBSIDIARIES OF THE REGISTRANT
               ------------------------------
Name of Subsidiary                  Jurisdiction of Incorporation
- ------------------                  -----------------------------
1. Pacific Sunwear Stores Corp.     California
2. ShopPacSun.com Corp              California

EX-23.1

exv23w1

EX-99.1

exv99w1