-----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, DGPKxrX230dqc/JogYRtnkN7k9a4TmnXyDWDzRyLVLQPcEgDW1ZxvQzk0Hw/26oy EGXmHCvYWJ8AggsAqHGFgQ== 0000892569-99-001564.txt : 19990623 0000892569-99-001564.hdr.sgml : 19990623 ACCESSION NUMBER: 0000892569-99-001564 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990502 FILED AS OF DATE: 19990524 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: SEC FILE NUMBER: 000-21296 FILM NUMBER: 99632917 BUSINESS ADDRESS: STREET 1: 5200 E LA PALMA AVE CITY: ANAHEIM STATE: CA ZIP: 92807 BUSINESS PHONE: 7146938066 MAIL ADDRESS: STREET 1: 5200 E LA PALMA AVE CITY: ANAHEIM STATE: CA ZIP: 92807 10-Q 1 FORM 10-Q PERIOD END MAY 2, 1999 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 MAY 2, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-21296 PACIFIC SUNWEAR OF CALIFORNIA, INC. CALIFORNIA 95-3759463 (State of Incorporation) (I.R.S Employer Identification No.) 5200 EAST LA PALMA AVENUE ANAHEIM, CALIFORNIA 92807 (Address of principal executive offices) (Zip code) (714) 693-8066 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of the registrant's Common Stock, par value $.01 per share, at May 18, 1999 was 20,583,899. 2 PACIFIC SUNWEAR OF CALIFORNIA, INC. FORM 10-Q FOR THE QUARTER ENDED MAY 2, 1999 INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of May 2, 1999 (unaudited) and January 31, 1999................................................................................3 Consolidated Statements of Income and Comprehensive Income (unaudited) for the thirteen weeks ended May 2, 1999 and May 3, 1998............................................4 Consolidated Statements of Cash Flows (unaudited) for the thirteen weeks ended May 2, 1999 and May 3, 1998...................................................................5 Notes to Consolidated Financial Statements..........................................................6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................8-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk...........................................13 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................................................14 Item 2. Changes in Securities and Use of Proceeds............................................................14 Item 3. Defaults Upon Senior Securities......................................................................14 Item 4. Submission of Matters to a Vote of Security Holders..................................................14 Item 5. Other Information....................................................................................14 Item 6. Exhibits and Reports on Form 8-K.....................................................................14 SIGNATURE PAGE.......................................................................................15
2 3 PACIFIC SUNWEAR OF CALIFORNIA, INC. CONSOLIDATED BALANCE SHEETS
ASSETS MAY 2, JANUARY 31, 1999 1999 ------------- ------------- CURRENT ASSETS: (Unaudited) Cash and cash equivalents (Note 2) $ 11,253,028 $ 19,031,738 Accounts receivable 2,415,226 899,179 Merchandise inventories 46,444,821 42,469,829 Prepaid expenses, includes $3,775,556 and $3,620,435 of prepaid rent, respectively 5,889,245 5,044,941 Prepaid income tax -- 713,402 Deferred taxes 1,944,275 1,944,275 ------------- ------------- Total current assets 67,946,595 70,103,364 PROPERTY AND EQUIPMENT: Leasehold improvements 53,409,402 47,877,157 Furniture, fixtures and equipment 50,112,807 45,819,759 ------------- ------------- 103,522,209 93,696,916 Less accumulated depreciation and amortization (28,857,495) (26,773,496) ------------- ------------- Net property and equipment 74,664,714 66,923,420 OTHER ASSETS: Goodwill, net of accumulated amortization of $837,651 and $758,180, respectively 7,526,092 7,605,563 Deferred compensation and other assets (Note 6) 3,698,592 3,142,504 ------------- ------------- Total other assets 11,224,684 10,748,067 ------------- ------------- Total assets $ 153,835,993 $ 147,774,851 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 13,303,326 $ 13,867,906 Accrued liabilities (Note 5) 7,720,482 8,690,783 Income taxes payable 446,092 -- ------------- ------------- Total current liabilities 21,469,900 22,558,689 DEFERRED COMPENSATION 3,112,838 2,826,531 OTHER LONG-TERM LIABILITIES 28,316 28,316 DEFERRED RENT 4,900,803 4,689,772 DEFERRED TAXES 974,522 974,522 SHAREHOLDERS' EQUITY: Preferred stock, par value $.01; authorized, 5,000,000; none issued and outstanding Common stock, par value $.01; authorized 50,625,000 shares; issued and outstanding, 20,569,947 and 20,433,852 shares, respectively 205,699 204,339 Additional paid-in capital 62,510,539 59,902,375 Retained earnings 60,633,376 56,590,307 ------------- ------------- Total shareholders' equity 123,349,614 116,697,021 ------------- ------------- Total liabilities and shareholders' equity $ 153,835,993 $ 147,774,851 ============= =============
See accompanying notes 3 4 PACIFIC SUNWEAR OF CALIFORNIA, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
FOR THE THIRTEEN WEEKS ENDED -------------------------------- MAY 2, 1999 MAY 3, 1998 ----------- ----------- Net sales $81,442,910 $61,162,250 Cost of goods sold, including buying, distribution and occupancy costs 55,297,787 41,555,214 ----------- ----------- Gross margin 26,145,123 19,607,036 Selling, general and administrative expenses 19,681,292 15,147,526 ----------- ----------- Operating income 6,463,831 4,459,510 Interest income 112,238 320,404 ----------- ----------- Income before income tax expense 6,576,069 4,779,914 Income tax expense (Note 4) 2,533,000 1,893,000 ----------- ----------- Net income $ 4,043,069 $ 2,886,914 =========== =========== Comprehensive income (Note 1) $ 4,043,069 $ 2,886,914 =========== =========== Net income per share, basic (Note 3) $ 0.20 $ 0.14 ----------- ----------- Net income per share, diluted (Note 3) $ 0.19 $ 0.13 ----------- ----------- Weighted average shares outstanding, basic (Note 3) 20,488,049 20,675,355 =========== =========== Weighted average shares outstanding, diluted (Note 3) 21,239,207 21,495,905 =========== ===========
See accompanying notes 4 5 PACIFIC SUNWEAR OF CALIFORNIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THIRTEEN WEEKS ENDED ----------------------------------- MAY 2, 1999 MAY 3, 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,043,069 $ 2,886,914 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,095,081 2,133,131 Change in: Accounts receivable (1,516,047) (285,542) Merchandise inventories (3,974,992) (1,714,916) Prepaid expenses (844,304) 36,961 Deferred compensation and other assets (282,282) 502,825 Accounts payable (564,580) 1,763,730 Accrued liabilities (970,301) (2,492,835) Income taxes and deferred income taxes 2,472,982 (154,105) Deferred rent 211,031 386,761 ------------ ------------ Net cash provided by operating activities 1,669,657 3,062,924 CASH FLOWS FROM INVESTING ACTIVITIES: Short term investment maturities -- 9,857,178 Investment in property and equipment (10,744,403) (9,447,899) ------------ ------------ Net cash (used in) provided by investing activities (10,744,403) 409,279 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 1,296,036 266,960 ------------ ------------ Net cash provided by financing activities 1,296,036 266,960 ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS: (7,778,710) 3,739,163 CASH AND CASH EQUIVALENTS, beginning of period 19,031,738 14,781,566 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 11,253,028 $ 18,520,729 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ -- $ -- Income taxes $ 60,018 $ 2,047,105
Non-cash transaction: During the three months ended May 2, 1999 and May 3, 1998, the Company recorded an increase to additional paid-in capital of $1,313,488 and $881,356, 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 CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements are unaudited except for the January 31, 1999 balance sheet. These statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its wholly-owned subsidiaries (the "Company"). All significant intercompany transactions have been eliminated in consolidation. The Company's fiscal year is the 52- or 53-week period which ends on the Sunday closest to the end of January. "Fiscal 1999" is a 52-week period which ends January 30, 2000. In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported expenses during the reported period. Actual results could differ from these estimates. The results of operations for the first quarter ended May 2, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending January 30, 2000. For further information, refer to the financial statements and notes thereto as of and for the years ended January 31, 1999, February 1, 1998 and February 2, 1997. Comprehensive Income -- The Company adopted SFAS No. 130, "Reporting Comprehensive Income", in the first quarter 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income. Components of comprehensive income include net earnings (loss), foreign currency translation adjustments and gains/losses associated with investments available for sale. The adoption of SFAS No. 130 required no additional disclosure for the Company and did not have any effect on the Company's financial position or results of operations. NOTE 2 - CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and marketable securities with original maturities of three months or less. NOTE 3 - NET INCOME PER SHARE, BASIC AND DILUTED The following table summarizes the computation of EPS:
THIRTEEN WEEKS ENDED: MAY 2, 1999 MAY 3, 1998 --------------------------------------- -------------------------------------- NET PER SHARE NET PER SHARE INCOME SHARES AMOUNT INCOME SHARES AMOUNT ---------- ---------- --------- ---------- ---------- --------- BASIC EPS: Net Income $4,043,069 20,488,049 $0.20 $2,886,914 20,675,355 $0.14 DILUTED EPS: Effect of dilutive stock options 751,158 820,550 Net Income $4,043,069 21,239,207 $0.19 $2,886,914 21,495,905 $0.13 ---------- ---------- ----- ---------- ---------- -----
Options to purchase 9,904 and 4,212 shares of common stock in the first thirteen weeks of fiscal 1999 and the first thirteen weeks of fiscal 1998, respectively, were not included in the computation of diluted earnings per common share because the option exercise price was greater than the average market price of the common stock. 6 7 Stock Split - On June 8, 1998, the Company effected a three-for-two stock split. Earnings per share and share outstanding amounts have been restated to give retroactive effect to the stock split in these financial statements. NOTE 4 - FEDERAL AND STATE INCOME TAX EXPENSE The combined federal and state income tax expense was calculated using estimated effective annual tax rates. NOTE 5 - ACCRUED LIABILITIES Accrued liabilities consist of the following:
MAY 2, JANUARY 31, 1999 1999 ------------ ------------ Accrued compensation and benefits $ 2,897,412 $ 4,546,415 Sales tax payable 1,619,459 738,910 Reserve for store expansion/relocation and closing costs 1,238,089 1,322,077 Gift certificates and store merchandise credits 631,715 969,378 Other accrued liabilities 1,333,807 1,114,003 ------------ ------------ $ 7,720,482 $ 8,690,783 ============ ============
NOTE 6 - DEFERRED COMPENSATION AND OTHER ASSETS Deferred compensation and other assets consist of the following:
MAY 2, JANUARY 31, 1999 1999 ------------ ------------ Deferred compensation $ 3,364,694 $ 2,807,694 Covenant not-to-compete 166,666 179,167 Security deposits 167,232 155,643 ------------ ------------ $ 3,698,592 $ 3,142,504 ============ ============
NOTE 7 - NEW SUBSIDIARY; LIMITED LIABILITY COMPANY In March 1999, the Company formed Pacific Sunwear.com Corp, a wholly-owned subsidiary, in order to sell merchandise over the internet. The Company anticipates that it will begin selling merchandise over the internet in the summer of 1999. In March 1999, the Company announced an agreement with Vans, Inc. ("Vans"), whereby a new limited liability company named Van Pac, LLC (the "LLC") was created in order to produce and distribute Vans apparel. The apparel line created by the LLC will initially be for sale in Pacific Sunwear and Vans stores only. The Company will provide product development, design, sourcing, quality control and inventory planning services to the LLC, while Vans will contribute design services and license the VANS and TRIPLE CROWN trademarks and logos to the LLC. Vans owns 51% of the LLC and the Company owns 49%. The LLC anticipates launching the new line in the summer of 1999. 7 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS RESULTS OF OPERATIONS Thirteen weeks ended May 2, 1999 (first quarter) as compared to thirteen weeks ended May 3, 1998 (first quarter) Net Sales Net sales increased to $81.4 million for the first thirteen weeks of fiscal 1999 from $61.2 million for the first thirteen weeks of fiscal 1998, an increase of $20.2 million, or 33.0%. Of this $20.2 million increase, $13.4 million was attributable to net sales generated by new stores opened in fiscal 1998, as well as Pacific Sunwear stores converted to "d.e.m.o." stores, and not yet included in the comparable store base, $3.9 million was attributable to a 7.2% increase in comparable store net sales in the first thirteen weeks of fiscal 1999, $2.1 million was attributable to net sales generated by 29 new stores opened in fiscal 1999 not yet included in the comparable store base, and $1.2 million was attributable to 17 Pacific Sunwear stores that have been expanded or relocated to the larger format and not yet included in the comparable store base. Partially offsetting this increase was a $.4 million decrease in net sales attributable to the closing of four stores during fiscal 1998 and one store during fiscal 1999. The increase in comparable store net sales was primarily attributable to increases in comparable store net sales of junior apparel, footwear, accessories and, to a lesser extent, increases in comparable store net sales of young men's merchandise. Retail prices of the Company's merchandise remained relatively unchanged in the first thirteen weeks of fiscal 1999 compared to the first thirteen weeks of fiscal 1998 and had no significant impact on the net sales increase for the first thirteen weeks of fiscal 1999. Gross Margin Gross margin, after buying, distribution and occupancy costs, increased to $26.1 million for the first thirteen weeks of fiscal 1999 from $19.6 million for the first thirteen weeks of fiscal 1998, an increase of $6.5 million, or 33.2%. As a percentage of net sales, gross margin was 32.1% for both the first thirteen weeks of fiscal 1999 and the first thirteen weeks of fiscal 1998. Occupancy costs for the first thirteen weeks of fiscal 1999 decreased .2% as a percentage of net sales compared to the first thirteen weeks of fiscal 1998, which was related to higher comparable store net sales. Offsetting this decrease was a .2% increase in distribution costs as a percentage of net sales during the first thirteen weeks of fiscal 1999 as compared to the first thirteen weeks of fiscal 1998 primarily due to depreciation expense of the Company's new distribution facility. The Company's new distribution facility was placed into service and the Company began recording the related depreciation expense in the second quarter of fiscal 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $19.7 million for the first thirteen weeks of fiscal 1999 from $15.1 million for the first thirteen weeks of fiscal 1998, an increase of $4.6 million, or 30.5%. As a percentage of net sales, these expenses decreased to 24.2% from 24.8%. Of this .6% net decrease as a percentage of net sales, .6% was due to a decrease in general and administrative expenses as a percentage of net sales and .4% was due to a decrease in store expansion/relocation and closing expenses as a percentage of net sales. These decreases as a percentage of net sales were primarily a result of leveraging these expenses over higher total net sales. Offsetting these decreases was a .4% increase in store selling expenses as a percentage of net sales, primarily due to an increase in advertising expense during the first thirteen weeks of fiscal 1999 as compared to the first thirteen weeks of fiscal 1998. The Company initiated its first ever national print advertising campaign in the first thirteen weeks of fiscal 1999. Income Tax Expense Income tax expense was $2.5 million for the first thirteen weeks of fiscal 1999 compared to $1.9 million for the first thirteen weeks of fiscal 1998. The effective income tax rate was 38.5% for the first thirteen weeks of fiscal 1999 as compared to 39.6% for the first thirteen weeks of fiscal 1998. The lower effective income tax rate for the first thirteen weeks of fiscal 1999 was primarily attributable to a lower weighted effective state income tax rate for the Company. The weighted effective state income tax rate of the Company will vary depending on a variety of factors, such as varying income tax rates by state and changes in the weighting formulas caused by the Company's growth by state, as well as other factors. 8 9 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. In fiscal 1998, the Company used funds for the relocation of and capital improvements to its new corporate offices and distribution facility. In addition, during the fourth quarter of fiscal 1998, the Company purchased and retired 667,500 shares of its common stock at an average cost of $13.31 per share for a total cost of $8.9 million. These purchases were made pursuant to a resolution adopted by the Board of Directors in December 1998 which authorized the Company to purchase up to 1.0 million shares of its common stock. Net cash provided by operating activities for the first thirteen weeks of fiscal 1999 was $1.7 million compared to $3.1 million for the first thirteen weeks of fiscal 1998. This $1.4 million decrease was primarily attributable to an increase in merchandise inventories net of accounts payable of $4.6 million, an increase in accounts receivable of $1.2 million, an increase in prepaid expenses of $.9 million and net increases in other items netting to $1.0 million, offset by an increase in accrued income taxes and deferred income taxes of $2.6 million, an increase in accrued liabilities of $1.5 million, an increase in net income of $1.2 million and an increase in depreciation and amortization of $1.0 million. Inventories at May 2, 1999 were $46.4 million compared to $42.5 million at January 31, 1999, an increase of $3.9 million. This increase was primarily related to opening 29 new stores and expanding/relocating five stores with in excess of 50% larger average square footage than their previous locations. Net cash used in investing activities was $10.7 million for the first thirteen weeks of fiscal 1999 compared to net cash provided by investing activities of $.4 million for the first thirteen weeks fiscal 1998. Net cash invested in property and equipment was $10.7 million for the first thirteen weeks of fiscal 1999 compared to $9.5 million for the first thirteen weeks of fiscal 1998. The increase in capital expenditures was primarily due to an increase in the number of new stores opened. As of the first thirteen weeks of fiscal 1998, the Company had short term investment maturities of $9.9 million. Net cash provided by financing activities for the thirteen weeks of fiscal 1999 was $1.3 million compared to $.3 million for the first thirteen weeks of fiscal 1998. In the first thirteen weeks of fiscal 1999, the Company received proceeds of $1.3 million from the exercise of stock options compared to $.3 million in the first thirteen weeks of fiscal 1998. The Company has a credit facility with a bank, which expires in August 2000. The credit facility provides for a $25.0 million line of credit, which can be used for cash advances, commercial letters of credit and shipside bonds. Interest on cash advances under the line of credit facility is payable monthly at the bank's prime rate (7.75 % at May 2, 1999). At May 2, 1999, the Company had $6.2 million in letters of credit outstanding. The loan agreement subjects the Company to various restrictive covenants, including maintenance of certain financial ratios and prohibits payment of cash dividends on common stock. At May 2, 1999, the Company was in compliance with all of the covenants. The Company plans to open approximately 83 new stores, of which 52 will be Pacific Sunwear stores, 13 will be Pacific Sunwear Outlet stores and 18 will be d.e.m.o. stores during the remainder of fiscal 1999. The Company also plans to expand or relocate 10 existing smaller Pacific Sunwear stores during the remainder of fiscal 1999. The Company estimates that capital expenditures during the remainder of fiscal 1999 will be approximately $24 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 one store in the first thirteen weeks of fiscal 1999. The Company anticipates closing two additional stores in fiscal 1999. Management believes that the Company's working capital, bank line of credit and cash flows from operating activities will be sufficient to meet the Company's operating and capital expenditure requirements through the end of fiscal 2000. 9 10 INFLATION The Company does not believe that inflation has had a material effect on the results of operations during the past three years. There can be no assurance that the Company's business will not be affected by inflation in the future. NEW ACCOUNTING PRONOUNCEMENTS Accounting for Derivatives and Hedging Activities -- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and Hedging Activities" (SFAS 133). SFAS 133 must be implemented by the Company in fiscal 2000. SFAS 133 is not expected to have a significant impact on the Company's consolidated financial statements. SEASONALITY AND QUARTERLY RESULTS The Company's business is seasonal by nature, with the Christmas and back-to-school periods historically accounting for the largest percentage of annual net sales. The Company's first quarter historically accounts for the smallest percentage of annual net sales. In fiscal 1998 and fiscal 1997, excluding sales generated by new and relocated/expanded stores, the Christmas and back-to-school periods together accounted for approximately 34% and 35%, respectively, of the Company's annual net sales and a higher percentage of the Company's operating income. In fiscal 1998, excluding net sales generated by new and relocated/expanded stores, approximately 45% of the Company's annual net sales occurred in the first half of the fiscal year and 55% in the second half. The Company's quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings; the amount of revenue contributed by new stores; the timing and level of markdowns; the timing of store closings, expansions and relocations; competitive factors; and general economic conditions. YEAR 2000 READINESS The Company has completed a year 2000 review of its information technology and non-information technology systems in preparation for the year 2000. The Company's material merchandise, financial and store computer software systems are provided by third-party vendors and are used with minor modifications by the Company. The software vendors have provided updated software versions as part of the normal periodic software upgrade process that address the year 2000 issue. This upgrade process has been substantially completed as of the end of fiscal 1998 and did not cost the Company additional amounts beyond normal recurring annual software maintenance fees paid by the Company. While the Company will incur internal staff costs as well as certain outside consulting and other expenditures related to its year 2000 readiness efforts, the total incremental expenses are not expected to have a material impact on the Company's financial condition or results of operations. As of May 2, 1999, the Company had incurred less than $150,000 in expenses relating to its year 2000 readiness efforts. The source of funds for these expenses has been the Company's working capital, and the Company anticipates that it will fund its additional year 2000 expenses from its working capital. The Company's most significant software system includes purchase order management, open order reporting, open-to-buy, receiving, distribution, basic stock replenishment, inter-store transfers, inventory and price management, general ledger and accounts payable functions. This system has been upgraded and has been certified by the software vendor as year 2000 compliant. In addition, the Company uses a recently installed materials handling system at its new distribution center and the vendor of this system has advised the Company that the system is year 2000 compliant. With regard to the Company's vendors, the Company has contacted its significant merchandise vendors regarding their state of year 2000 readiness and these vendors have advised the Company that they expect to be ready for the year 2000. None of these vendors accounted for more than 9% of the Company's net sales in fiscal 1998. The Company also uses numerous third-party vendors to provide other goods and services, as well as office, distribution center and other supplies to the Company and its stores. The Company has contacted its significant goods and services vendors regarding their state of year 2000 readiness and these vendors have advised the Company that they expect to be ready for the year 2000. There is no assurance that the systems of the vendors from whom the Company receives merchandise, goods and services will be year 2000 ready or that any failure on their part to be year 2000 ready would not have an adverse impact on the Company if a number of such vendors fail to be year 2000 ready on a timely basis. 10 11 The year 2000 issue presents a number of risks and uncertainties that could impact the Company, from the failure of one or several of the Company's significant vendors to timely fill the Company's merchandise orders to public utility failures affecting the Company's retail stores. The Company is currently analyzing these risks and uncertainties and has begun to develop contingency plans to address material risks related to the year 2000 issues. These contingency plans include the following: January 1, 2000 falls on a Saturday, when the Company's distribution center and corporate offices are normally closed. The contingency plans include operating the distribution center and corporate office systems on January 1 in order to quickly address any year 2000 issues that may arise. The Company's shipment of merchandise to its stores is traditionally at a low point during the time frame surrounding the immediate beginning of the new year due to the fact that the stores are primarily engaged in the promotional selldown of inventories after the holiday season. The Company plans to monitor merchandise shipments from vendors during the weeks immediately following January 1, 2000, and survey its vendors to determine if they are encountering year 2000 issues that may prevent them from delivering future shipments of merchandise on a timely basis. Contingency plans include processing substitute orders with vendors that do not have year 2000 issues. The Company's stores will be open for business on January 1, 2000. Contingency plans for the Company's stores include: (i) all stores will report to the corporate office during the morning of January 1, 2000 whether they are open and operating normally, or if they have encountered problems, (ii) a procedure to rank year 2000 issues reported by stores in order of importance, using the ability of the store to conduct business and process sales as the primary criteria, (iii) the Company's staff of information systems personnel will be on hand and available to work on any year 2000 issues on January 1, 2000 and (iv) the use of existing manual sales processing procedures in any affected stores until such time as any year 2000 issues are fixed. While the Company continues to believe the year 2000 issues described above will not materially affect its financial position or results of operations, it remains uncertain as to what extent, if any, the Company may be impacted. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS This report on Form 10-Q contains "forward-looking statements" within the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The Company is hereby providing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements of the Company herein. Any statements that express, or involve discussions as to expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always through the use of words or phrases such as "will result" "expects to" "will continue" "anticipates" "plans" "intends" "estimated" "projects" and "outlook") are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Such uncertainties include, among others, the following factors: FLUCTUATIONS IN COMPARABLE STORE NET SALES RESULTS. The Company's comparable store net sales results have fluctuated significantly in the past, on a monthly, quarterly and annual basis, and are expected to continue to fluctuate in the future. A variety of factors affect the Company's comparable store net sales results, including changes in fashion trends, changes in the Company's merchandise mix, calendar shifts of holiday periods, actions by competitors, weather conditions and general economic conditions. The Company's comparable store net sales results for any particular fiscal month, fiscal quarter or fiscal year in the future may decrease. As a result of these or other factors the Company's future comparable store net sales results are likely to have a significant effect on the market price of the Company's common stock. RISKS OF NEW SPECIALTY STORE CONCEPT NAMED "D.E.M.O.". The Company's ability to expand into new concepts has not been fully tested. The Company opened the first d.e.m.o. store in April of fiscal 1998, and at the end of the first thirteen weeks of fiscal 1999 operated 22 d.e.m.o. stores. Accordingly, the operation of its d.e.m.o. stores is subject to numerous risks, including unanticipated operating problems, lack of experience, lack of customer acceptance, new vendor relationships and competition from existing and new retailers. There can be no assurance that the Company's d.e.m.o. stores will achieve sales and profitability levels that justify the Company's investment in this new retail format. Expansion of the d.e.m.o. format also involves other risks that could have a material adverse 11 12 effect on the Company, including (i) the diversion of management's attention from the Company's core business, (ii) difficulties with the hiring, retention and training of key personnel for the d.e.m.o. stores, (iii) risks associated with new vendors and (iv) difficulties with locating and obtaining favorable store sites and negotiating acceptable lease terms. INTERNET SALES. The Company intends to begin selling merchandise over the internet in the summer of 1999. The internet operations involve, among other things, internet web site design activities, investment in new systems, distribution center enhancements, training of personnel and hiring of additional personnel to handle new functions. The Company's internet operations will be subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, higher than expected volumes of traffic on the web site that could lead to system failures and the need to invest in additional computer systems to support the traffic, lack of experience in managing the new internet business, lack of customer acceptance and lack of experience in the fulfillment and shipping of individual orders to customers. There can be no assurance that the internet operations will achieve sales and profitability levels that justify the Company's investment therein. The internet operations also involve other risks that could have a material adverse effect on the Company, including (i) the diversion of management's attention from the Company's core business, (ii) the failure to reach profitability within the foreseeable future, (iii) difficulties with hiring, retention and training of key personnel to conduct the Company's internet operations, (iv) diversion of sales from Pacific Sunwear stores, (v) rapid technological change, (vi) liability for online content and (vii) risks related to the failure of the computer systems that operate the web site and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions. In addition, the internet operations involves risks which are beyond the Company's control that could have a material adverse effect on the Company, including (i) price competition involving the items the Company intends to sell, (ii) the entry of the Company's vendors into the internet business, in direct competition with the Company, (iii) the level of merchandise returns experienced by the Company, (iv) governmental regulation, (v) online security breaches, (vi) credit card fraud, (vii) general economic conditions and economic conditions specific to the internet, online commerce and the apparel industry and (viii) competition from other internet web sites that may have significantly more capital resources and experience in internet sales than the Company. EXPANSION AND MANAGEMENT OF GROWTH. Pacific Sunwear's continued growth depends to a significant degree on its ability to open and operate stores on a profitable basis and on management's ability to manage the Company's planned expansion. During the remainder of fiscal 1999, the Company plans to open approximately 83 new stores, of which 52 will be Pacific Sunwear stores, 13 will be Pacific Sunwear Outlet stores and 18 will be d.e.m.o. stores. The Company also plans to expand or relocate 10 existing smaller Pacific Sunwear stores during the remainder of fiscal 1999. The Company's planned expansion is dependant upon a number of factors, including the ability of the Company to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate merchandise supply and hire and train qualified management level and other employees. Factors beyond the Company's control may also affect the Company's ability to expand, including general economic and business conditions affecting consumer spending. There can be no assurance that the Company will achieve its planned expansion or that such expansion will be profitable. As the Company's operations continue to grow, there could be increasing strain on the Company's resources, and the Company could experience difficulties relating to a variety of operational matters, including hiring, training and managing an increasing number of employees, having sufficient working capital, bank line of credit and cash flow from operating activities for the Company's future operating and capital requirements, obtaining sufficient quantities of merchandise from its preferred vendors, obtaining sufficient materials and contract manufacturers to produce its private brand products and enhancing its distribution, financial and operating systems. There can be no assurance that the Company will be able to manage its growth effectively. Any failure to manage growth could have a material adverse effect on the Company's business, financial condition and results of operations. MERCHANDISING/FASHION SENSITIVITY. The Company's success is largely dependent upon its ability to gauge the fashion tastes of its customers and to provide merchandise that satisfies customer demand in a timely manner. The Company's failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on the Company's business, financial condition and results of operations. Misjudgements or unanticipated fashion misjudgements could have a material adverse effect on the Company's image with its customers. PRIVATE BRAND MERCHANDISE. Sales from private brand merchandise accounted for approximately 36% and 38% of net sales in fiscal 1998 and fiscal 1997, respectively. The Company intends to increase the percentage of net sales in private brands in the future, although there can be no assurance that the Company will be able to achieve increases in private brand sales as a percentage of net sales. Because the Company's private brand merchandise 12 13 generally carries higher merchandise margins than its other merchandise, the Company's failure to anticipate, identify and react in a timely manner to fashion trends with its private brand merchandise, particularly if the percentage of net sales derived from private brand merchandise increases, may have a material adverse affect on the Company's business, financial condition and results of operations. RELIANCE ON KEY PERSONNEL. The continued success of the Company is dependant to a significant degree upon the services of its key personnel, particularly its executive officers. The loss of the services of any member of senior management could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's success in the future will also be dependent upon the Company's ability to attract and retain qualified personnel. The Company's inability to attract and retain qualified personnel in the future could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDANCE ON SINGLE DISTRIBUTION FACILITY. The Company's distribution functions for all of its stores are handled from a single facility in Anaheim, California. In addition, the Company intends initially to process shipments related to sales of merchandise over the internet from the same facility. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures arising from the year 2000 issue or otherwise, would have a material adverse effect on the Company's business, financial condition and results of operations. YEAR 2000 READINESS AND CONTINGENCY PLAN. There can be no assurance that a failure in the Company's information and non-information technology systems due to the year 2000 will not occur. Any significant failure due to the year 2000 could have a material adverse effect on the Company's business, financial condition and results of operations. Examples of failures due to the year 2000 include, among others: (i) failures of one or several of the Company's significant vendors to timely fill the Company's merchandise orders, (ii) public utility failures that prevent some of the Company's stores from opening for normal business hours, the Company's distribution center from handling distribution functions, and/or the Company's corporate office from conducting normal business, (iii) failures in the banking system, including the processing of charge card, check and debit card transactions and (iv) other unforeseen failures in the national infrastructure that the Company depends upon to conduct its business. VOLATILITY OF STOCK PRICE. The market price of the Company's common stock has fluctuated substantially in the past and there can be no assurance that the market price of the Common Stock will not continue to fluctuate significantly. Future announcements or management discussions concerning the Company or its competitors, internet sales results, d.e.m.o. sales and profitability results, variations in operating results or comparable store net sales, changes in earnings estimates by analysts or changes in accounting policies, among other factors, could cause the market price of the common stock to fluctuate substantially. For example, in December 1998 the Company's stock price decreased dramatically after a decrease in the Company's comparable store net sales for the month of November 1998 was reported. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many small public companies for reason frequently unrelated to the operating performance of the specific companies. ************* The Company cautions that the risk factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Further, management cannot assess the impact of each such factor on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rates. A discussion of the Company's accounting policies for financial instruments and further disclosures relating to financial instruments is included in the Summary of Significant Accounting Policies and Nature of Business in the Notes to Consolidated Financial Statements in the Company's Form 10-K for the year ended January 31, 1999. The Company monitors the risks associated with interest rates and financial instrument positions. 13 14 PART II-OTHER INFORMATION Item 1 - Legal Proceedings - Not Applicable Item 2 - Changes in Securities and Use of Proceeds - Not Applicable Item 3 - Defaults Upon Senior Securities - Not Applicable Item 4 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 5 - Other Information - Not Applicable Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: (27) Financial Data Schedule (b) Reports on Form 8-K: No reports were filed on form 8-K during the quarter for which this report is filed. 14 15 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: May 21, 1999 /s/ GREG H. WEAVER ------------------------------------------- Greg H. Weaver Chairman of the Board and Chief Executive Officer Date: May 21, 1999 /s/ CARL W. WOMACK ------------------------------------------- Carl W. Womack Senior Vice President, Chief Financial Officer and Secretary 15 16 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- (27) Financial Data Schedule EX-27 2 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 MAY 2, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q. 3-MOS JAN-30-2000 FEB-01-1999 MAY-02-1999 11,253,028 0 2,415,226 0 46,444,821 67,946,595 103,522,209 (28,857,495) 153,835,993 21,469,900 0 205,699 0 0 123,143,915 153,835,993 81,442,910 81,442,910 55,297,787 19,681,292 0 0 (112,238) 6,576,069 2,533,000 4,043,069 0 0 0 4,043,069 0.20 0.19 For Purposes of This Exhibit, Primary Means Basic
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