##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 29, 2005
 OR
 o
    
    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
(State of Incorporation)
    
    95-3759463
(I.R.S Employer Identification No.)3450 East Miraloma Avenue
Anaheim, California
(Address of principal executive offices)
    
    92806
(Zip code)
 (714) 414-4000
  Yes þ No o
  Yes þ No o
  Yes o No þ




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended October 29, 2005
 Index
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of October 29, 2005 and January 29, 2005
    
    
    3Condensed Consolidated Statements of Income and Comprehensive Income for the third quarter and nine months ended October 29, 2005 and October 30, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended October 29, 2005 and October 30, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-11Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11-23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    24Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    24Item 5.
    
    Other Information
    
    
    24Item 6.
    
    Exhibits
    
    
    24SIGNATURE PAGE
    
    
    25EXHIBIT 10.1EXHIBIT 31EXHIBIT 32
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited, all amounts in thousands except share amounts)
 October 29, 2005
    
    
    January 29, 2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    46,701
    
    
    $
    64,308Marketable securities
    
    
    74,311
    
    
    
    79,223Merchandise inventories
    
    
    243,465
    
    
    
    175,081Other current assets
    
    
    40,932
    
    
    
    34,206Total current assets
    
    
    405,409
    
    
    
    352,818PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    576,797
    
    
    
    503,745Less accumulated depreciation and amortization
    
    
    (232,943
    )
    
    
    (199,523
    )Total property and equipment, net
    
    
    343,854
    
    
    
    304,222Other Assets
    
    
    23,836
    
    
    
    20,738TOTAL ASSETS
    
    $
    773,099
    
    
    $
    677,778LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    46,723
    
    
    $
    38,753Other current liabilities
    
    
    70,865
    
    
    
    56,557Total current liabilities
    
    
    117,588
    
    
    
    95,310LONG-TERM LIABILITIES:Deferred lease incentives
    
    
    80,850
    
    
    
    67,683Deferred rent
    
    
    28,103
    
    
    
    26,826Deferred income taxes
    
    
    16,132
    
    
    
    16,132Other long-term liabilities
    
    
    15,934
    
    
    
    13,793Total long-term liabilities
    
    
    141,019
    
    
    
    124,434Commitments and contingencies (Note 5)SHAREHOLDERS EQUITY:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 170,859,375 shares authorized; 74,238,004
and 74,916,773 shares issued and outstanding, respectively
    
    
    742
    
    
    
    749Additional paid-in capital
    
    
    38,572
    
    
    
    61,310Retained earnings
    
    
    475,178
    
    
    
    395,975Total shareholders equity
    
    
    514,492
    
    
    
    458,034TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    773,099
    
    
    $
    677,778
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (unaudited, in thousands except share and per share amounts)
 For the Third Quarter Ended
    
    
    For the Nine Months EndedOctober 29,
    
    
    October 30,
    
    
    October 29,
    
    
    October 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    $
    377,491
    
    
    $
    332,422
    
    
    $
    966,540
    
    
    $
    850,086Cost of goods sold, including
buying, distribution and
occupancy costs
    
    
    233,052
    
    
    
    207,888
    
    
    
    614,395
    
    
    
    544,709Gross margin
    
    
    144,439
    
    
    
    124,534
    
    
    
    352,145
    
    
    
    305,377Selling, general and
administrative expenses
    
    
    80,905
    
    
    
    70,684
    
    
    
    228,618
    
    
    
    200,140Operating income
    
    
    63,534
    
    
    
    53,850
    
    
    
    123,527
    
    
    
    105,237Interest income, net
    
    
    1,566
    
    
    
    404
    
    
    
    3,831
    
    
    
    1,176Income before income tax expense
    
    
    65,100
    
    
    
    54,254
    
    
    
    127,358
    
    
    
    106,413Income tax expense
    
    
    24,616
    
    
    
    20,515
    
    
    
    48,155
    
    
    
    40,238Net income
    
    $
    40,484
    
    
    $
    33,739
    
    
    $
    79,203
    
    
    $
    66,175Comprehensive income
    
    $
    40,484
    
    
    $
    33,739
    
    
    $
    79,203
    
    
    $
    66,175Net income per share, basic
    
    $
    0.54
    
    
    $
    0.45
    
    
    $
    1.06
    
    
    $
    0.87Net income per share, diluted
    
    $
    0.54
    
    
    $
    0.44
    
    
    $
    1.04
    
    
    $
    0.85Weighted average shares
outstanding, basic
    
    
    74,531,489
    
    
    
    74,415,403
    
    
    
    74,983,286
    
    
    
    76,298,445Weighted average shares
outstanding, diluted
    
    
    75,337,910
    
    
    
    75,919,451
    
    
    
    76,003,452
    
    
    
    77,996,056
  4




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, in thousands)
 For the Nine Months EndedOctober 29,
    
    
    October 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    79,203
    
    
    $
    66,175Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    46,782
    
    
    
    37,413Tax benefits related to exercise of stock options
    
    
    6,895
    
    
    
    4,429Loss on disposal of equipment
    
    
    126
    
    
    
    3,257Change in operating assets and liabilities:Merchandise inventories
    
    
    (68,734
    )
    
    
    (53,259
    )Other current assets
    
    
    (5,899
    )
    
    
    (8,319
    )Other assets
    
    
    (3,098
    )
    
    
    (1,141
    )Accounts payable
    
    
    7,970
    
    
    
    21,041Other current liabilities
    
    
    10,163
    
    
    
    (8,703
    )Deferred lease incentives
    
    
    12,786
    
    
    
    10,451Deferred rent
    
    
    (1,356
    )
    
    
    (994
    )Other long-term liabilities
    
    
    2,456
    
    
    
    1,456Net cash provided by operating activities
    
    
    87,294
    
    
    
    71,806CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (77,815
    )
    
    
    (62,949
    )Purchases of available-for-sale marketable securities
    
    
    (602,925
    )
    
    
    (911,075
    )Sales of available-for-sale marketable securities
    
    
    599,875
    
    
    
    926,275Purchases of held-to-maturity marketable securities
    
    
    (21,038
    )
    
    
    (23,374
    )Maturities of held-to-maturity marketable securities
    
    
    29,000
    
    
    
    17,836Net cash used in investing activities
    
    
    (72,903
    )
    
    
    (53,287
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchases of common stock
    
    
    (43,739
    )
    
    
    (109,502
    )Proceeds from exercise of stock options
    
    
    12,957
    
    
    
    10,779Principal payments under long-term debt and capital lease obligations
    
    
    (1,216
    )
    
    
    (1,485
    )Net cash used in financing activities
    
    
    (31,998
    )
    
    
    (100,208
    )NET DECREASE IN CASH AND CASH EQUIVALENTS:
    
    
    (17,607
    )
    
    
    (81,689
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    64,308
    
    
    
    109,640CASH AND CASH EQUIVALENTS, end of period
    
    $
    46,701
    
    
    $
    27,951SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    41
    
    
    $
    105Cash paid for income taxes
    
    $
    35,638
    
    
    $
    38,836SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Increase to additional paid-in capital related to the issuance of stock to
satisfy certain deferred compensation liabilities
    
    $
    1,142
    
    
    $
    5,471Increase in non-cash property and equipment accruals
    
    $
    8,821
    
    
    $
    6,772
  5




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the quarterly period ended October 29, 2005
 (unaudited, all amounts in thousands except share and per share amounts unless otherwise indicated)
 1. BASIS OF PRESENTATION AND NATURE OF BUSINESS
 Basis
of Presentation
  Nature of Business
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Marketable Securities
 6




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Customer
Loyalty Programs 
 Stock-Based
Compensation
 For the Third Quarter Ended
    
    
    For the Nine Months EndedOctober 29,
    
    
    October 30,
    
    
    October 29,
    
    
    October 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    40,484
    
    
    $
    33,739
    
    
    $
    79,203
    
    
    $
    66,175Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects
    
    
    (1,540
    )
    
    
    (1,530
    )
    
    
    (5,530
    )
    
    
    (4,758
    )Pro forma net income
    
    $
    38,944
    
    
    $
    32,209
    
    
    $
    73,673
    
    
    $
    61,417Earnings Per ShareBasic, as reported
    
    $
    0.54
    
    
    $
    0.45
    
    
    $
    1.06
    
    
    $
    0.87Basic, pro forma
    
    $
    0.52
    
    
    $
    0.43
    
    
    $
    0.98
    
    
    $
    0.81Diluted, as reported
    
    $
    0.54
    
    
    $
    0.44
    
    
    $
    1.04
    
    
    $
    0.85Diluted, pro forma
    
    $
    0.52
    
    
    $
    0.42
    
    
    $
    0.98
    
    
    $
    0.79
 7




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Fiscal Year2005
    
    2004Expected Option Life
    
    5 years
    
    5 yearsStock Volatility
    
    
    53.4%  62.8%
    
    
    
    37.0%  37.8%Risk-free Interest Rates
    
    
    3.9%  4.5%
    
    
    
    3.3%  3.7%Expected Dividends
    
    None
    
    None
 New
Accounting Pronouncements
   3. OTHER CURRENT LIABILITIES
  October 29,
    
    
    January 29,2005
    
    
    2005Accrued compensation and benefits
    
    $
    17,230
    
    
    $
    13,284Accrued capital expenditures
    
    
    12,410
    
    
    
    6,223Income taxes payable
    
    
    11,615
    
    
    
    5,993Sales taxes payable
    
    
    6,164
    
    
    
    6,647Accrued gift cards
    
    
    6,073
    
    
    
    10,386Other
    
    
    17,373
    
    
    
    14,024$
    70,865
    
    
    $
    56,557
 4. NEW CREDIT FACILITY
  8




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5. COMMITMENTS AND CONTINGENCIES
  Litigation
 Letters
of Credit
 Accrued
Sublease Loss Charges
 Lease
Guarantee
 9




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##### Table of Contents



6. COMMON STOCK REPURCHASE AND RETIREMENT
  Maximum# of Shares
    
    
    
    
    
    
    Value ofPurchased
    
    
    
    
    
    
    Shares thatAverage
    
    
    as Part of
    
    
    
    
    
    
    May Yet bePrice
    
    
    Publicly
    
    
    Value of
    
    
    Purchased# of Shares
    
    
    Paid Per
    
    
    Announced
    
    
    Shares
    
    
    Under thePeriod
    
    Purchased
    
    
    Share
    
    
    Plan
    
    
    Purchased
    
    
    Plan417,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    115,499May 2005
    
    
    490,000
    
    
    $
    21.26
    
    
    
    490,000
    
    
    $
    10,415
    
    
    $
    105,084July 2005
    
    
    417,500
    
    
    $
    22.90
    
    
    
    417,500
    
    
    $
    9,563
    
    
    $
    95,521August 2005
    
    
    528,100
    
    
    $
    23.28
    
    
    
    528,100
    
    
    $
    12,296
    
    
    $
    83,225September 2005
    
    
    250,000
    
    
    $
    22.77
    
    
    
    250,000
    
    
    $
    5,692
    
    
    $
    77,533October 2005
    
    
    250,000
    
    
    $
    23.09
    
    
    
    250,000
    
    
    $
    5,773
    
    
    $
    71,760November 2005
    
    
    272,700
    
    
    $
    26.69
    
    
    
    272,700
    
    
    $
    7,279
    
    
    $
    64,481December 2005
    
    
    100,000
    
    
    $
    25.23
    
    
    
    100,000
    
    
    $
    2,523
    
    
    $
    61,958Total
    
    
    2,308,300
    
    
    $
    23.20
    
    
    
    2,308,300
    
    
    $
    53,541
 7. NET INCOME PER SHARE, BASIC AND DILUTED
  Third Quarter EndedOctober 29, 2005
    
    October 30, 2004NetNet Income
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSBasic EPS:
    
    $
    40,484
    
    
    
    74,531,489
    
    
    $
    0.54
    
    
    $
    33,739
    
    
    
    74,415,403
    
    
    $
    0.45Diluted EPS:Effect of dilutive stock options
    
    
    
    
    
    
    806,421
    
    
    
    (0.00
    )
    
    
    
    
    
    
    1,504,048
    
    
    
    (0.01
    )$
    40,484
    
    
    
    75,337,910
    
    
    $
    0.54
    
    
    $
    33,739
    
    
    
    75,919,451
    
    
    $
    0.44
 First Nine Months EndedOctober 29, 2005
    
    October 30, 2004NetNet Income
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSBasic EPS:
    
    $
    79,203
    
    
    
    74,983,286
    
    
    $
    1.06
    
    
    $
    66,175
    
    
    
    76,298,445
    
    
    $
    0.87Diluted EPS:Effect of dilutive stock options
    
    
    
    
    
    
    1,020,166
    
    
    
    (0.02
    )
    
    
    
    
    
    
    1,697,611
    
    
    
    (0.02
    )$
    79,203
    
    
    
    76,003,452
    
    
    $
    1.04
    
    
    $
    66,175
    
    
    
    77,996,056
    
    
    $
    0.85
  10




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ITEM 2
 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
  Cautionary Note Regarding Forward-Looking Statements
  Executive Overview
  Comparable
(or same store) sales
 Net
merchandise margins
 Operating
margin
 Store
sales trends
 11




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Cash
flow and liquidity (working capital)
 Critical Accounting Policies
  Revenue
Recognition
 Inventory
Valuation
 Store
Operating Lease Accounting
 Evaluation
of Long-Lived Assets
 12




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##### Table of Contents



Evaluation
of Insurance Reserves
 Evaluation
of Income Taxes
 Evaluation
of Litigation Matters
 Results of Operations
  Third Quarter Ended
    
    
    Nine Months EndedOct. 29,
    
    
    Oct. 30,
    
    
    Oct. 29,
    
    
    Oct. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, including
buying, distribution and
occupancy costs
    
    
    61.7
    
    
    
    62.5
    
    
    
    63.6
    
    
    
    64.1Gross margin
    
    
    38.3
    
    
    
    37.5
    
    
    
    36.4
    
    
    
    35.9Selling, general and
administrative expenses
    
    
    21.5
    
    
    
    21.3
    
    
    
    23.6
    
    
    
    23.5Operating income
    
    
    16.8
    
    
    
    16.2
    
    
    
    12.8
    
    
    
    12.4Interest income, net
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.1Income before income tax expense
    
    
    17.2
    
    
    
    16.3
    
    
    
    13.2
    
    
    
    12.5Income tax expense
    
    
    6.5
    
    
    
    6.2
    
    
    
    5.0
    
    
    
    4.7Net income
    
    
    10.7
    %
    
    
    10.1
    %
    
    
    8.2
    %
    
    
    7.8
    %
 13




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##### Table of Contents



October 29,
    
    
    October 30,2005
    
    
    2004PacSun stores
    
    
    798
    
    
    
    734Outlet stores
    
    
    93
    
    
    
    84d.e.m.o. stores
    
    
    193
    
    
    
    159Total stores
    
    
    1,084
    
    
    
    977Square footage (in 000s)
    
    
    3,828
    
    
    
    3,391
 The third quarter (thirteen weeks) ended October 29, 2005 as compared to the third quarter
(thirteen weeks) ended October 30, 2004
 Net Sales
  $millions
    
    Attributable to$
    21
    
    
    104 new stores opened in fiscal 2005 not yet included in the comparable store base14
    
    
    4.6% increase in comparable store net sales in the third quarter of fiscal 2005 compared
to the third quarter of fiscal 20049
    
    
    Net sales from stores opened in fiscal 2004 not yet included in the comparable store base3
    
    
    Other non-comparable sales (net sales from expanded or relocated stores not yet included
in the comparable store base and internet net sales)(2
    )
    
    10 closed stores in fiscal 2005 and 5 closed stores in fiscal 2004$
    45
    
    
    Total
    Gross Margin
  14




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Selling, General and Administrative Expenses
  %
    
    Attributable to0.2
    
    Increase in general and administrative expenses as a percentage of net
sales to 5.0% ($19 million) for the third quarter of fiscal 2005 from
4.8% ($16 million) for the third quarter of fiscal 2004, primarily due
to the addition of senior management positions in our home office and
design expenses associated with One Thousand Steps.0.0
    
    Store payroll, direct store expenses and store closing expenses were
flat as a percentage of net sales at 16.5% in the third quarter of
each of fiscal 2005 and fiscal 2004. In absolute dollars, store
payroll expenses were $40 million for the third quarter of fiscal 2005
versus $35 million for the third quarter of fiscal 2004, primarily due
to the addition of 13 net new stores during the fourth quarter of
fiscal 2004 and 94 net new stores during the first nine months of
fiscal 2005. Direct store expenses were $22 million for the third
quarter of fiscal 2005 versus $19 million for the third quarter of
fiscal 2004, primarily due to increased depreciation associated with
new store additions and increased advertising/promotional expenses
associated with our new PacSun prototype stores.0.2
    
    Total
 Net Interest Income
  Income Tax Expense
  The nine months (39 weeks) ended October 29, 2005 as compared to the nine months (39 weeks)
ended October 30, 2004
 Net Sales
  15




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$millions
    
    Attributable to$
    47
    
    
    Net sales from stores opened in fiscal 2004 not yet included in the comparable store base35
    
    
    Net sales from 104 new stores opened in fiscal 2005 not yet included in the comparable
store base29
    
    
    3.7% increase in comparable store net sales in the first nine months of fiscal 2005
compared to the first nine months of fiscal 200410
    
    
    Other non-comparable sales (net sales from expanded or relocated stores not yet included
in the comparable store base and internet net sales)(5
    )
    
    10 closed stores in fiscal 2005 and 5 closed stores in fiscal 2004$
    116
    
    
    Total
    Gross Margin
  Selling, General and Administrative Expenses
  16




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##### Table of Contents



%
    
    Attributable to0.3
    
    Increase in general and administrative expenses as a percentage
of net sales to 5.5% ($53 million) for the first nine months of
fiscal 2005 from 5.2% ($44 million) for the first nine months of
fiscal 2004, primarily due to the addition of senior management
positions in our home office as well as design expenses
associated with our new PacSun prototype stores and One Thousand
Steps.(0.2)
    
    Decrease in store payroll expenses as a percentage of net sales
to 11.5% ($112 million) in the first nine months of fiscal 2005
from 11.7% ($100 million) for the first nine months of fiscal
2004, primarily due to leveraging these expenses over higher
total sales and tight control of store payroll costs. The
increase in absolute dollars was primarily attributable to the
addition of 13 net new stores during the fourth quarter of fiscal
2004 and 94 net new stores during the first nine months of fiscal
2005.0.0
    
    Direct store expenses and store closing expenses were flat as a
percentage of sales at 6.6% for the first nine months of each of
fiscal 2005 and fiscal 2004. In absolute dollars, these expenses
were $64 million for the first nine months of fiscal 2005
compared to $56 million for the first nine months of fiscal 2004,
primarily due to increased depreciation associated with new store
additions and increased advertising/promotion expenses associated
with our new PacSun prototype stores.0.1
    
    Total
 Net Interest Income
  Income Tax Expense
  Liquidity and Capital Resources
  Operating Cash Flows
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##### Table of Contents



$millions
    
    Attributable to$
    13
    
    
    Increase in net income.10
    
    
    Increase in cash flow adjustments related to accrued liabilities, primarily due to higher
payroll accruals at the end of the third quarter of fiscal 2005 as compared to the third
quarter of fiscal 2004 and a $4M cash payment for settlement of a litigation matter in
fiscal 2004.9
    
    
    Increase in depreciation expense, primarily due to the addition of 13 net new stores
during the fourth quarter of fiscal 2004 and 94 net new stores during the first nine
months of fiscal 2005.9
    
    
    Increase in cash flows from accrued income taxes. Cash payments for income taxes were $3
million lower in the first nine months of fiscal 2005 as compared to the first nine
months of fiscal 2004 due to the timing of estimated income tax payments.3
    
    
    Other items netting to an increase in cash provided by operating activities.(29
    )
    
    Decrease in cash flows from accounts payable, net of inventory, due to timing of payments.$
    15
    
    
    Total
 Working Capital
  $millions
    
    Description$
    258
    
    
    Working capital at January 29, 200560
    
    
    Increase in inventory, net of accounts payable, primarily due to planned volume
increases in key merchandise categories in advance of the holiday selling season and the
addition of 94 net new stores during fiscal 2005.(23
    )
    
    Decrease in cash and marketable securities, primarily due to capital expenditures and
stock repurchases, partially offset by cash from operations.(7
    )
    
    Net decrease in working capital attributable to all other current assets and liabilities.$
    288
    
    
    Working capital at October 29, 2005
 Investing Cash Flows
  $millions
    
    Attributable to$
    60
    
    
    Construction costs of new, expanded and relocated stores12
    
    
    Capital expenditure improvements on existing stores6
    
    
    Other capital expenditures, including computer hardware and software$
    78
    
    
    Total
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##### Table of Contents



Financing Cash Flows
  $millions
    
    Attributable to$
    (44
    )
    
    Repurchase and retirement of common stock13
    
    
    Proceeds from employee exercises of stock options(1
    )
    
    Principal repayments under capital lease and long-term debt obligations$
    (32
    )
    
    Total
  Credit Facility
   Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    More than(in millions)
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating lease obligations
    
    $
    644
    
    
    $
    98
    
    
    $
    189
    
    
    $
    167
    
    
    $
    190Capital lease obligations
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    32
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    677
    
    
    $
    131
    
    
    $
    189
    
    
    $
    167
    
    
    $
    190
  19




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##### Table of Contents



Operating
Leases
  New Accounting Pronouncements
  Inflation
  Seasonality and Quarterly Results
  Risk Factors
 The products we sell are subject to significant merchandising/fashion sensitivity.
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##### Table of Contents



We may not be able to manage our planned expansion effectively.
 We plan to launch a new retail concept, One Thousand Steps, which could negatively affect existing
operations.
 Our customers may not accept our proprietary brand merchandise.
 Our comparable store net sales results can fluctuate significantly.
 We could lose key personnel at any time.
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##### Table of Contents



Our dependence on a single distribution facility exposes us to significant operational risks.
 Selling merchandise over the internet carries particular risks that can distract attention from our
core businesses.
 Any terrorist attacks or war/threat of war could significantly affect consumer spending.
 Our foreign sources of production may not always be reliable.
 Any failure by us to maintain credit facility financial covenants could have a material adverse
impact on our business.
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##### Table of Contents



The expensing of stock options will reduce our future reported earnings.
 Adverse outcomes of litigation matters could significantly affect our operational results.
 Our stock price can fluctuate significantly.
   
 ITEM 3
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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##### Table of Contents



ITEM 4
 CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 Item 1
 Legal Proceedings
  
 Item 2
 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3
 Defaults Upon Senior Securities 
 
 Item 4
 Submission of Matters to a Vote of Security Holders 
 
 Item 5
 Other Information 
 
 Item 6
 Exhibits
 Exhibit 10.1
    
    Amendment No. 2 to Amended and Restated Employment Agreement
between the Company and Greg H. Weaver dated February 5, 2001Exhibit 31
    
    Written statements of Seth R. Johnson and Gerald M. Chaney
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32
    
    Written statement of Seth R. Johnson and Gerald M. Chaney
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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##### Table of Contents



SIGNATURES
  Pacific Sunwear of California, Inc.(Registrant)Date: December 1, 2005
    
    /s/ SETH R. JOHNSONSeth R. JohnsonDirector and Chief Executive Officer(Principal Executive Officer)Date: December 1, 2005
    
    /s/ GERALD M. CHANEYGerald M. ChaneySenior Vice President, Chief Financial Officer(Principal Financial and Accounting Officer)
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##### Table of Contents



Index to Exhibits
 Exhibit 10.1
    
    Amendment No. 2 to Amended and Restated Employment Agreement
between the Company and Greg H. Weaver dated February 5, 2001Exhibit 31
    
    Written statements of Seth R. Johnson and Gerald M. Chaney
pursuant to section 302 of the Sarbanes-Oxley Act of 2002.Exhibit 32
    
    Written statement of Seth R. Johnson and Gerald M. Chaney
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.