-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W0gcyN4LFNiKOUeECpZatsQXM3fsilNI0vERH5N4De/aMJjjN1GIjwdhW9VFDLu1 IWxdNC1lmr5iqTs4h/aylw== 0000892569-96-002657.txt : 19961219 0000892569-96-002657.hdr.sgml : 19961219 ACCESSION NUMBER: 0000892569-96-002657 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961103 FILED AS OF DATE: 19961218 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC SUNWEAR OF CALIFORNIA INC CENTRAL INDEX KEY: 0000874841 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-APPAREL & ACCESSORY STORES [5600] IRS NUMBER: 953759463 STATE OF INCORPORATION: CA FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21296 FILM NUMBER: 96682275 BUSINESS ADDRESS: STREET 1: 5037 E HUNTER AVE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7146938066 MAIL ADDRESS: STREET 1: 5037 E HUNTER AVENUE CITY: ANAHEIM STATE: CA ZIP: 92807 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 3, 1996 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 3, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-21296 PACIFIC SUNWEAR OF CALIFORNIA, INC. CALIFORNIA 95-3759463 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 5037 EAST HUNTER AVENUE ANAHEIM, CALIFORNIA 92807 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 693-8066 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS); AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO____ THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $.01 PER SHARE, AT DECEMBER 6, 1996 WAS 8,083,777. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PACIFIC SUNWEAR OF CALIFORNIA, INC. FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 3, 1996 INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements...................................................... Balance Sheets as of November 3, 1996 (unaudited) and February 4, 1996.... 3 Statements of Operations (unaudited) for the third quarter and nine months 4 ended November 3, 1996 and October 29, 1995............................... Statements of Cash Flows (unaudited) for the first nine months ended 5 November 3, 1996 and October 29, 1995..................................... Notes to Financial Statements............................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of 7-11 Operations................................................................ PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................................... 12 Item 2. Changes in Securities..................................................... 12 Item 3. Defaults upon Senior Securities........................................... 12 Item 4. Submission of Matters to a Vote of Security Holders....................... 12 Item 5. Other Information......................................................... 12 Item 6. Exhibits and Reports on Form 8-K.......................................... 12 SIGNATURE PAGE............................................................ 13
2 3 PACIFIC SUNWEAR OF CALIFORNIA, INC. BALANCE SHEETS
NOVEMBER 3, FEBRUARY 4, 1996 1996 ------------ ------------ (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents..................................... $ 6,006,550 $ 4,315,842 Accounts receivable........................................... 1,044,509 323,299 Merchandise inventories....................................... 22,684,879 15,408,844 Prepaid expenses, includes $1,787,939 and $1,575,311 of prepaid rent, respectively................................. 2,688,126 2,451,170 Deferred taxes................................................ 1,160,179 1,160,179 ------------ ------------ Total current assets....................................... 33,584,243 23,659,334 Property and Equipment: Leasehold improvements........................................ 24,436,367 22,044,879 Furniture, fixtures and equipment............................. 19,782,715 16,667,276 ------------ ------------ 44,219,082 38,712,155 Less accumulated depreciation and amortization................ (15,649,422) (12,088,943) ------------ ------------ Net property and equipment................................. 28,569,660 26,623,212 Other Assets: Goodwill, net of accumulated amortization of $285,444 and $265,283, respectively..................................... 803,299 823,460 Deposits and other assets..................................... 485,564 364,739 ------------ ------------ Total other assets......................................... 1,288,863 1,188,199 ------------ ------------ Total assets.......................................... $ 63,442,766 $ 51,470,745 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt............................. $ -- $ 375,000 Accounts payable.............................................. 9,734,726 5,268,496 Accrued liabilities, includes $1,781,088 and $1,349,268 of accrued compensation, respectively......................... 4,428,340 2,747,414 Income taxes payable.......................................... 1,188,091 468,661 ------------ ------------ Total current liabilities.................................. 15,351,157 8,859,571 Long-term debt.................................................. -- 406,250 Deferred compensation........................................... 300,580 185,348 Deferred rent................................................... 3,087,670 2,724,381 Deferred taxes.................................................. 985,808 985,808 Shareholders' Equity: Common stock, par value $.01; authorized, 22,500,000 shares; issued and outstanding, 8,060,010 and 7,950,256 shares, respectively............................................... 80,600 79,503 Additional paid-in capital.................................... 30,266,961 28,914,368 Retained earnings............................................. 13,369,990 9,315,516 ------------ ------------ Total shareholders' equity................................. 43,717,551 38,309,387 ------------ ------------ Total liabilities and shareholders' equity............ $ 63,442,766 $ 51,470,745 ============ ============
See accompanying notes 3 4 PACIFIC SUNWEAR OF CALIFORNIA, INC. STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THIRD QUARTER ENDED FOR THE NINE MONTHS ENDED ----------------------------------- ----------------------------------- NOVEMBER 3, 1996 OCTOBER 29, 1995 NOVEMBER 3, 1996 OCTOBER 29, 1995 ---------------- ---------------- ---------------- ---------------- Net sales........................... $ 43,247,154 $ 31,367,982 $105,454,832 $ 76,516,986 Cost of goods sold, including buying, distribution, and occupancy costs................... 28,959,797 21,705,616 73,071,566 55,012,824 ------------ ------------ ------------ ------------ Gross margin........................ 14,287,357 9,662,366 32,383,266 21,504,162 Selling, general and administrative expenses.......................... 9,837,141 7,520,546 25,805,134 20,084,395 ------------ ------------ ------------ ------------ Operating income.................... 4,450,216 2,141,820 6,578,132 1,419,767 Interest income..................... 89,862 35,324 137,342 54,257 ------------ ------------ ------------ ------------ Income before income tax expense.... 4,540,078 2,177,144 6,715,474 1,474,024 Income tax expense.................. 1,801,000 854,000 2,661,000 551,000 ------------ ------------ ------------ ------------ Net income.......................... $ 2,739,078 $ 1,323,144 $ 4,054,474 $ 923,024 ============ ============ ============ ============ Net income per common and common equivalent share.................. $ 0.33 $ 0.17 $ 0.49 $ 0.12 ------------ ------------ ------------ ------------ Weighted average common and common equivalent shares outstanding..... 8,342,081 7,975,304 8,268,413 8,001,911 ============ ============ ============ ============
See accompanying notes 4 5 PACIFIC SUNWEAR OF CALIFORNIA, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED ------------------------------------- NOVEMBER 3, 1996 OCTOBER 29, 1995 ---------------- ---------------- Cash Flows from Operating Activities: Net income.................................................. $ 4,054,474 $ 923,024 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 3,852,948 3,097,775 Change in: Accounts receivable.................................... (721,210) (506,257) Merchandise inventories................................ (7,276,035) (5,373,203) Prepaid expenses....................................... (236,956) (422,543) Deposits and other assets.............................. (120,825) (199,679) Accounts payable....................................... 4,466,230 2,742,752 Accrued liabilities.................................... 1,680,926 725,223 Income taxes and deferred income taxes................. 1,163,972 499,230 Deferred rent.......................................... 363,289 671,208 Deferred compensation.................................. 115,232 291,123 ------------ ------------ Net cash provided by operating activities........... 7,342,045 2,448,653 Cash flows from investing activities: Short-term investment maturities............................ -- 4,512,035 Investment in property and equipment........................ (5,779,235) (8,339,310) ------------ ------------ Net cash used in investing activities............... (5,779,235) (3,827,275) Cash Flows from Financing Activities: Principal payments under loan agreement and capital lease obligations.............................................. (781,250) (288,524) Net principal borrowings under loan agreement............... -- 1,000,000 Proceeds from exercise of stock options..................... 909,148 110,103 ------------ ------------ Net cash provided by financing activities........... 127,898 821,579 ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents.......... 1,690,708 (557,043) Cash and cash equivalents, beginning of period................ 4,315,842 1,998,235 ------------ ------------ Cash and cash equivalents, end of period...................... $ 6,006,550 $ 1,441,192 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest.................................................... $ 10,811 $ 106,087 Income taxes................................................ $ 1,497,028 $ 51,770
Non-cash transactions: During the nine months ended November 3, 1996 and October 29, 1995, the Company recorded an increase to additional paid-in capital of $444,542 and $0, respectively, related to tax benefits associated with the exercise of non-qualified stock options. See accompanying notes 5 6 NOTES TO FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION The accompanying financial statements are unaudited except for the February 4, 1996 balance sheet. These statements have been prepared in accordance with generally accepted accounting principles for the interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company's fiscal year is the 52- or 53-week period which ends on the Sunday closest to the end of January. "Fiscal 1996" is a 52-week period which ends on February 2, 1997. In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported expenses during the reported period. Actual results could differ from these estimates. The results of operations for the third quarter and nine months ended November 3, 1996 are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 1997. For further information, refer to the financial statements and notes thereto as of and for the years ended February 4, 1996, January 29, 1995, and January 30, 1994. NOTE 2 -- NET INCOME PER SHARE AND STOCK SPLIT Stock split -- On October 9, 1996 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 from additional paid-in capital to common stock the par value ($26,501) of the additional shares arising from the split. Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding during the relevant periods after giving effect to the stock split. NOTE 3 -- FEDERAL AND STATE INCOME TAX The combined federal and state income tax expense were calculated using estimated effective annual statutory tax rates. NOTE 4 -- NEW ACCOUNTING PRONOUNCEMENT In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which was effective for the Company beginning February 5, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share in financial statements filed with form 10-K for the fiscal year ended February 2, 1997. 6 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The thirteen weeks ended November 3, 1996 (third quarter) as compared to the thirteen weeks ended October 29, 1995 (third quarter) Net sales increased to $43.2 million for the third quarter of fiscal 1996 from $31.4 million for the third quarter of fiscal 1995, an increase of $11.8 million, or 37.6%. Of this $11.8 million increase, $6.9 million was attributable to a 22.9% increase in comparable store net sales in the third quarter of fiscal 1996 compared to the comparable thirty-nine week period ended November 5, 1995, $3.9 million was attributable to sales generated by 20 new stores opened in the first nine months of fiscal 1996, $1.9 million was attributable to sales generated by stores opened prior to fiscal 1996 and not yet included in the comparable store base and $0.1 million was attributable to the expansion or relocation of 2 existing stores. Offsetting these increases was a $1.0 million decrease in sales attributable to a one week shift in the fiscal calendar, which was caused by a change in the measurement period used for period-to-period comparisons (fiscal 1995 was a 53-week period and fiscal 1996 will be a 52-week period). The increase in comparable store net sales was primarily attributable to the addition of footwear and juniors to certain of the Company's stores, and, to a lesser extent, to increases in sales of young men's merchandise. In fiscal 1996, the Company significantly expanded the number of stores offering footwear and juniors. Sales of this merchandise represented approximately 12% of net sales for the third quarter of fiscal 1996 as compared to approximately 1% of net sales for the third quarter of fiscal 1995. As a result of the addition of footwear, an increase in the sales of pants as a percentage of net sales and a decrease in T-shirt sales as a percentage of net sales, the average retail price per unit sold increased approximately 13% in the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995. Gross margin, after buying, distribution and occupancy costs, increased to $14.3 million for the third quarter of fiscal 1996 from $9.7 million for the third quarter of fiscal 1995, an increase of $4.6 million, or 47.4%. As a percentage of net sales, gross margin increased to 33.0% from 30.9%. Of this 2.1% increase in gross margin as a percentage of net sales, 2.1% was due to a decrease in occupancy costs as a percentage of net sales. This decrease in occupancy as a percentage of net sales was primarily related to higher comparable store net sales. Net merchandise margins increased 0.5% as a percentage of net sales for the third quarter of fiscal 1996 compared to third quarter of fiscal 1995, due to an increase in sales of private brand merchandise as a percentage of net sales and improved sourcing of private brand merchandise, partially offset by an increase in markdowns of both branded and private brand merchandise. Buying and distribution costs as a percentage of net sales increased 0.5% in the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995 due to an increase in freight costs as the Company used air freight to expedite shipments to its stores during the back-to-school period. Selling, general and administrative expenses increased to $9.8 million for the third quarter of fiscal 1996 from $7.5 million for the third quarter of fiscal 1995, an increase of $2.3 million, or 30.7%. As a percentage of net sales, these expenses decreased to 22.7% from 23.9%. Of this 1.2% decrease as a percentage of net sales, 1.0% was due to a decrease in general and administrative expenses as a percentage of net sales as a result of leveraging these expenses over higher net sales, and 1.1% was attributable to a decrease in store selling expenses as a percentage of net sales primarily as a result of an increase in comparable store net sales and higher total net sales. Partially offsetting these decreases was an increase of 0.9% ($0.5 million) in store expansion/relocation and closing expenses (primarily for the write-off of store leasehold improvements and furniture and fixtures) as a percentage of net sales. Income tax expense was $1.8 million for the third quarter of fiscal 1996 compared to $.9 million for the third quarter of fiscal 1995. The effective income tax rate for the third quarter of fiscal 1996 was 39.7% compared to 39.2% for the third quarter of fiscal 1995. The higher effective income tax rate for the third quarter of fiscal 1996 was primarily due to an increase in taxable interest income in the third quarter of fiscal 1996. Interest income for the third quarter of fiscal 1995 was mostly non-taxable. 7 8 The thirty-nine weeks ended November 3, 1996 (nine months) as compared to the thirty-nine weeks ended October 29, 1995 (nine months) Net sales increased to $105.5 million for the first nine months of fiscal 1996 from $76.5 million for the first nine months of fiscal 1995, an increase of $29.0 million, or 37.9%. Of this $29.0 million increase, $10.9 million was attributable to a 14.3% increase in comparable store net sales in the first nine months of fiscal 1996 compared to the comparable thirty-nine week period ended November 5, 1995, $10.9 million was attributable to sales generated by stores opened prior to fiscal 1996 and not yet included in the comparable store base, $6.4 million was attributable to sales generated by 20 new stores opened in the first nine months of fiscal 1996 and $0.1 million was attributable to the expansion or relocation of two existing stores. In addition, there was a $0.7 million increase in sales attributable to a one week shift in the fiscal calendar, which was caused by a change in the measurement period used for period-to-period comparisons (fiscal 1995 was a 53-week period and fiscal 1996 will be a 52-week period). The increase in comparable store net sales was primarily attributable to the addition of footwear and juniors to certain of the Company's stores, and, to a lesser extent, to increases in sales of young men's merchandise. In fiscal 1996, the Company significantly expanded the number of stores offering footwear and juniors. Sales of this merchandise represented approximately 11% of net sales for the first nine months of fiscal 1996 as compared to approximately 1% of net sales for the first nine months of fiscal 1995. As a result of the addition of footwear, an increase in the sales of pants as a percentage of net sales and a decrease in T-shirt sales as a percentage of net sales, the average retail price per unit sold increased approximately 7% in the first nine months of fiscal 1996 compared to the first nine months of fiscal 1995. Gross margin, after buying, distribution and occupancy costs, increased to $32.4 million for the first nine months of fiscal 1996 from $21.5 million for the first nine months of fiscal 1995, an increase of $10.9 million, or 50.7%. As a percentage of net sales, gross margin increased to 30.7% from 28.1%. Of this 2.6% increase in gross margin as a percentage of net sales, 2.1% was due to a decrease in occupancy costs as a percentage of net sales, which was primarily related to an increase in comparable store net sales. In addition, merchandise margins increased 0.5% as a percentage of net sales for the first nine months of fiscal 1996 compared to the first nine months of fiscal 1995, primarily due to an increase in sales of higher margin private brand merchandise as a percentage of net sales and improved sourcing of private brand merchandise, partially offset by an increase in markdowns of both branded and private brand merchandise. Selling, general and administrative expenses increased to $25.8 million for the first nine months of fiscal 1996 from $20.1 million for the first nine months of fiscal 1995, an increase of $5.7 million, or 28.4%. As a percentage of net sales, these expenses decreased to 24.5% from 26.2%. Of this 1.7% decrease as a percentage of net sales, 1.7% was due to a decrease in general and administrative expenses as a percentage of net sales as a result of leveraging these expenses over higher net sales, and 0.5% was attributable to a decrease in store selling expenses as a percentage of net sales primarily as a result of an increase in comparable store net sales. Partially offsetting these decreases was an increase of 0.5% ($0.7 million) in store expansion/relocation and closing expenses (primarily the write-off of store leasehold improvements and furniture and fixtures) as a percentage of net sales. Income tax expense was $2.7 million for the first nine months of fiscal 1996 compared to $0.6 million for the first nine months of fiscal 1995. The effective income tax rate for the first nine months of fiscal 1996 was 39.6% compared to 37.4% for the first nine months of fiscal 1995. The higher effective income tax rate for the first nine months of fiscal 1996 was primarily due to an increase in taxable interest income in the first nine months of fiscal 1996. Interest income for the first nine months of fiscal 1995 was mostly non-taxable. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations from internally generated cash flow, short-term borrowings and equity financing. The Company's primary capital requirements have been for the construction of new stores, remodeling, relocation, or expansion of selected existing stores and financing of inventories. Net cash provided by operating activities for the first nine months of fiscal 1996 was $7.3 million compared to $2.4 million for the first nine months of fiscal 1995. This $4.9 million increase is primarily 8 9 attributable to a $3.1 million increase in net income, a $.8 million increase in depreciation, a $1.6 million increase in accrued expenses and income taxes, offset by decreases of other items of $.6 million. Working capital at November 3, 1996 was $18.2 million compared to $14.8 million at February 4, 1996, an increase of $3.4 million. Inventories at November 3, 1996 were $22.7 million compared to $15.4 million at February 4, 1996, an increase of $7.3 million. 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 November 3, 1996 was primarily related to opening new stores with larger average square footage than existing stores, and the addition of juniors and footwear to certain of the Company's existing stores. The increase in accounts payable of $4.5 million at November 3, 1996 compared to February 4, 1996 was attributable to the increase in inventories at November 3, 1996. Net cash used in investing activities was $5.8 million for the first nine months of fiscal 1996 compared to $3.8 million for the first nine months of fiscal 1995. Net cash used in investment in property and equipment for the first nine months of fiscal 1996 was $5.8 million compared to $8.3 million for the first nine months of fiscal 1995. These expenditures related primarily to the construction of new stores. The decrease in the first nine months of fiscal 1996 compared to the same period of the prior year was primarily due to having opened only 20 new stores in the fiscal 1996 period as compared to 51 new stores in the prior period. In the first nine months of fiscal 1996, $4.6 million was expended for the 30 new stores to be opened in fiscal 1996, $0.8 million for expansions or relocations of certain existing stores and $0.4 million related to the Company's computer hardware and software and materials handling system. Net cash provided by financing activities for the first nine months of fiscal 1996 was $0.1 million compared to $0.8 million for the first nine months of fiscal 1995. In the first nine months of fiscal 1996, the Company paid off a term loan from its bank of $0.8 million compared to net borrowings of $0.7 million in the first nine months of fiscal 1995. In the first nine months of fiscal 1996, the Company received proceeds of $0.9 million from the exercise of stock options compared to $0.1 million in the same period last year. The Company has a credit facility with a bank which expires in August 1998. The credit facility provides for an $11.5 million line of credit, which includes sub-limits of $7.5 million each for cash advances and commercial letters of credit. Interest on advances under the line of credit facility is payable monthly at the bank's prime rate (8.25% at November 3, 1996). At November 3, 1996, the Company had $1.2 million in letters of credit outstanding and no cash advances outstanding. The loan agreement subjects the Company to various restrictive covenants, including maintenance of certain financial ratios, and prohibits payment of cash dividends on common stock. At November 3, 1996, the Company was in compliance with all of its covenants. The Company has minimum annual rental commitments under existing store leases and the lease for its corporate offices and distribution center of approximately $15.1 million in fiscal 1997 and $15.0 million in fiscal 1998. The Company estimates that capital expenditures for the fourth quarter of fiscal 1996 will be approximately $2.5 million in connection with opening 10 new stores, expanding or relocating five existing stores, and commencing construction on approximately 7 to 12 stores that will open during fiscal 1997. In fiscal 1996, the Company's average cost to build a new store, including leasehold improvements, furniture and fixtures and landlord allowances, was approximately $190,000. In fiscal 1996, the average cost of expanding or relocating stores was approximately $250,000. The average total cost to build new stores will vary in the future, depending on various factors, including changes in store design, local construction costs and landlord allowances. The Company's average initial inventory for new stores opened in fiscal 1996 was approximately $130,000. The Company plans to open approximately 40 stores, and expand or relocate 10 to 15 existing stores, during fiscal 1997. The Company estimates that capital expenditures in fiscal 1997 will total approximately $13 million. The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. The Company anticipates expanding or relocating five stores to larger spaces in the fourth quarter of fiscal 1996 and plans to expand or relocate 10 to 15 stores in fiscal 1997. The Company anticipates closing three stores in the fourth quarter of fiscal 1996 and two stores in fiscal 1997. 9 10 Management believes that the Company's working capital, bank loan agreement and cash flow from operating activities will be sufficient to meet the Company's operating and capital expenditure requirements through the end of fiscal 1997. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which was effective for the Company beginning February 5, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share in financial statements filed with form 10-K for the fiscal year ended February 2, 1997. In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and long-lived assets and certain identifiable intangibles to be disposed of. The Company adopted SFAS No. 121 in the first interim period of fiscal 1996 and such adoption did not impact its financial position or results of operations. INFLATION The Company does not believe that inflation has had a material effect on the results of operations during the past three years. There can be no assurance that the Company's business will not be affected by inflation in the future. SEASONALITY AND QUARTERLY RESULTS The Company's business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Company's first quarter historically accounts for the smallest percentage of annual net sales. In fiscal 1995 and 1994, excluding net sales generated by new 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 1995, approximately 43% of the Company's annual net sales occurred in the first half of the fiscal year and 57% in the second half, excluding net sales generated by new stores. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the amount of revenue contributed by new stores. IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS The preceding Management's Discussion and Analysis contains forward looking statements within the meaning of section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include the plans and objectives of management for future operations, including plans and objectives relating to the future economic performance of the Company. The forward-looking statements and associated risks set forth may include or relate to: (i) the planned opening of approximately 40 stores and expansion or relocation of 10 to 15 stores in fiscal 1997; (ii) the increase in average new store size; (iii) the success of the Company's juniors and footwear merchandising initiatives; (iv) statements regarding increased sales per store and sales growth as a consequence of adding new stores; (v) the timely ability of branded and private brand merchandise in sufficient quantities to satisfy customer demand; (vi) the growth in store operating and general and 10 11 administrative expenses as a result of store expansion; and (vii) the sufficiency of the Company's working capital, bank line of credit and cash flow from operating activities for the Company's future operating and capital requirements. The forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the following: (i) the ability of the Company to gauge the fashion tastes of its customers and provide merchandise that satisfies customer demand; (ii) a decline in demand for the merchandise offered by the Company; (iii) the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, and hire and train employees; (iv) management's ability to manage the Company's planned expansion; (v) the unavailability of merchandise from the Company's vendors and private brand sources; (vi) the effect of economic conditions; (vii) the effect of severe weather or natural disasters; (viii) the effect of competitive pressures from other retailers, particularly including those in the recently introduced juniors and footwear categories; and (ix) a disruption of trade with the countries in which the Company's private brand contract manufacturers are located. Results actually achieved thus may differ materially from expected results in these statements. In addition, as disclosed above, the business and operations of the Company are subject to substantial risks which increase the uncertainty inherent in such forward-looking statements. Any of the other factors disclosed above could cause the Company's net income or growth in net income to differ materially from prior results. 11 12 PART II -- OTHER INFORMATION Item 1 -- Legal Proceedings -- Not Applicable Item 2 -- Changes in Securities -- Not Applicable Item 3 -- Defaults Upon Senior Securities -- Not Applicable Item 4 -- Submission of Matters to a Vote of Security Holders -- Not Applicable Item 5 -- Other Information -- Not Applicable Item 6 -- Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Employment Agreement, dated as of October 1, 1996, by and between Pacific Sunwear of California, Inc. and Greg H. Weaver. (27) Financial Data Schedule (b) Reports on Form 8-K: No reports were filed on form 8-K during the quarter for which this report is filed. 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pacific Sunwear of California, Inc. (Registrant) Date: December 16, 1996 /s/ Greg H. Weaver -------------------------------------- President, Chief Executive Officer and Director Date: December 16, 1996 /s/ Carl W. Womack -------------------------------------- Senior Vice President, Chief Financial Officer and Secretary 13 EX-10.1 2 EMPLOYMENT AGREEMENT BETWEEN COMPANY & MR. WEAVER 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is entered into as of October 1, 1996, by and between Pacific Sunwear of California, Inc., a California corporation (the "Company"), and Greg H. Weaver ("Executive"). The Company desires to employ Executive, and Executive desires to be an employee of the Company, pursuant to the terms and conditions set forth herein. In consideration of the foregoing and the promises and covenants set forth below, the parties agree as follows: 1. Employment. The Company hereby employs Executive as President and Chief Executive Officer, and Executive agrees to be employed in such positions during the term of this Agreement. Executive shall devote his full time and efforts to perform his duties faithfully and diligently and, to the best of his ability, to advance the interests of the Company. 2. Compensation. The Company shall pay Executive a base salary of $375,000 per year, with such increases as may be approved by the Company's Board of Directors, payable in accordance with the Company's practices in effect from time to time. Notwithstanding the foregoing, the minimum annual adjustment to the base salary of Executive, commencing October 1, 1997, shall be equal to the greater of (i) the percentage by which the Consumer Price Index for the last month of the then current year of the term of this Agreement shall have increased as compared to the Consumer Price Index of the same month of the immediately preceding year and (ii) 5% of Executive's then annual base salary. "Consumer Price Index" refers to the Consumer Price Index -- Los Angeles Metropolitan Area -- All items compiled by the U.S. Department of Labor, Bureau of Labor Statistics, based on 1967 as 100. In addition, Executive shall receive a monthly car lease allowance of $800 per month, reimbursement for all other automobile expenses, family medical insurance, four weeks vacation per year and other benefits that are comparable to the benefits offered to other executive officers of the Company in general. The Company also shall provide Executive with a $1,000,000 term life insurance policy wherein Executive or a person designated by Executive is the beneficiary, subject to Executive completing and passing any required physical examinations. The Company also shall reimburse Executive for all out-of-pocket expenses reasonably incurred and paid by him in the performance of his duties pursuant to this Agreement. Such reimbursement shall be in accordance with the Company's policies, and Executive shall furnish to the Company the documentation required to support the deductibility of such expenses for federal income tax purposes. All payments made under this Agreement are subject to all deductions required by law. Executive also shall be entitled to participate in an annual bonus program wherein Executive shall receive a bonus equal to a percentage of his base salary, not to exceed 75% of his base salary, based upon the achievement of financial performance criteria to be established by the Company in consultation with Executive. The bonus payment, if any, shall be made reasonably promptly after audited financial statements are available to the Company for the purpose of determining the satisfaction of the financial performance criteria. 3. Term. (a) The term of this Agreement (the "Term") shall commence on the date hereof and shall terminate on October 18, 1997; provided, however, if the Company does not give Executive written notice at least 60 days prior to the end of the Term of the Company's intention to not have the Term extended for a one year period, then the Term shall automatically be extended for one year and shall be automatically extended each year thereafter unless the Company gives Executive written notice at least 60 days prior to the end of the Term (any such notice being a "60 Day Notice") of the Company's intention not to extend the Term. (b) The Term may be terminated at any time upon the occurrence of any of the following events: (i) The death or permanent disability of Executive; 2 (ii) Executive's voluntary resignation; (iii) Executive's discharge for cause; or (iv) Upon the 30th day following written notice of termination other than for cause (the "Termination Without Cause Notice") from the Company to Executive. (c) Executive shall be considered permanently disabled if Executive is absent from employment or unable to render services hereunder on a full-time basis by reason of physical or mental illness or disability for six months or more in the aggregate in any consecutive twelve month period during the Term. (d) As used in Paragraph 3(b)(ii), "voluntary resignation" means Executive has resigned for any reason other than at the express written request, whether or not for cause, of the Board. (e) As used in Paragraph 3(b)(iii), "cause" shall mean only that (i) Executive has refused to perform or discharge his material obligations or duties hereunder for 30 days after notice from the Board of such refusal, or (ii) Executive has engaged in illegal or other wrongful conduct substantially detrimental to the business or reputation of the Company. (f) If this Agreement is terminated pursuant to Paragraphs 3(b)(i), 3(b)(ii) or 3(b)(iii), this Agreement shall terminate immediately or at such later date as shall be designated by the Board and all of Executive's rights hereunder shall terminate effective upon such termination, except for payment of amounts earned by or owed to Executive prior to Executive's termination hereunder, including, without limitation, a Pro Rata Portion of the Bonus (as defined below). Except as provided above and as otherwise specified in any notice of termination, Executive shall not continue after termination to be an employee of the Company for any purpose and all rights Executive might thereafter have as an employee pursuant to any plan shall cease except as expressly provided to the contrary in writing under any such plan. (g) If the Company should terminate this Agreement pursuant to Paragraph 3(b)(iv) by giving a Termination Without Cause Notice or shall at any time give a 60 Day Notice: (i) Executive shall cease to be Chief Executive Officer and President of the Company, and to hold such other office or position Executive then holds in the Company or any subsidiary or affiliate thereof, effective upon the date specified in the Termination Without Cause Notice or the 60 Day Notice, as the case may be (the "Effective Date"), and if requested by a majority of the members of the Board, shall resign from the Board and from any of the Boards of Directors of the Company's subsidiaries or affiliated companies of which Executive may be a member. (ii) The Company shall be obligated and shall continue to pay Executive a salary at Executive's then annual salary (without regard to any bonus) for a period of one year following the Effective Date. Such payments shall be made in installments payable as provided in Section 2 hereof. The Company also shall pay Executive in a single payment within 60 days of the end of the Company's fiscal year a Pro Rata Portion of the Bonus (as defined below). "Pro Rata Portion of the Bonus" means an amount equal to any bonus to which Executive would have been entitled had Executive remained an employee for the balance of the fiscal year in which his employment terminated multiplied by a fraction, the numerator of which is the number of days from February 1 to the date of Executive's termination, and the denominator of which is 365. (h) Executive must give the Company written notice of at least 60 days prior to Executive's voluntary resignation. 4. Return of Documents and Property. Upon the termination of Executive's employment by the Company, or at any time upon the request of the Company, Executive (or his heir or personal representative) shall deliver to the Company (a) all documents and materials containing trade secrets and other confidential information relating to the Company's business and affairs, and (b) all other documents, materials and other 2 3 property belonging to the Company or its affiliated companies that are in the possession or under the control of Executive. 5. Assignment. Executive's rights and obligations under this Agreement shall not be assignable by Executive. The Company's rights and obligations under this Agreement shall not be assignable by the Company except as incident to the transfer, by merger, liquidation, or otherwise, of all or substantially all of the business of the Company. 6. Notices. Any notice required or permitted under this Agreement shall be given in writing and shall be deemed to have been effectively made or given if personally delivered, or if telegraphed, telexed, cabled, or mailed to the other party at its address set forth below in this Section 6, or at such other address as such party may designate by written notice to the other party hereto. Any effective notice hereunder shall be deemed given on the date personally delivered or on the date telegraphed, telexed, cabled or deposited in the United States mail (sent by certified mail, return receipt requested) mailed, as the case may be at the following address: (i) If to the Company: Pacific Sunwear of California, Inc. 5037 East Hunter Avenue Anaheim, California 92705 Attention: Secretary (ii) If to the Executive: Mr. Greg H. Weaver c/o Pacific Sunwear of California, Inc. 5037 East Hunter Avenue Anaheim, California 92705 7. Miscellaneous. This Agreement constitutes the entire agreement of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than those contained herein. This Agreement supersedes all prior agreements between the parties concerning the subject matter hereof, including that certain Severance Agreement dated February 6, 1996, between the Company and Executive which is hereby deemed terminated as of the date of this Agreement. This Agreement may only be amended in writing signed by both parties. No waiver by any party of any breach of this Agreement shall be deemed to be a waiver by any party of any preceding or succeeding breach. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without regard to conflicts of laws principles. The headings contained herein are for reference purposes only and shall not in any away affect the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, all such counterparts together shall constitute but one and the same instrument. 3 4 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PACIFIC SUNWEAR OF CALIFORNIA, INC. By: ---------------------------------- CARL W. WOMACK Chief Financial Officer, Vice President of Finance and Secretary "Executive" ------------------------------------- GREG H. WEAVER 4 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Pacific Sunwear of California, Inc.'s Form 10Q for the quarterly period ended November 3, 1996 and is qualified in its entirety by reference to such Form 10Q. 1 3-MOS FEB-02-1997 AUG-05-1996 NOV-03-1996 6,006,550 0 1,044,509 0 22,684,879 33,584,243 44,219,082 (15,649,422) 63,442,766 15,351,157 0 0 0 80,600 43,636,951 63,442,766 43,247,154 43,247,154 28,959,797 9,837,141 0 0 (89,862) 4,540,078 1,801,000 2,739,078 0 0 0 2,739,078 $0.33 $0.33
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