##### 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 July 30, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  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
  þ o
  þ o
  o þ




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended July 30, 2005
 Index
 
 Page(s)PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of July 30, 2005 and January 29, 2005
    
    
    3Condensed Consolidated Statements of Income and Comprehensive Income
for the second quarters and first halves ended July 30, 2005 and July 31, 2004
(as restated)
    
    
    4Condensed Consolidated Statements of Cash Flows for the first halves ended
July 30, 2005 and July 31, 2004 (as restated)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-11Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    12-24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24-25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25-26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    26SIGNATURE PAGE
    
    
    27EXHIBIT 3.1EXHIBIT 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)
 July 30, 2005
    
    
    January 29, 2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    92,227
    
    
    $
    64,308Marketable securities
    
    
    70,366
    
    
    
    79,223Merchandise inventories
    
    
    242,631
    
    
    
    175,081Other current assets
    
    
    37,146
    
    
    
    34,206Total current assets
    
    
    442,370
    
    
    
    352,818PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    551,039
    
    
    
    503,745Less accumulated depreciation and amortization
    
    
    (223,165
    )
    
    
    (199,523
    )Total property and equipment, net
    
    
    327,874
    
    
    
    304,222Other Assets
    
    
    22,063
    
    
    
    20,738TOTAL ASSETS
    
    $
    792,307
    
    
    $
    677,778LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    106,695
    
    
    $
    38,753Other current liabilities
    
    
    56,534
    
    
    
    56,557Total current liabilities
    
    
    163,229
    
    
    
    95,310LONG-TERM LIABILITIES:Deferred lease incentives
    
    
    75,873
    
    
    
    67,683Deferred rent
    
    
    27,717
    
    
    
    26,826Deferred income taxes
    
    
    16,132
    
    
    
    16,132Other long-term liabilities
    
    
    14,946
    
    
    
    13,793Total long-term liabilities
    
    
    134,668
    
    
    
    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; 75,041,904
and 74,916,773 shares issued and outstanding, respectively
    
    
    750
    
    
    
    749Additional paid-in capital
    
    
    58,966
    
    
    
    61,310Retained earnings
    
    
    434,694
    
    
    
    395,975Total shareholders equity
    
    
    494,410
    
    
    
    458,034TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    792,307
    
    
    $
    677,778
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (unaudited, all amounts in thousands except share and per share amounts)
 For the Second Quarter Ended
    
    
    For the First Half EndedJuly 30, 2005
    
    
    July 31, 2004
    
    
    July 30, 2005
    
    
    July 31, 2004(as restated, see
    
    
    
    
    
    
    (as restated, seeNote 3)
    
    


    
    
    Note 3)Net sales
    
    $
    309,064
    
    
    $
    272,164
    
    
    $
    589,049
    
    
    $
    517,665Cost of goods sold, including
buying, distribution and
occupancy costs
    
    
    198,707
    
    
    
    177,525
    
    
    
    381,342
    
    
    
    336,821Gross margin
    
    
    110,357
    
    
    
    94,639
    
    
    
    207,707
    
    
    
    180,844Selling, general and
administrative expenses
    
    
    77,592
    
    
    
    66,865
    
    
    
    147,714
    
    
    
    129,457Operating income
    
    
    32,765
    
    
    
    27,774
    
    
    
    59,993
    
    
    
    51,387Interest income, net
    
    
    1,180
    
    
    
    316
    
    
    
    2,265
    
    
    
    773Income before income tax expense
    
    
    33,945
    
    
    
    28,090
    
    
    
    62,258
    
    
    
    52,160Income tax expense
    
    
    12,833
    
    
    
    10,623
    
    
    
    23,539
    
    
    
    19,724Net income
    
    $
    21,112
    
    
    $
    17,467
    
    
    $
    38,719
    
    
    $
    32,436Comprehensive income
    
    $
    21,112
    
    
    $
    17,467
    
    
    $
    38,719
    
    
    $
    32,436Net income per share, basic
    
    $
    0.28
    
    
    $
    0.23
    
    
    $
    0.51
    
    
    $
    0.42Net income per share, diluted
    
    $
    0.28
    
    
    $
    0.22
    
    
    $
    0.51
    
    
    $
    0.41Weighted average shares
outstanding, basic
    
    
    75,125,782
    
    
    
    76,322,161
    
    
    
    75,209,185
    
    
    
    77,239,966Weighted average shares
outstanding, diluted
    
    
    76,118,501
    
    
    
    77,911,595
    
    
    
    76,338,599
    
    
    
    79,035,717
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, all amounts in thousands)
 For the First Half EndedJuly 31, 2004(as restated,July 30, 2005
    
    
    see Note 3)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    38,719
    
    
    $
    32,436Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    31,081
    
    
    
    24,423Tax benefits related to exercise of stock options
    
    
    5,737
    
    
    
    2,906Loss on disposal of equipment
    
    
    
    
    
    
    2,839Change in operating assets and liabilities:Merchandise inventories
    
    
    (67,550
    )
    
    
    (66,082
    )Other current assets
    
    
    (2,940
    )
    
    
    (5,204
    )Other assets
    
    
    (1,325
    )
    
    
    (665
    )Accounts payable
    
    
    67,942
    
    
    
    37,274Other current liabilities
    
    
    (2,917
    )
    
    
    (15,350
    )Deferred lease incentives
    
    
    7,809
    
    
    
    5,727Deferred rent
    
    
    (658
    )
    
    
    (904
    )Other long-term liabilities
    
    
    1,444
    
    
    
    1,229Net cash provided by operating activities
    
    
    77,342
    
    
    
    18,629CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (48,173
    )
    
    
    (39,950
    )Purchases of held-to-maturity marketable securities
    
    
    (26,493
    )
    
    
    (19,829
    )Maturities of held-to-maturity marketable securities
    
    
    20,625
    
    
    
    2,640Purchases of available-for-sale marketable securities
    
    
    (442,350
    )
    
    
    (637,450
    )Sales of available-for-sale marketable securities
    
    
    457,075
    
    
    
    635,300Net cash used in investing activities
    
    
    (39,316
    )
    
    
    (59,289
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchase and retirement of common stock
    
    
    (19,978
    )
    
    
    (74,931
    )Proceeds from exercise of stock options
    
    
    10,756
    
    
    
    6,883Principal payments under long-term debt and capital lease obligations
    
    
    (885
    )
    
    
    (932
    )Net cash used in financing activities
    
    
    (10,107
    )
    
    
    (68,980
    )NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    27,919
    
    
    
    (109,640
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    64,308
    
    
    
    109,640CASH AND CASH EQUIVALENTS, end of period
    
    $
    92,227
    
    
    $
    0SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    32
    
    
    $
    81Cash paid for income taxes
    
    
    21,659
    
    
    
    23,781SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Increase to additional paid-in capital related to the issuance of
stock to satisfy certain deferred compensation liabilities (Note 6)
    
    $
    1,142
    
    
    $
    4,853Increase in non-cash property and equipment accruals
    
    
    6,179
    
    
    
    5,200
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the Quarterly Period Ended July 30, 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 www.pacsun.com www.demostores.com
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Marketable Securities
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Customer Loyalty Programs 
 Stock-Based Compensation
 For the Second Quarter Ended
    
    
    For the First Half EndedJuly 30,
    
    
    July 31,
    
    
    July 30,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net IncomeAs reported
    
    $
    21,112
    
    
    $
    17,467
    
    
    $
    38,719
    
    
    $
    32,436Deduct: Total
stock-based
employee
compensation
expense determined
under fair value
based method for
all awards, net of
related tax effects
    
    
    (2,170
    )
    
    
    (1,673
    )
    
    
    (3,991
    )
    
    
    (3,231
    )Pro forma
    
    $
    18,942
    
    
    $
    15,794
    
    
    $
    34,728
    
    
    $
    29,205Earnings per ShareBasic, as reported
    
    $
    0.28
    
    
    $
    0.23
    
    
    $
    0.51
    
    
    $
    0.42Basic, pro forma
    
    $
    0.25
    
    
    $
    0.21
    
    
    $
    0.46
    
    
    $
    0.38Diluted, as reported
    
    $
    0.28
    
    
    $
    0.22
    
    
    $
    0.51
    
    
    $
    0.41Diluted, pro forma
    
    $
    0.25
    
    
    $
    0.20
    
    
    $
    0.46
    
    
    $
    0.37
 7




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Fiscal Year2005
    
    
    2004Expected Option Life
    
    5 years
    
    5 yearsStock Volatility
    
    
    56.7% - 62.8
    %
    
    
    37.0  37.8
    %Risk-free Interest Rates
    
    
    3.9  4.1
    %
    
    
    3.6  3.7
    %Expected Dividends
    
    None
    
    None
 New Accounting Pronouncements
 Reclassifications
 3. RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
  Second Quarter Ended July 31, 2004As
    
    
    Lease and E-Previously
    
    
    Commerce
    
    
    PacBucks
    
    
    AsReported
    
    
    Corrections
    
    
    Corrections
    
    
    RestatedConsolidated Income
StatementNet Sales
    
    $
    274,797
    
    
    $
    342
    
    
    $
    (2,975
    )
    
    $
    272,164Cost of Sales
    
    
    179,977
    
    
    
    (2,452
    )
    
    
    
    
    
    
    177,525Gross Margin
    
    
    94,820
    
    
    
    2,794
    
    
    
    (2,975
    )
    
    
    94,639SG&A Expenses
    
    
    64,061
    
    
    
    2,804
    
    
    
    
    
    
    
    66,865Operating Income
    
    
    30,759
    
    
    
    (10
    )
    
    
    (2,975
    )
    
    
    27,774Income Tax Provision
    
    
    11,750
    
    
    
    (2
    )
    
    
    (1,125
    )
    
    
    10,623Net Income
    
    
    19,325
    
    
    
    (8
    )
    
    
    (1,850
    )
    
    
    17,467Earnings Per Share, diluted
    
    
    0.25
    
    
    
    (0.00
    )
    
    
    (0.03
    )
    
    
    0.22
 8




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First Half Ended July 31, 2004As
    
    
    Lease and E-Previously
    
    
    Commerce
    
    
    PacBucks
    
    
    AsReported
    
    
    Corrections
    
    
    Corrections
    
    
    RestatedConsolidated Income
StatementNet Sales
    
    $
    519,928
    
    
    $
    712
    
    
    $
    (2,975
    )
    
    $
    517,665Cost of Sales
    
    
    341,537
    
    
    
    (4,716
    )
    
    
    
    
    
    
    336,821Gross Margin
    
    
    178,391
    
    
    
    5,428
    
    
    
    (2,975
    )
    
    
    180,844SG&A Expenses
    
    
    124,011
    
    
    
    5,446
    
    
    
    
    
    
    
    129,457Operating Income
    
    
    54,380
    
    
    
    (18
    )
    
    
    (2,975
    )
    
    
    51,387Income Tax Provision
    
    
    20,854
    
    
    
    (5
    )
    
    
    (1,125
    )
    
    
    19,724Net Income
    
    
    34,299
    
    
    
    (13
    )
    
    
    (1,850
    )
    
    
    32,436Earnings Per Share, diluted
    
    
    0.43
    
    
    
    (0.00
    )
    
    
    (0.02
    )
    
    
    0.41
 First Half Ended July 31, 2004As
    
    
    Lease andPreviously
    
    
    ARSReported
    
    
    Corrections
    
    
    As RestatedConsolidated Cash Flow StatementNet Cash Provided by Operating Activities
    
    $
    7,256
    
    
    $
    11,373
    
    
    $
    18,629Net Cash Used in Investing Activities
    
    
    (46,572
    )
    
    
    (12,717
    )
    
    
    (59,289
    )Net Cash Used in Financing Activities
    
    
    (68,980
    )
    
    
    
    
    
    
    (68,980
    )Net Decrease in Cash and Cash Equivalents
    
    
    (108,296
    )
    
    
    (1,344
    )
    
    
    (109,640
    )Cash and Cash Equivalents, Beginning
    
    
    142,840
    
    
    
    (33,200
    )
    
    
    109,640Cash and Cash Equivalents, Ending
    
    
    34,544
    
    
    
    (34,544
    )
    
    
    0
 4. OTHER CURRENT LIABILITIES
  July 30,
    
    
    January 29,2005
    
    
    2005Accrued capital expenditures
    
    $
    10,853
    
    
    $
    6,223Accrued compensation and benefits
    
    
    9,434
    
    
    
    13,284Sales taxes payable
    
    
    6,650
    
    
    
    6,647Accrued gift cards
    
    
    6,255
    
    
    
    10,386Income taxes payable
    
    
    3,364
    
    
    
    5,993Other
    
    
    19,978
    
    
    
    14,024$
    56,534
    
    
    $
    56,557
 5. COMMITMENTS AND CONTINGENCIES
  9




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Litigation
 Letters of Credit
 Accrued Sublease Loss Charges
 Lease Guarantee
 6. COMMON STOCK REPURCHASES
  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
    
    
    Plan$
    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
    
    
    $
    83,225
 10




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##### Table of Contents



7. NET INCOME PER SHARE, BASIC AND DILUTED
  Second Quarter EndedJuly 30, 2005
    
    July 31, 2004NetNet Income
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSBasic EPS:
    
    $
    21,112
    
    
    
    75,125,782
    
    
    $
    0.28
    
    
    $
    17,467
    
    
    
    76,322,161
    
    
    $
    0.23Diluted EPS:Effect of dilutive stock options
    
    
    
    
    
    
    992,719
    
    
    
    (0.00
    )
    
    
    
    
    
    
    1,589,434
    
    
    
    (0.00
    )$
    21,112
    
    
    
    76,118,501
    
    
    $
    0.28
    
    
    $
    17,467
    
    
    
    77,911,595
    
    
    $
    0.22
 First Half EndedJuly 30, 2005
    
    
    July 31, 2004NetNet Income
    
    
    Shares
    
    
    EPS
    
    
    Income
    
    
    Shares
    
    
    EPSBasic EPS:
    
    $
    38,719
    
    
    
    75,209,185
    
    
    $
    0.51
    
    
    $
    32,436
    
    
    
    77,239,966
    
    
    $
    0.42Diluted EPS:Effect of dilutive stock options
    
    
    
    
    
    
    1,129,414
    
    
    
    (0.00
    )
    
    
    
    
    
    
    1,795,751
    
    
    
    (0.00
    )$
    38,719
    
    
    
    76,338,599
    
    
    $
    0.51
    
    
    $
    32,436
    
    
    
    79,035,717
    
    
    $
    0.41
  11




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##### Table of Contents



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
 12




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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
 13




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##### Table of Contents



Evaluation of Insurance Reserves
 Evaluation of Income Taxes
 Evaluation of Litigation Matters
 Results of Operations
  Second Quarter Ended
    
    
    First Half EndedJuly 30,
    
    
    July 31,
    
    
    July 30,
    
    
    July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, including
buying, distribution and
occupancy costs
    
    
    64.3
    
    
    
    65.2
    
    
    
    64.7
    
    
    
    65.1Gross margin
    
    
    35.7
    
    
    
    34.8
    
    
    
    35.3
    
    
    
    34.9Selling, general and
administrative expenses
    
    
    25.1
    
    
    
    24.6
    
    
    
    25.1
    
    
    
    25.0Operating income
    
    
    10.6
    
    
    
    10.2
    
    
    
    10.2
    
    
    
    9.9Interest income, net
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.2Income before income tax expense
    
    
    11.0
    
    
    
    10.3
    
    
    
    10.6
    
    
    
    10.1Income tax expense
    
    
    4.2
    
    
    
    3.9
    
    
    
    4.0
    
    
    
    3.8Net income
    
    
    6.8
    %
    
    
    6.4
    %
    
    
    6.6
    %
    
    
    6.3
    %
 14




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##### Table of Contents



July 30, 2005
    
    
    July 31, 2004PacSun stores
    
    
    780
    
    
    
    717Outlet stores
    
    
    91
    
    
    
    82d.e.m.o. stores
    
    
    183
    
    
    
    148Total stores
    
    
    1,054
    
    
    
    947Square footage (in 000s)
    
    
    3,720
    
    
    
    3,266
 The second quarter (thirteen weeks) ended July 30, 2005 as compared to the second quarter
(thirteen weeks) ended July 31, 2004
 Net Sales
  $millions
    
    Attributable to$16
   

Net
sales from stores opened in fiscal 2004 not yet included in the comparable store base12
   
    73 new stores opened in fiscal 2005 not yet included in the comparable store base8
   
    3.2% increase in comparable store net sales in the second quarter of fiscal 2005
compared to the second quarter of fiscal 20043
   
    Other non-comparable sales (net sales from expanded or relocated stores not yet included
in the comparable store base and internet net sales)(2)
   
    9 closed stores in fiscal 2005 and 5 closed stores in fiscal 2004$37
    

Total
    Gross Margin
  15




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##### Table of Contents



Selling, General and Administrative Expenses
  %
   

Attributable
to0.5
   
    Increase in general and administrative expenses as a percentage of
net sales to 5.9% ($18 million) for the second quarter of fiscal
2005 from 5.4% ($15 million) for the second quarter of fiscal 2004,
primarily due to design expenses attributable to the development of
our new large store prototype and new third store concept (One
Thousand Steps).0.4
   
    Increase in store closing expenses to $0.9 million for the second
quarter of fiscal 2005 as compared to a credit of $0.2 million for
the second quarter of fiscal 2004, primarily due to a credit
recognized in the second quarter of fiscal 2004 due to the execution
of a lease termination agreement related to our former corporate
offices.(0.4)
   
    Decrease in direct store expenses as a percentage of net sales to
6.7% ($21 million) for the second quarter of fiscal 2005 from 7.1%
($19 million) for the second quarter of fiscal 2004 as a result of
small improvements in several expense categories.0.0
   

Store payroll expenses as a percentage of net sales were 12.2% in
the second quarter of each of fiscal 2005 and fiscal 2004. In
absolute dollars, store payroll expenses were $38 million for the
second quarter of fiscal 2005 versus $33 million for the second
quarter of fiscal 2004, primarily due to the addition of 43 net new
stores during the second half of fiscal 2004 and 64 net new stores
during the first half of fiscal 2005.0.5
   

Total
 Net Interest Income
  Income Tax Expense
  16




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##### Table of Contents



The first half (26 weeks) ended July 30, 2005 as compared to the first half (26 weeks) ended
July 31, 2004
 Net Sales
  $millions
    
    Attributable to$39


Net
sales from stores opened in fiscal 2004 not yet included in the
comparable store base15

    3.1% increase in comparable store net sales in the first half of fiscal 2005 compared to
the first half of fiscal 200414

    Net sales from 73 new stores opened
in fiscal 2005 not yet included in the comparable store base6

    Other non-comparable sales (net sales from expanded or relocated stores not yet included
in the comparable store base and internet net sales)(3)


9
closed stores in fiscal 2005 and 5 closed stores in fiscal 2004$71



Total
    Gross Margin
  Selling, General and Administrative Expenses
  17




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##### Table of Contents



%


    Attributable to0.3

    Increase in general and administrative expenses as a percentage
of net sales to 5.8% ($34 million) for the first half of fiscal
2005 from 5.5% ($28 million) for the first half of fiscal 2004,
primarily due to design expenses attributable to the development
of our new large store prototype and new third store concept (One
Thousand Steps).(0.2)

    Decrease in store payroll expenses as a percentage of net sales
to 12.3% ($72 million) in the first half of fiscal 2005 from
12.5% ($65 million) for the first half 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 43 net new
stores during the second half of fiscal 2004 and 64 net new
stores during the first half of fiscal 2005.0.1



Total
 Net Interest Income
  Income Tax Expense
  Liquidity and Capital Resources
  Operating Cash Flows
  $millions


Attributable to$29
    

Increase
in cash flows from accounts payable, net of inventory, due to timing
of payments.12
    
    Increase in cash flows from other current liabilities, including $9 million from accrued
liabilities and $3 million from accrued income taxes. Cash payments for payroll were
lower in the first half of fiscal 2005 as compared to the first half of fiscal 2004,
primarily due to the settlement of a litigation matter in the prior year, which resulted
in a $4 million cash payment during the first half of fiscal 2004. Cash payments for
income taxes were lower primarily due to the timing of fiscal 2005 estimated income tax
payments in relation to the actual income tax liability as compared to the same items for
fiscal 2004.7
    
    Increase in depreciation expense, primarily due to the addition of 43 net new stores
during the second half of fiscal 2004 and 64 net new stores during the first half of
fiscal 2005.6
    

Increase
in net income.4



Other
items netting to an increase in cash provided by operating
activities.$58
    

Total
 18




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##### Table of Contents



Working Capital
  $millions
    
    Description$258
    

Working
capital at January 29, 200519
    

Increase
in cash and marketable securities, primarily due to cash provided by
operations.2
    

Increase
in other current assets.$279
    

Working
capital at July 30, 2005
 Investing Cash Flows
  $millions
    
    Attributable to$36
    

Construction
costs of new, expanded and relocated stores7
    

Capital
expenditure improvements on existing stores5
    

Other
capital expenditures, including computer hardware and software$48
    

Total
   Financing Cash Flows
  Credit Facility
  19




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##### Table of Contents



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
    
    $
    650
    
    
    $
    100
    
    
    $
    192
    
    
    $
    168
    
    
    $
    190Capital lease obligations
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    27
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    678
    
    
    $
    128
    
    
    $
    192
    
    
    $
    168
    
    
    $
    190
  Operating Leases
  20




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##### Table of Contents



New Accounting Pronouncements
  Inflation
  Seasonality and Quarterly Results
  Risk Factors
 The products we sell are subject to significant merchandising/fashion sensitivity.
 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.
 21




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##### Table of Contents



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.
 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
 22




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##### Table of Contents



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.
 The expensing of stock options will reduce our future reported earnings.
 Adverse outcomes of litigation matters could significantly affect our operational results.
 23




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##### Table of Contents



Our stock price can fluctuate significantly.
   
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4  CONTROLS AND PROCEDURES
   24




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##### Table of Contents



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
      VOTES
    
    
    VOTESDIRECTOR NAME
    
    CAST FOR
    
    
    WITHHELDClass II:Greg H. Weaver
    
    
    71,387,172
    
    
    
    603,503Julius Jensen III
    
    
    70,633,921
    
    
    
    1,356,754Pearson C. Cummin III
    
    
    71,426,250
    
    
    
    564,425Michael Goldstein
    
    
    71,379,386
    
    
    
    611,289Class I:Seth R. Johnson
    
    
    71,424,112
    
    
    
    566,563
 25




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##### Table of Contents



Item 5  Other Information
 
 Item 6  Exhibits
 Exhibit 3.1
    
    Third Amended and Restated Bylaws of the Company, as amendedExhibit 10.1
    
    Summary of Compensation for Timothy M. HarmonExhibit 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.
 26




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##### Table of Contents



SIGNATURES
  Pacific Sunwear of California, Inc.(Registrant)Date: August 31, 2005
    
    
    
    /s/ SETH R. JOHNSONSeth R. JohnsonDirector and Chief Executive Officer(Principal Executive Officer)Date: August 31, 2005
    
    
    
    /s/ GERALD M. CHANEYGerald M. ChaneySenior Vice President, Chief Financial Officer(Principal Financial and Accounting Officer)
 27




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##### Table of Contents



EXHIBIT
INDEX
 Exhibit
No.
    

DescriptionExhibit 3.1
    
    Third Amended and Restated Bylaws of the Company, as amendedExhibit 10.1
    
    Summary of Compensation for Timothy M. HarmonExhibit 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.