-----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, SZf1fLj/dbKMpp90fHThsXsKvQ5razW8Uzr0ueUzaScATbSHJQHlel1NuaRvrDg2 7K4sCu+VLlSXfsCsVhwqjw== 0000892569-97-003475.txt : 19980102 0000892569-97-003475.hdr.sgml : 19980102 ACCESSION NUMBER: 0000892569-97-003475 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971102 FILED AS OF DATE: 19971216 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC SUNWEAR OF CALIFORNIA INC CENTRAL INDEX KEY: 0000874841 STANDARD INDUSTRIAL CLASSIFICATION: 5600 IRS NUMBER: 953759463 STATE OF INCORPORATION: CA FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21296 FILM NUMBER: 97739036 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 - QUARTER ENDED NOVEMBER 2, 1997 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21296 PACIFIC SUNWEAR OF CALIFORNIA, INC. CALIFORNIA 95-3759463 (State of Incorporation) (I.R.S Employer Identification No.) 5037 EAST HUNTER AVENUE ANAHEIM, CALIFORNIA 92807 (Address of principal executive offices) (Zip code) (714) 693-8066 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, at November 21, 1997 was 13,725,042. 2 PACIFIC SUNWEAR OF CALIFORNIA, INC. FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 2, 1997 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements: Balance Sheets as of November 2, 1997 (unaudited) and February 2, 1997...............3 Statements of Operations (unaudited) for the third quarter and nine months ended November 2, 1997 and November 3, 1996......................................4 Statements of Cash Flows (unaudited) for the nine months ended November 2, 1997 and November 3, 1996............................................5 Notes to Financial Statements......................................................6-7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.........................................................8-12 PART II. OTHER INFORMATION Item 1. Legal Proceedings.....................................................................12 Item 2. Changes in Securities.................................................................12 Item 3. Defaults Upon Senior Securities.......................................................12 Item 4. Submission of Matters to a Vote of Security Holders...................................12 Item 5. Other Information.....................................................................12 Item 6. Exhibits and Reports on Form 8-K......................................................12 SIGNATURE PAGE........................................................................13
2 3 PACIFIC SUNWEAR OF CALIFORNIA, INC. BALANCE SHEETS ASSETS
NOVEMBER 2, FEBRUARY 2, 1997 1997 ------------- ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 7,467,925 $ 9,962,626 Short-term investments 16,676,534 -- Accounts receivable 1,452,042 583,811 Merchandise inventories 35,349,278 19,760,412 Prepaid expenses, includes $2,577,499 and $1,910,681 of prepaid rent, respectively 3,682,482 3,216,160 of prepaid rent, respectively Deferred taxes 1,358,733 1,358,733 ------------- ------------ Total current assets 65,986,994 34,881,742 PROPERTY AND EQUIPMENT: Leasehold improvements 35,242,433 25,210,439 Furniture, fixtures and equipment 26,419,537 20,244,954 ------------- ------------ 61,661,970 45,455,393 Less accumulated depreciation and amortization (19,437,598) (15,952,174) ------------- ------------ Net property and equipment 42,224,372 29,503,219 OTHER ASSETS: Goodwill, net of accumulated amortization of $360,826 and $292,165, respectively 8,002,917 796,578 Deposits and other assets 1,234,851 523,018 ------------- ------------ Total other assets 9,237,768 1,319,596 ------------- ------------ Total assets $ 117,449,134 $ 65,704,557 ============= ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 13,534,033 $ 6,686,561 Accrued liabilities (Note 7) 7,638,055 6,035,689 Income taxes payable 1,464,239 469,258 ------------- ------------ Total current liabilities 22,636,327 13,191,508 DEFERRED COMPENSATION 924,299 371,057 DEFERRED RENT 3,588,653 3,139,487 DEFERRED TAXES 1,456,463 1,456,463 SHAREHOLDERS' EQUITY: Preferred Stock, par value $.01; authorized, 5,000,000 shares; none issued and outstanding Common Stock, par value $.01; authorized, 33,750,000 shares; issued and outstanding, 13,664,918 and 12,138,161 shares, respectively 136,649 121,382 Additional paid-in capital 62,171,469 30,697,321 Retained earnings 26,535,274 16,727,339 ------------- ------------ Total shareholders' equity 88,843,392 47,546,042 ------------- ------------ Total liabilities and shareholders' equity $ 117,449,134 $ 65,704,557 ============= ============
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 2, 1997 NOVEMBER 3, 1996 NOVEMBER 2, 1997 NOVEMBER 3, 1996 ----------- ----------- ------------ ------------ Net sales $65,312,228 $43,247,154 $152,571,105 $105,454,832 Cost of goods sold, including buying, distribution, and occupancy costs Cost of goods sold, including buying, distribution and occupancy costs 41,641,155 28,959,797 101,343,997 73,071,566 ----------- ----------- ------------ ------------ Gross margin 23,671,073 14,287,357 51,227,108 32,383,266 Selling, general and administrative expenses 14,536,882 9,837,141 35,858,585 25,805,134 ----------- ----------- ------------ ------------ Operating income 9,134,191 4,450,216 15,368,523 6,578,132 Interest income 465,822 89,862 855,412 137,342 ----------- ----------- ------------ ------------ Income before income tax expense 9,600,013 4,540,078 16,223,935 6,715,474 Income tax expense 3,796,000 1,801,000 6,416,000 2,661,000 ----------- ----------- ------------ ------------ Net income $ 5,804,013 $ 2,739,078 $ 9,807,935 $ 4,054,474 =========== =========== ============ ============ Net income per common and common equivalent share $ 0.41 $ 0.22 $ 0.73 $ 0.33 ----------- ----------- ------------ ------------ Weighted average common and common equivalent shares outstanding 14,156,319 12,513,122 13,421,957 12,402,620 =========== =========== ============ ============
See accompanying notes 4 5 PACIFIC SUNWEAR OF CALIFORNIA, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED ---------------------------------- NOVEMBER 2, 1997 NOVEMBER 3, 1996 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,807,935 $ 4,054,474 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,863,186 3,852,948 Change in, net of effect of acquisition: Accounts receivable (868,231) (721,210) Merchandise inventories (14,314,232) (7,276,035) Prepaid expenses (451,322) (236,956) Deposits and other assets (470,166) (120,825) Accounts payable 6,847,472 4,466,230 Accrued liabilities 1,602,366 1,680,926 Income taxes and deferred income taxes 1,993,100 1,163,972 Deferred rent 449,166 363,289 Deferred compensation 553,242 115,232 ------------ ----------- Net cash provided by operating activities 10,012,516 7,342,045 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (24,395,534) -- Short-term investment maturities 7,719,000 -- Acquisition, net of cash acquired (10,414,634) -- Investment in property and equipment (15,907,345) (5,779,235) ------------ ----------- Net cash used in investing activities (42,998,513) (5,779,235) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 30,085,073 -- Principal payments under loan agreement -- (781,250) Cash paid in lieu of fractional shares due to 3-for-2 stock split (2,187) (1,692) Proceeds from exercise of stock options 408,410 910,840 ------------ ----------- Net cash provided by financing activities 30,491,296 127,898 ------------ ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (2,494,701) 1,690,708 CASH AND CASH EQUIVALENTS, beginning of period 9,962,626 4,315,842 ------------ ----------- CASH AND CASH EQUIVALENTS, end of period $ 7,467,925 $ 6,006,550 ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 2,381 $ 10,811 Income taxes $ 4,422,900 $ 1,497,028
Non-cash transaction: During the nine months ended November 2, 1997 and November 3, 1996 , the Company recorded an increase to additional paid-in capital of $998,119 and $444,542, respectively, related to tax benefits associated with the exercise of non-qualified stock options. See accompanying notes 5 6 PACIFIC SUNWEAR OF CALIFORNIA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying financial statements are unaudited except for the February 2, 1997 balance sheet. These statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company's fiscal year is the 52- or 53-week period which ends on the Sunday closest to the end of January. "Fiscal 1997" is a 52-week period which ends February 1, 1998. In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported expenses during the reported period. Actual results could differ from these estimates. The results of operations for the third quarter and nine months ended November 2, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 1998. For further information, refer to the financial statements and notes thereto as of and for the years ended February 2, 1997, February 4, 1996 and January 29, 1995. NOTE 2 - CASH AND CASH EQUIVALENTS; SHORT-TERM INVESTMENTS Cash and cash equivalents include cash on hand and marketable securities with original maturities of three months or less. Short-term investments consist of highly liquid investments with original maturities between three and twelve months. Management determines the proper classifications of investments at the time of purchase and reevaluates such designations as of each balance sheet date. At November 2, 1997, all securities were classified as held-to-maturity under the provisions of SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" based on the Company's positive intent and ability to hold the securities to maturity. In accordance with SFAS No. 115, these securities are carried at amortized cost, which approximates fair market value. NOTE 3 - FOLLOW-ON OFFERING On June 16, 1997, the Company issued 1,260,000 shares of its common stock in a follow-on stock offering and on July 17, 1997 issued an additional 47,250 shares upon the partial exercise of the underwriters' over-allotment option. The Company's net proceeds, after deducting expenses associated with the offering, were $30.1 million. NOTE 4 - NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share are based on the weighted average number of common and common equivalent shares outstanding during the relevant periods. Stock Split - On October 9, 1997, the Company effected a three-for-two stock split. Earnings per share and share outstanding amounts have been restated to give retroactive effect to the stock split in these financial statements. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted earnings per share. For the third quarter of fiscal 1997 and fiscal 1996, the amount of basic earnings per share would have been $.42 in comparison to $.41 per common and common equivalent share and $.23 in comparison to $.22 per common and common equivalent share, respectively. For the nine months ended November 2, 1997 and November 3, 1996, the 6 7 amount of basic earnings per share would have been $.76 in comparison to $.73 per common and common equivalent share and $.34 in comparison to $.33 per common and common equivalent share, respectively. NOTE 5 - CREDIT FACILITY The Company has a credit facility with a bank which expires in August 1998. The credit facility provides for an $11.5 million line of credit, which includes sub-limits of $7.5 million for cash advances, and $9.0 million (as amended in June 1997) for commercial letters of credit. Interest on advances under the line of credit facility is payable monthly at the bank's prime rate (8.5% at November 2, 1997). At November 2, 1997, the Company had $4.1 million in letters of credit outstanding and no cash advances outstanding. The loan agreement subjects the Company to various restrictive covenants, including maintenance of certain financial ratios and prohibits payment of cash dividends on capital stock. At November 2, 1997, the Company was in compliance with such covenants. NOTE 6 - FEDERAL AND STATE INCOME TAX EXPENSE The combined federal and state income tax expense was calculated using estimated effective annual statutory tax rates. NOTE 7 - ACCRUED LIABILITIES Accrued liabilities consist of the following:
NOVEMBER 2, FEBRUARY 2, 1997 1997 ---------- ---------- Accrued compensation and benefits $3,055,259 $2,939,217 Reserve for store expansion/relocation and closing costs 1,964,675 1,424,315 Sales tax payable 736,104 401,181 Other accrued liabilities 1,882,017 1,270,976 ---------- ---------- $7,638,055 $6,035,689 ========== ==========
NOTE 8 - ACQUISITION Effective September 4,1997 the Company acquired from Good Vibrations, Inc., a Florida corporation, the store assets and inventory, leasehold improvements and lease rights pertaining to 15 retail stores operated by Good Vibrations. The purchase price for this acquisition of the assets was $10.4 million, which included $7.3 million of goodwill and $.3 million for non-competition agreements, which will be amortized over 25 years and 5 years, respectively. The stores are located in regional malls in Florida, offering casual young men's apparel, junior apparel, accessories and footwear to teens and young adults. 7 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The thirteen weeks ended November 2, 1997 (third quarter) as compared to the thirteen weeks ended November 3, 1996 (third quarter) Net Sales Net sales increased to $65.3 million for the third quarter of fiscal 1997 from $43.2 million for the third quarter of fiscal 1996, an increase of $22.1 million, or 51.2%. Of this $22.1 million increase, $8.3 million was attributable to net sales generated by 37 new stores opened in fiscal 1997 and not yet included in the comparable store base, $6.6 million was attributable to a 17.2% increase in comparable store net sales in the third quarter of fiscal 1997, $4.3 million was attributable to net sales generated by new stores opened in fiscal 1996 and not yet included in the comparable store base, $2.0 million was attributable to 15 stores that have been expanded or relocated to the larger format and not yet included in the comparable store base and $1.5 million was attributable to the 15 Good Vibrations stores acquired in September 1997 and not yet included in the comparable store base. Offsetting these increases, was a $.6 million decrease due to closing six stores, three of which were closed in the fourth quarter of fiscal 1996 and three of which were closed during the nine months ended November 2, 1997. The increase in comparable store net sales was primarily attributable to the addition of footwear and juniors to certain of the Company's stores and, to a lesser extent, increases in sales of young men's merchandise. Net sales of footwear and junior female apparel represented approximately 24% of total net sales for the third quarter of fiscal 1997 compared to approximately 12% for the third quarter of fiscal 1996. The average retail price per unit sold increased approximately 5% in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996, primarily attributable to a change in the mix of products sold, including the addition of footwear, an increase in sales of pants as a percentage of net sales and a decrease in T-shirt sales as a percentage of net sales. Gross Margin Gross margin, after buying, distribution and occupancy costs, increased to $23.7 million for the third quarter of fiscal 1997 from $14.3 million for the third quarter of fiscal 1996, an increase of $9.4 million, or 65.7%. As a percentage of net sales, gross margin increased to 36.3% from 33.1%. Of this 3.2% increase, 1.4% was due to a decrease in occupancy costs as a percentage of net sales which was related to higher comparable store net sales, 1.3% was due to an increase in net merchandise margins as a percentage of net sales as a result of an increase in initial markup and .5% was due to a decrease in buying and distribution cost as a percentage of net sales. Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $14.5 million for the third quarter of fiscal 1997 from $9.8 million for the third quarter of fiscal 1996, an increase of $4.7 million, or 48.0%. As a percentage of net sales, these expenses decreased to 22.2% from 22.7%. Of this .5% decrease, .7% was attributable to a decrease in store selling expenses as a percentage of net sales, primarily as a result of an increase in comparable store net sales and higher total net sales, partially offset by a .2% increase in general and administrative expenses as a percentage of net sales. Income Tax Expense Income tax expense was $3.8 million for the third quarter of fiscal 1997 compared to $1.8 million for the third quarter of fiscal 1996. The effective income tax rate for the third quarter of fiscal 1997 was 39.6 % compared to 39.7% for the third quarter of fiscal 1996. 8 9 The thirty-nine weeks ended November 2, 1997 (nine months) as compared to the thirty-nine weeks ended November 3, 1996 (nine months) Net Sales Net sales increased to $152.6 million for the first nine months of fiscal 1997 from $105.5 million for the first nine months of fiscal 1996, an increase of $47.1 million, or 44.6%. Of this $47.1 million increase, $15.4 million was attributable to a 16.2% increase in comparable store net sales in the first nine months of fiscal 1997, $15.1 million was attributable to net sales generated by new stores opened in fiscal 1996 and not yet included in the comparable store base, $12.6 million was attributable to 37 new stores opened in fiscal 1997 and not yet included in the comparable store base, $4.0 million was attributable to 15 stores that have been expanded or relocated to the larger format and are not yet included in the comparable store base and $1.5 million was attributable to the 15 Good Vibrations stores acquired in September 1997 and not yet included in the comparable store base. Offsetting these increases was a $1.5 million decrease due to closing six stores, three of which were closed in the fourth quarter of fiscal 1996 and three of which were closed during the nine months ended November 2, 1997. The increase in comparable store net sales was primarily attributable to the addition of footwear and juniors to certain of the Company's stores and, to a lesser extent, increases in sales of young men's merchandise. Net sales of footwear and juniors represented approximately 23% of total net sales for the first nine months of fiscal 1997 compared to approximately 11% for the first nine months of fiscal 1996. The average retail price per unit sold increased approximately 8% in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996, primarily attributable to a change in the mix of products sold, including the addition of footwear, an increase in sales of pants as a percentage of net sales and a decrease in T-shirt sales as a percentage of net sales. Gross Margin Gross margin, after buying, distribution and occupancy costs, increased to $51.2 million for the first nine months of fiscal 1997 from $32.4 million for the first nine months of fiscal 1996, an increase of $18.8 million, or 58.0%. As a percentage of net sales, gross margin increased to 33.6% from 30.7%. Of this 2.9% increase, 1.8% was due to a decrease in occupancy costs as a percentage of net sales which was related to higher comparable store net sales, 1.0% was due to an increase in net merchandise margins due to an increase in initial markup and a decrease in markdowns as a percentage of net sales and .1% was due to a decrease in buying and distribution costs. Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $35.9 million for the nine months of fiscal 1997 from $25.8 million for the nine months of fiscal 1996, an increase of $10.1 million, or 39.1%. As a percentage of net sales, these expenses decreased to 23.5% from 24.5%. Of this 1.0% decrease, 1.2% was attributable to a decrease in store selling expenses as a percentage of net sales primarily as a result of an increase in comparable store net sales and higher total net sales, partially offset by a .2% increase in general and administrative expenses as a percentage of net sales. Income Tax Expense Income tax expense was $6.4 million for the first nine months of fiscal 1997 compared to $2.7 million for the first nine months of fiscal 1996. The effective income tax rate for the first nine months of fiscal 1997 was 39.5% compared to 39.6% for the first nine months of fiscal 1996. 9 10 LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations from internally generated cash flow, short-term borrowings and equity financing. The Company's primary capital requirements have been for the construction of new stores, remodeling, expansion, or relocation of selected stores and financing of inventories. Net cash provided by operating activities for the first nine months of fiscal 1997 was $10.0 million compared to $7.3 million for the first nine months of fiscal 1996. The $2.7 million increase was attributable to an increase in net income of $5.7 million, an increase in accrued liabilities and taxes of $.8 million, an increase in depreciation and amortization of $1.0 million, offset by an increase in merchandise inventories net of accounts payable of $4.7 million and net increases of other items of $.1 million. Working capital at November 2, 1997 was $43.4 million compared to $21.7 million at February 2, 1997, an increase of $21.7 million. This increase was primarily attributable to the increase in cash and short term investments as a result of a follow-on offering completed in the second quarter of fiscal 1997, offset by capital expenditures related to the construction of 37 new stores and 10 expansions/relocations, as well as the acquisition of the store assets and leasehold improvements of 15 stores operated by Good Vibrations, Inc., in the third quarter of fiscal 1997 and the goodwill generated thereby. Inventories at November 2, 1997 were $35.3 million compared to $19.8 million at February 2, 1997, an increase of $15.5 million. This increase was related to opening 37 new stores, the acquisition of the 15 Good Vibrations stores, expanding/relocating ten stores with 50% larger average square footage, the addition of juniors and footwear to certain of the Company's existing stores as well as a seasonal increase in inventories in all stores. The increase in accounts payable of $6.8 million at November 2, 1997 compared to February 2, 1997 was primarily attributable to the increase in inventories at November 2, 1997. Net cash used in investing activities was $43.0 million for the first nine months of fiscal 1997 compared to $5.8 million for the first nine months of fiscal 1996. Of this $37.2 million increase, $24.4 million is attributable to the purchase of short-term investments in fiscal 1997, offset by $7.7 million in short-term investment maturities. Net cash invested in property and equipment for the first nine months of fiscal 1997 was $15.9 million compared to $5.8 million for the first nine months of fiscal 1996, due to an increase in the number of new stores opened and, to a lesser extent, an increase in the number of stores expanded/relocated in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. The Company purchased the store assets, leasehold improvements and lease rights for 15 Good Vibrations stores for approximately $9.2 million in cash and purchased inventories of approximately $1.2 million in cash at the closing, which occurred on September 4, 1997. Of the $10.4 million purchase price, $9.9 million was paid on the closing date, $.3 million was paid on September 30, 1997 and the balance of $.2 million is payable in March 1998. Net cash provided by financing activities for the first nine months of fiscal 1997 was $30.5 million compared to $.1 million for the first nine months of fiscal 1996. In the second quarter of fiscal 1997, the Company issued 1,307,250 shares of common stock in a follow-on stock offering. The net proceeds to the Company from the issuance of these shares were $30.1 million. Additionally, the Company made no borrowings or repayments under its loan agreement, compared to the repayment of a term loan of $.8 million in the first nine months of fiscal 1996. In the first nine months of fiscal 1997, the Company received proceeds of $.4 million from the exercise of stock options compared to $.9 million in the first nine months of fiscal 1996. At November 2, 1997, the Company had $4.1 million in letters of credit outstanding. The Company estimates that its capital expenditures during the fourth quarter of 1997 will be approximately $7.0 million in connection with opening 15 new stores, the relocation of the corporate office and distribution center scheduled to occur in the first quarter of fiscal 1998, expanding or relocating six existing stores and commencing construction on approximately 12 new stores opening in fiscal 1998. The Company plans to open approximately 60 stores, and expand or relocate 15 existing stores during fiscal 1998. In addition, the Company plans to relocate the corporate office and distribution center to a new location in close proximity to the current facilities in the first quarter of fiscal 1998. The Company estimates that capital expenditures in fiscal 1998 will total approximately $28 million. The Company reviews the operating performance of its stores on an ongoing basis to determine which stores, if any, to close and records closing costs as stores are closed or identified to be closed. The Company closed three stores in the first nine months of fiscal 1997 and anticipates closing one additional store during the remainder of fiscal 1997. 10 11 Management believes that the Company's working capital, bank line of credit and cash flows from operating activities will be sufficient to meet the Company's operating and capital expenditure requirements through the end of fiscal 1998. INFLATION The Company does not believe that inflation has had a material effect on the results of operations during the past three years. There can be no assurance that the Company's business will not be affected by inflation in the future. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128") which is effective for financial statements issued for periods ending after December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted earnings per share. For the third quarter of fiscal 1997 and fiscal 1996, the amount of basic earnings per share would have been $.42 in comparison to $.41 per common and common equivalent share and $.23 in comparison to $.22 per common and common equivalent share, respectively. For the first nine months ended November 2, 1997 and November 3, 1996, the amount of basic earnings per share would have been $.76 in comparison to $.73 per common and common equivalent share and $.34 in comparison to $.33 per common and common equivalent share, respectively. SEASONALITY AND QUARTERLY RESULTS The Company's business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Company's first quarter historically accounts for the smallest percentage of annual net sales. In fiscal 1996 and fiscal 1995, excluding net sales generated by new and expanded/relocated stores, the Christmas and back-to-school periods together accounted for approximately 36% of the Company's annual net sales and a higher percentage of the Company's operating income. In fiscal 1996, excluding net sales generated by new and expanded/relocated stores, approximately 43% of the Company's annual net sales occurred in the first half of the fiscal year and 57% in the second half. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the amount of revenue contributed by new stores, the timing and level of markdowns, the timing of store closings, expansions and relocations, competitive factors and general economic conditions. SAFE HARBOR STATEMENT The preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include the plans and objectives of management for future operations, including plans and objectives relating to the future economic performance of the Company. The forward-looking statements and associated risks set forth herein may include or relate to: (i) the planned opening of approximately 15 stores and expansion or relocation of six stores during the remainder of fiscal 1997; (ii) the opening of 60 new stores and expansion/relocation of 15 existing stores fiscal year 1998; (iii) the relocation of the corporate office and distribution center to a new location in close proximity to the current facilities in the first quarter of fiscal 1998; (iv) anticipation of closing one additional store in fiscal 1997; (v) the $28 million estimate of fiscal 1998 capital expenditures and (vi) sufficiency of the Company's working capital, bank line of credit and cash flows from operating activities for the Company's future operating and capital requirements. The forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, the following: (i) the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, and hire and train employees; (ii) management's ability to manage the Company's planned expansion; (iii) the availability of merchandise from the Company's vendors and private brand sources; (iv) any unexpected delays in the timing of the availability of the Company's new corporate office and distribution center; (v) the effect of economic conditions; and (vi) the effect of competitive pressures from other retailers, particularly including those in the recently introduced juniors and footwear categories. Results actually achieved thus may differ materially from expected results in these statements. 11 12 PART II-OTHER INFORMATION Item 1 - Legal Proceedings - Not Applicable Item 2 - Changes in Securities - Not Applicable Item 3 - Defaults Upon Senior Securities - Not Applicable Item 4 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 5 - Other Information - Not Applicable Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 Employment Agreement, dated November 3, 1997, by and between Pacific Sunwear of California, Inc. and Greg H. Weaver. (27) Financial Data Schedule (b) Reports on Form 8-K: On September 16, 1997 a form 8-K was filed reporting the acquisition of certain assets of Good Vibrations , Inc. a Florida corporation. The Company purchased the leasehold interests and improvements, store assets, intellectual property, certain contracts and goodwill for a purchase price of approximately $9.2 million in cash and purchased inventories of approximately $1.2 million in cash at the closing date of September 4, 1997. 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Pacific Sunwear of California, Inc. (Registrant) Date: December 10, 1997 \s\ GREG H. WEAVER ---------------------- Greg H. Weaver Chairman of the Board, Chief Executive Officer Date: December 10, 1997 \s\ CARL W. WOMACK --------------------- Carl W. Womack Senior Vice President, Chief Financial Officer and Secretary 13 EX-10.1 2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT 1 EXHIBIT 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "AGREEMENT") is entered into as of November 3, 1997, by and between Pacific Sunwear of California, Inc., a California corporation (the "Company"), and Greg H. Weaver ("Executive"). The Company desires to employ Executive, and Executive desires to be an employee of the Company, pursuant to the terms and conditions set forth herein. In consideration of the foregoing and the promises and covenants set forth below, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Executive as Chairman of the Board of Directors and Chief Executive Officer, and Executive agrees to be employed in such positions during the term of this Agreement. Executive shall devote his full time and efforts to perform his duties faithfully and diligently and, to the best of his ability, to advance the interests of the Company. 2. COMPENSATION. The Company shall pay Executive a base salary of $500,000 per year, with such increases as may be approved by the Company's Board of Directors, payable in accordance with the Company's practices in effect from time to time. Notwithstanding the foregoing, the minimum annual adjustment to the base salary of Executive, commencing November 3, 1997, shall be equal to the greater of (i) the percentage by which the Consumer Price Index for the last month of the then current year of the term of this Agreement shall have increased as compared to the Consumer Price Index of the same month of the immediately preceding year and (ii) 5% of Executive's then annual base salary. "Consumer Price Index" refers to the Consumer Price Index - Los Angeles Metropolitan Area - All items compiled by the U.S. Department of Labor, Bureau of Labor Statistics, based on 1967 as 100. 2 In addition, Executive shall receive a monthly car lease allowance of $800 per month, reimbursement for all other automobile expenses, family medical insurance, five weeks vacation per year and other benefits that are comparable to the benefits offered to other executive officers of the Company in general. The Company also shall provide Executive with a $1,000,000 term life insurance policy wherein Executive or a person designated by Executive is the beneficiary, subject to Executive completing and passing any required physical examinations. The Company also shall reimburse Executive for all out-of-pocket expenses reason- ably incurred and paid by him in the performance of his duties pursuant to this Agreement. Such reimbursement shall be in accordance with the Company's policies, and Executive shall furnish to the Company the documentation required to support the deductibility of such expenses for federal income tax purposes. All payments made under this Agreement are subject to all deductions required by law. Executive also shall be entitled to participate in an annual bonus program wherein Executive shall receive (i) with regard to 1998 and thereafter, a bonus equal to a percentage of his base salary, not to exceed 150% (100% x 150%) of his base salary and (ii) with regard to 1997, 112.5% (75% x 150%) using $400,000 as the base salary for three quarters of 1997 and using $500,000 as the base salary for one quarter of 1997), based upon the achievement of financial performance criteria to be established by the Company in consultation with Executive. The bonus payment, if any, shall be made reasonably promptly after audited financial statements are available to the Company for the purpose of determining the satisfaction of the financial performance criteria. Nothwithstanding the foregoing, if the Company determines in good faith that there is a reasonable likelihood that any bonus payable to Executive would not be deductible by the Company for federal income tax purposes solely by reason of the limitation under Section 162(m) of the Internal Revenue Code of 1986, as amended ("Section 162(m)"), then to the extent reasonably deemed necessary by the Company to ensure that the entire amount of such bonus is deductible, the Company may defer payment of all or any 2 3 portion of such bonus. The amount of bonus so deferred shall accrue interest at the rate of 7.5% per year, compounded monthly, until paid. The amount of such deferred bonus and accrued interest shall be paid to Executive (or his estate in the event of his death) at the earliest possible date, as determined by the Company in good faith, on which the deductibility of compensation paid or payable to Executive for the taxable year of the Company for which the payment is made will not be limited by Section 162(m). 3. TERM. (a) The term of this Agreement (the "Term") shall commence on the date hereof and shall terminate on January 15, 1999; provided, however, if the Company does not give Executive written notice at least 60 days prior to the end of the Term of the Company's intention to not have the Term extended for a one year period, then the Term shall automatically be extended for one year and shall be automatically extended each year thereafter unless the Company gives Executive written notice at least 60 days prior to the end of the Term (any such notice being a "60 Day Notice") of the Company's intention not to extend the Term. (b) The Term may be terminated at any time upon the occurrence of any of the following events: (i) The death or permanent disability of Executive; (ii) Executive's voluntary resignation; (iii) Executive's discharge for cause; or (iv) Upon the 30th day following written notice of termination other than for cause (the "Termination Without Cause Notice") from the Company to Executive. (c) Executive shall be considered permanently disabled if Executive is absent from employment or unable to render services hereunder on a full-time 3 4 basis by reason of physical or mental illness or disability for six months or more in the aggregate in any consecutive twelve month period during the Term. (d) As used in Paragraph 3(b)(ii), "voluntary resignation" means Executive has resigned for any reason other than at the express written request, whether or not for cause, of the Board. (e) As used in Paragraph 3(b)(iii), "cause" shall mean only that (i) Executive has refused to perform or discharge his material obligations or duties hereunder for 30 days after notice from the Board of such refusal, or (ii) Executive has engaged in illegal or other wrongful conduct substantially detrimental to the business or reputation of the Company. (f) If this Agreement is terminated pursuant to Paragraphs 3(b)(i), 3(b)(ii) or 3(b)(iii), this Agreement shall terminate immediately or at such later date as shall be designated by the Board and all of Executive's rights hereunder shall terminate effective upon such termination, except for payment of amounts earned by or owed to Executive prior to Executive's termination hereunder, including, without limitation, a Pro Rata Portion of the Bonus (as defined below). Except as provided above and as otherwise specified in any notice of termination, Executive shall not continue after termination to be an employee of the Company for any purpose and all rights Executive might thereafter have as an employee pursuant to any plan shall cease except as expressly provided to the contrary in writing under any such plan. (g) If the Company should terminate this Agreement pursuant to Paragraph 3(b)(iv) by giving a Termination Without Cause Notice or shall at any time give a 60 Day Notice: (i) Executive shall cease to be Chairman of the Board of Directors and Chief Executive Officer of the Company, and to hold such other office or 4 5 position Executive then holds in the Company or any subsidiary or affiliate thereof, effective upon the date specified in the Termination Without Cause Notice or the 60 Day Notice, as the case may be (the "Effective Date"), and if requested by a majority of the members of the Board, shall resign from the Board and from any of the Boards of Directors of the Company's subsidiaries or affiliated companies of which Executive may be a member. (ii) The Company shall be obligated and shall continue to pay Executive a salary at Executive's then annual salary (without regard to any bonus) for a period of one year following the Effective Date. Such payments shall be made in installments payable as provided in Section 2 hereof. The Company also shall pay Executive in a single payment within 60 days of the end of the Company's fiscal year a Pro Rata Portion of the Bonus (as defined below). "Pro Rata Portion of the Bonus" means an amount equal to any bonus to which Executive would have been entitled had Executive remained an employee for the balance of the fiscal year in which his employment terminated multiplied by a fraction, the numerator of which is the number of days from February 1 to the date of Executive's termination, and the denominator of which is 365. (h) Executive must give the Company written notice of at least 60 days prior to Executive's voluntary resignation. 4. RETURN OF DOCUMENTS AND PROPERTY. Upon the termination of Executive's employment by the Company, or at any time upon the request of the Company, Executive (or his heir or personal representative) shall deliver to the Company (a) all documents and materials containing trade secrets and other confidential information relating to the Company's business and affairs, and (b) all other documents, materials and other property belonging to the Company or its 5 6 affiliated companies that are in the possession or under the control of Executive. 5. ASSIGNMENT. Executive's rights and obligations under this Agreement shall not be assignable by Executive. The Company's rights and obligations under this Agreement shall not be assignable by the Company except as incident to the transfer, by merger, liquidation, or otherwise, of all or substantially all of the business of the Company. 6. NOTICES. Any notice required or permitted under this Agreement shall be given in writing and shall be deemed to have been effectively made or given if personally delivered, or if telegraphed, telexed, cabled, or mailed to the other party at its address set forth below in this Section 6, or at such other address as such party may designate by written notice to the other party hereto. Any effective notice hereunder shall be deemed given on the date personally delivered or on the date telegraphed, telexed, cabled or deposited in the United States mail (sent by certified mail, return receipt requested) mailed, as the case may be at the following address: (i) If to the Company: Pacific Sunwear of California, Inc. 5037 East Hunter Avenue Anaheim, California 92705 Attention: Secretary (ii) If to the Executive: Mr. Greg H. Weaver c/o Pacific Sunwear of California, Inc. 5037 East Hunter Avenue Anaheim, California 92705 7. MISCELLANEOUS. This Agreement constitutes the entire agreement of the parties hereto relating to the subject matter hereof, and there are no written or oral terms or representations made by either party other than 6 7 those contained herein. This Agreement supersedes all prior agreements between the parties concerning the subject matter hereof, including that certain Severance Agreement dated February 6, 1996, between the Company and Executive which is hereby deemed terminated as of the date of this Agreement. This Agreement may only be amended in writing signed by both parties. No waiver by any party of any breach of this Agreement shall be deemed to be a waiver by any party of any preceding or succeeding breach. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without regard to conflicts of laws principles. The headings contained herein are for reference purposes only and shall not in any away affect the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, all such counterparts together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. PACIFIC SUNWEAR OF CALIFORNIA, INC. By: ______________________________ CARL W. WOMACK Chief Financial Officer, Vice President of Finance and Secretary "EXECUTIVE" ----------------------------------- GREG H. WEAVER 7 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 2, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 3-MOS FEB-01-1998 AUG-04-1997 NOV-02-1997 7,467,925 16,676,534 1,452,042 0 35,349,278 65,986,994 61,661,970 (19,437,598) 117,449,134 22,636,327 0 0 0 136,649 88,706,743 117,449,134 65,312,228 65,312,228 41,641,155 14,536,882 0 0 (465,822) 9,600,013 3,796,000 5,804,013 0 0 0 5,804,013 0.42 0.42
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