##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One)[X]

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: January 31, 2004
 OR [   ]
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition
period from to
 Commission file number 0-21296 PACIFIC SUNWEAR OF CALIFORNIA, INC. (Exact name of registrant as specified in its charter)
 California
(State or other jurisdiction of
incorporation or organization)
    
    95-3759463
(I.R.S. Employer
Identification No.)
 3450 E. Miraloma Avenue, Anaheim, California
(Address of principal executive offices)
    
    92806
(Zip Code)
 Registrants telephone number, including area code: (714) 414-4000 Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
(Title of Class) 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[  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ] Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [  ]. The aggregate market value of Common Stock held by non-affiliates of the
registrant as of August 2, 2003, the end of the most recently completed second
quarter, was approximately $1.5 billion. All outstanding shares of voting
stock, except for shares held by executive officers and members of the Board of
Directors and their affiliates, are deemed to be held by non-affiliates. On March 24, 2004, the
registrant had 78,462,485 shares of Common Stock
outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the definitive Proxy
Statement for the 2004 Annual Meeting of Shareholders, to be filed with the
Commission no later than 120 days after the end of the registrants fiscal year
covered by this Form 10-K.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESINDEPENDENT AUDITORS REPORTCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMECONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSINDEX TO EXHIBITSEXHIBIT 10.15EXHIBIT 10.16EXHIBIT 23.1EXHIBIT 31EXHIBIT 32    Table of Contents  
 PART I 
 ITEM 1. BUSINESS Pacific Sunwear of California, Inc. and its wholly owned subsidiaries (the
Company or the Registrant) is a leading specialty retailer of everyday
casual apparel, accessories and footwear designed to meet the needs of active
teens and young adults. The Company operates three nationwide, primarily
mall-based chains of retail stores under the names Pacific Sunwear (also
PacSun), Pacific Sunwear (PacSun) Outlet, and d.e.m.o. PacSun and PacSun
Outlet stores specialize in board-sport inspired casual apparel, footwear and
related accessories catering to teenagers and young adults. d.e.m.o.
specializes in hip-hop inspired casual apparel and related accessories catering
to teenagers and young adults. In addition, the Company operates a website
through a subsidiary that sells PacSun merchandise online,
provides content and community for its target customers and provides
information about the Company. The Companys fiscal year is the 52- or 53-week period ending on the Saturday
closest to January 31. Fiscal 2003 was the 52-week period ended January 31,
2004. Fiscal 2002 was the 52-week period ended February 1, 2003. Fiscal 2001
was the 52-week period ended February 2, 2002. Fiscal 2004 will be the 52-week
period ending January 29, 2005. The Company, a California corporation, was incorporated in August 1982.
At the end of fiscal 2003, the Company operated 677 PacSun stores, 79 PacSun
Outlet stores and 121 d.e.m.o. stores for a total of 877 stores in 50 states
and Puerto Rico. As of March 26, 2004, the Company operated 682 PacSun
stores, 79 PacSun Outlet stores and 127 d.e.m.o. stores for a total of 888
stores in 50 states and Puerto Rico. The Companys executive offices are located at 3450 East Miraloma Avenue,
Anaheim, California, 92806; the telephone number is (714) 414-4000; and the
Companys internet address is www.pacsun.com. Through the Companys website,
the Company makes available free of charge, as soon as reasonably practicable
after such information has been filed or furnished to the Securities and
Exchange Commission (the Commission), its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange Act). Store Formats PacSun stores- The Companys original and primary store format, located
primarily in regional malls, offers a selection of board-sport inspired casual
apparel, footwear and related accessories to satisfy the casual wardrobe needs
of its customers. PacSun targets both male and female customers between the
ages of 12 and 22. PacSun stores offer a broad wardrobe selection, with the
goal of being viewed by its customers as the dominant retailer in its niche.
PacSun stores average approximately 3,500 square feet in size. The Company
currently seeks locations of approximately 3,500 to 4,000 square feet for its
new PacSun stores. At the end of fiscal 2003, the Company operated 677 PacSun
stores totaling approximately 2,380,000 square feet. PacSun Outlet- These stores average approximately 4,100 square feet and are
located in value-oriented outlet malls, both open-air and enclosed. This
format carries a selection similar to the PacSun mall stores, with an emphasis
on value pricing. The merchandise offerings at PacSun Outlets consist
primarily of off-price branded merchandise, private brand merchandise and a
smaller selection of full-priced branded merchandise. At the end of fiscal
2003, the Company operated 79 PacSun Outlet stores totaling approximately
323,000 square feet. d.e.m.o.- d.e.m.o. stores, located in regional malls, average
approximately 2,400 square feet and offer a broad assortment of hip-hop
inspired casual apparel and related accessories. d.e.m.o. targets both male
and female customers between the ages of 16 and 24. d.e.m.o. stores have no
merchandise overlap with PacSun or PacSun Outlet stores, and many d.e.m.o.
stores are located in the same malls as PacSun stores. The Company currently
seeks locations of approximately 2,500 to 3,000 square feet for its new
d.e.m.o. stores. 2




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At the end of fiscal 2003, the Company operated 121 d.e.m.o. stores totaling
approximately 294,000 square feet. Strategy The Companys mission is to be the leading lifestyle retailer of casual
fashion apparel, footwear and accessories for teens. The Companys target
customers are young men and women between the ages of 12 and 24. The Company
believes its customers want to stay current with, or ahead of, fashion trends
and continually seek newness in their everyday wear. The Company offers a
complete wardrobe selection representing fashion trends considered timely by
the Companys target customers. The key elements of the Companys strategy are
as follows: Offer Popular Name Brands Supplemented by Private Brands.In each of its
store formats, the Company offers a carefully edited selection of popular name
brands supplemented by private brands, with the goal of being seen by its
teenage and young adult customers as the source for wardrobe choices
appropriate to their lifestyle. The Company believes that its merchandising
strategy differentiates its stores from competitors who may offer 100% private
labels, greater than 80% name brands, or seek to serve a wider customer base
and age range. See Merchandising. Promote the PacSun Brand Image.The Company promotes the PacSun brand
through national print advertising in major magazines that target teens and
young adults. In the past, the Company has sponsored sporting events
consistent with the PacSun brand image and lifestyle and has conducted PacSun
television advertising campaigns. The Companys current promotional efforts
are focused exclusively on national print advertising, a trend that the Company
expects to continue through fiscal 2004. The Company also maintains a private
label credit card through a third party to promote the PacSun brand image and
lifestyle. Actively Manage Merchandise Trends.The Company does not attempt to
dictate fashion, but instead devotes considerable effort to identifying
emerging fashion trends and brand names. By using focus groups, listening to
its customers and store employees, monitoring sell-through trends, testing
small quantities of new merchandise in a limited number of stores, and
maintaining domestic and international sourcing relationships, the Company
enhances its ability to identify and respond to emerging fashion trends and
brand names as well as develop new private brand styles in order to capitalize
on existing fashion trends. Maintain Strong Vendor Relationships.The Company views its vendor
relationships as important to its success and promotes frequent personal
interaction with its vendors. The Company believes many of its vendors view
PacSun, PacSun Outlet and d.e.m.o. stores as important distribution channels,
in many cases as one of their largest customers, which enhance their own brand
image in the eyes of the customer. Provide Attentive Customer Service.The Company is committed to offering
courteous, professional and non-intrusive customer service. The Company
strives to give its young customers the same level of respect that is generally
given to adult customers at other retail stores, and to provide friendly and
informed customer service for parents. Responding to the expressed preferences
of its customers, the Company trains its employees to greet each customer, to
give prompt and courteous assistance when asked, and to thank customers after
purchases are made, but to refrain from giving extensive unsolicited advice.
PacSun and PacSun Outlet stores display large assortments of name brands and
private brands, merchandised by category. d.e.m.o. merchandise is displayed by
brand accompanied by vendor logo signage. Additionally, the stores provide a
friendly and social atmosphere for teens with appropriate background music,
while also providing a comfortable environment for parents and other adults.
The Company believes the combination of its attentive customer service and its
unique store environments is key to its success. Store Growth Strategy.The Company intends to continue its store growth
through the opening of new stores under its three formats in the next four
years. The Company has previously announced its plans to operate 1,400 total
stores by the end of 2007, of which approximately 900 will be PacSun stores,
approximately 100 will be PacSun Outlet stores, and approximately 400 will be
d.e.m.o. stores. In each of the last three fiscal years in the period ended
January 31, 2004, the Company opened 86, 73, and 129 net 3




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new stores, respectively. See Store Expansion within the Stores section of
this document for further details regarding plans for fiscal 2004. Internet Strategy. The Company sells merchandise over the internet at
www.pacsun.com. The website offers a selection of the same merchandise carried
in PacSun stores. In addition, the website offers content including videos,
contests, advice columns and lifestyle articles. The Company maintains a
substantial database of e-mail names that it uses for marketing purposes. The
Company also advertises its website as a shopping destination on major internet
portals and search engines and markets its website in its PacSun stores using
in-store signage, merchandise bags and receipts. The Companys internet
strategy benefits from the nationwide retail presence of its stores, the strong
brand recognition of PacSun, a loyal and internet-savvy customer base, the
participation of PacSuns key brands and the ability to return merchandise to
PacSun stores. Merchandising Merchandise.PacSun, PacSun Outlet and d.e.m.o. stores offer a broad selection
of casual apparel, related accessories and footwear for young men (guys) and
young women (girls), with the goal of being viewed by their customers as the
dominant retailer for their lifestyle. The following table sets forth the Companys merchandise assortment as a
percentage of net sales for the periods shown: Fiscal Year EndedJan. 31,
    
    Feb. 1,
    
    Feb. 2,2004
    
    2003
    
    2002Guys apparel
    
    
    38
    %
    
    
    41
    %
    
    
    46
    %Girls apparel
    
    
    31
    
    
    
    31
    
    
    
    28Accessories
    
    
    19
    
    
    
    18
    
    
    
    17Footwear
    
    
    12
    
    
    
    10
    
    
    
    9Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 The Company offers many name brands best known by its target customers. PacSun
offers a wide selection of well-known board-sport inspired name brands, such as
Quiksilver, Billabong, Hurley and ONeill. d.e.m.o. offers well-known name
brands sought by its target customers, such as Ecko, Phat Farm/Baby Phat,
Enyce, Rocawear and Sean John. In addition, the Company continuously adds and
supports up-and-coming new brands in both PacSun and d.e.m.o. No vendor
accounted for more than 8% of total net sales during fiscal 2003. The Company supplements its name brand offerings with private brands. The
Company believes that offering high-quality private brands contributes to its
status as a key fashion resource for the casual lifestyle and differentiates
the Company from its competitors. In addition, private brands provide the
Company an opportunity to broaden its customer base by providing merchandise of
comparable quality to brand name merchandise at lower prices, to capitalize on
emerging fashion trends when branded merchandise is not available in sufficient
quantities, and to exercise a greater degree of control over the flow of its
merchandise. A product design group, in collaboration with the Companys
buying staff, designs the Companys private brand merchandise internally. The
Company has a sourcing group that oversees the manufacture and delivery of its
private label merchandise, with manufacturing contracted both domestically and
internationally. Private label merchandise sales accounted for 32% and 33% of
the Companys net sales in fiscal 2003 and fiscal 2002, respectively. 4




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Vendor and Contract Manufacturer Relationships.The Company views its vendor
relationships as important to its success and promotes frequent personal
interaction with its vendors. The Company believes many of its vendors view
PacSun, PacSun Outlet and d.e.m.o. stores as important distribution channels,
in many cases as one of their largest customers, which enhance their own brand
image in the eyes of the customer. The Companys vendor base currently
includes more than 100 vendors. The Company maintains strong and interactive
relationships with its vendors, many of whose philosophies of controlled
distribution and merchandise development are consistent with the Companys
strategy. The Company generally purchases merchandise from vendors who prefer
distributing through specialty retailers, small boutiques and, in some cases,
better department stores, rather than distributing their merchandise through
mass-market channels. To encourage the design and development of new merchandise, the Company
frequently shares ideas regarding fashion trends and merchandise sell-through
information with its vendors. The Company also suggests merchandise design and
fabrication to certain vendors. The Company encourages the development of new
vendor relationships by attending trade shows and through its weekly
Open-house Wednesday program, during which new vendors are encouraged to make
presentations of their merchandise to the Companys buying staff. The Company has cultivated its private brand sources with a view toward
high-quality merchandise, production reliability and consistency of fit. The
Company sources its private label merchandise both domestically and
internationally in order to benefit from the lower costs associated with
foreign manufacturing and the shorter lead times associated with domestic
manufacturing. The Companys business is dependent upon its ability to offer current season,
brand name apparel at competitive prices and in adequate quantities. Some of
the Companys vendors have limited resources, production capacities and
operating histories and some have intentionally limited the distribution of
their merchandise. The inability or unwillingness on the part of key vendors
to expand their operations to keep pace with the anticipated growth of PacSun,
PacSun Outlet and d.e.m.o. stores, or the loss of one or more key vendors or
private brand sources for any reason, could have a material adverse effect on
the Companys business. Purchasing, Allocation and Distribution.The Companys merchandising
department oversees the purchasing and allocation of the Companys merchandise.
The Companys buyers are responsible for reviewing branded merchandise lines
from new and existing vendors, identifying emerging fashion trends, and
selecting branded and private label merchandise styles in quantities, colors
and sizes to meet inventory levels established by management. The Companys
planning and allocation department is responsible for management of inventory
levels by store and by class, allocation of merchandise to stores and inventory
replenishment based upon information generated by the Companys merchandise
management information systems. These systems provide the planning department
with current inventory levels at each store and for the Company as a whole, as
well as current selling history within each store by merchandise classification
and by style. See Information Systems. All merchandise is delivered to the Companys distribution facility, where it
is inspected, received into the Companys computer system, allocated to stores,
ticketed when necessary, and boxed for distribution to the Companys stores.
Each store is typically shipped merchandise three to five times a week,
providing it with a steady flow of new merchandise. The Company uses a
national and a regional small package carrier to ship merchandise to its stores
and occasionally uses airfreight during peak selling periods. 5




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Stores Locations.The Company has expanded from 11 stores in California at the end of
fiscal 1986 to 877 stores in 50 states and Puerto Rico at the end of fiscal
2003. The table below sets forth the number of stores located in each state as
of the end of fiscal 2003: PacSunSTATE
    
    PacSun
    
    Outlets
    
    d.e.m.o
    
    TotalAlabama
    
    
    10
    
    
    
    2
    
    
    
    
    
    
    
    12Alaska
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Arizona
    
    
    13
    
    
    
    2
    
    
    
    3
    
    
    
    18Arkansas
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1California
    
    
    72
    
    
    
    14
    
    
    
    26
    
    
    
    112Colorado
    
    
    12
    
    
    
    3
    
    
    
    1
    
    
    
    16Connecticut
    
    
    10
    
    
    
    
    
    
    
    1
    
    
    
    11Delaware
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    4Florida
    
    
    49
    
    
    
    6
    
    
    
    15
    
    
    
    70Georgia
    
    
    19
    
    
    
    1
    
    
    
    6
    
    
    
    26Hawaii
    
    
    6
    
    
    
    
    
    
    
    1
    
    
    
    7Idaho
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Illinois
    
    
    21
    
    
    
    1
    
    
    
    5
    
    
    
    27Indiana
    
    
    14
    
    
    
    2
    
    
    
    3
    
    
    
    19Iowa
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Kansas
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Kentucky
    
    
    7
    
    
    
    
    
    
    
    1
    
    
    
    8Louisiana
    
    
    10
    
    
    
    
    
    
    
    4
    
    
    
    14Maine
    
    
    2
    
    
    
    2
    
    
    
    1
    
    
    
    5Maryland
    
    
    14
    
    
    
    2
    
    
    
    4
    
    
    
    20Massachusetts
    
    
    20
    
    
    
    1
    
    
    
    3
    
    
    
    24Michigan
    
    
    24
    
    
    
    3
    
    
    
    4
    
    
    
    31Minnesota
    
    
    14
    
    
    
    1
    
    
    
    2
    
    
    
    17Mississippi
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Missouri
    
    
    9
    
    
    
    3
    
    
    
    
    
    
    
    12Montana
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Nebraska
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Nevada
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    7New Hampshire
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    6New Jersey
    
    
    20
    
    
    
    3
    
    
    
    6
    
    
    
    29New Mexico
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6New York
    
    
    29
    
    
    
    6
    
    
    
    5
    
    
    
    40North Carolina
    
    
    17
    
    
    
    2
    
    
    
    3
    
    
    
    22North Dakota
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Ohio
    
    
    31
    
    
    
    2
    
    
    
    5
    
    
    
    38Oklahoma
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Oregon
    
    
    7
    
    
    
    2
    
    
    
    
    
    
    
    9Pennsylvania
    
    
    42
    
    
    
    4
    
    
    
    7
    
    
    
    53Rhode Island
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2South Carolina
    
    
    9
    
    
    
    2
    
    
    
    3
    
    
    
    14South Dakota
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Tennessee
    
    
    9
    
    
    
    2
    
    
    
    1
    
    
    
    12Texas
    
    
    44
    
    
    
    3
    
    
    
    6
    
    
    
    53Utah
    
    
    10
    
    
    
    1
    
    
    
    
    
    
    
    11Vermont
    
    
    3
    
    
    
    1
    
    
    
    
    
    
    
    4Virginia
    
    
    18
    
    
    
    2
    
    
    
    2
    
    
    
    22Washington
    
    
    19
    
    
    
    1
    
    
    
    
    
    
    
    20West Virginia
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Wisconsin
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Wyoming
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Puerto Rico
    
    
    8
    
    
    
    1
    
    
    
    3
    
    
    
    12Total
    
    
    677
    
    
    
    79
    
    
    
    121
    
    
    
    877
 Store Expansion.During fiscal 2003, the Company opened 86 net new stores,
which included 65 PacSun stores, 7 PacSun Outlet stores and 14 d.e.m.o. stores.
In addition, the Company expanded or relocated 27 existing stores during
fiscal 2003. During fiscal 2004, the Company plans to open approximately 110
net new stores, of which approximately 65 will be PacSun stores, approximately
five will be PacSun Outlet stores and approximately 40 will be d.e.m.o. stores.
The Company also plans to expand or relocate approximately 35 existing smaller
stores during fiscal 2004. As of the date of this filing, approximately 75% of
the leases for the approximately 110 net new stores the Company expects to open
in fiscal 2004 have been executed. The Companys site selection strategy is to locate its stores primarily in
regional malls serving markets that meet its demographic criteria, including
average household income and population density. The Company also considers
mall sales per square foot, the performance of other retail tenants serving
teens and young adult customers, anchor tenants and occupancy costs. The
Company currently seeks PacSun store locations of approximately 3,500 to 4,000
square feet and d.e.m.o. store locations of approximately 2,500 to 3,000 6




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square feet primarily in high-traffic locations within regional malls. The
Company currently seeks PacSun Outlet store locations of approximately 4,000
square feet primarily in high-traffic value-oriented outlet malls, both
open-air and enclosed. For details concerning average costs to build and stock
new and relocated stores in fiscal 2003, see Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations, Liquidity and
Capital Resources. The Companys continued growth depends upon its ability to open and operate
stores on a profitable basis. The Companys ability to expand successfully
will be dependent upon a number of factors, including sufficient demand for the
Companys merchandise in its existing and new markets, 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 and other employees. Store Operations.Each store has a manager, one or more co-managers or
assistant managers, and approximately six to twelve part-time sales associates.
District managers supervise approximately seven to twelve stores and
approximately six to ten district managers report to a regional manager.
Regional, district, store managers and store co-managers participate in a bonus
program based on achieving predetermined levels of sales and inventory
shrinkage. Company stores are open during mall shopping hours. The Company
has well-established store operating policies and procedures and an extensive
in-store training program for new store managers and co-managers. The Company
places great emphasis on its loss prevention program in order to control
inventory shrinkage. This program includes the installation of electronic
article surveillance systems in all stores, education of store personnel on
loss prevention, and monitoring of returns, voids and employee sales. In each
fiscal year since fiscal 1991, the Company has achieved an inventory shrinkage
rate of 1.3% or less of net sales at retail, or .6% or less of net sales at
cost. Information Systems The Companys merchandise, financial and store computer systems are fully
integrated and operate using primarily IBM equipment. The software, which is
primarily provided by one of the largest vendors to the retail trade, is
regularly upgraded or modified as needs arise or change. The Companys
information systems provide management, buyers and planners comprehensive data
that helps them identify emerging trends and manage inventories. The systems
include purchase order management, electronic data interchange, open order
reporting, open-to-buy, receiving, distribution, merchandise allocation, basic
stock replenishment, inter-store transfers, inventory and price management.
Management uses weekly best/worst item sales reports to enhance the timeliness
and effectiveness of purchasing and markdown decisions. Merchandise purchases
are based on planned sales and inventories and are frequently revised to
reflect changes in demand for a particular item or classification. All of the Companys stores have a point-of-sale system operating on IBM
in-store computer hardware. The system features bar-coded ticket scanning,
automatic price look-up, dial-out check and credit authorization and automatic
nightly transmittal of data between the store and the Companys corporate
offices. Each of the regional and district managers uses a laptop computer and
can instantly access appropriate or relevant Company-wide information,
including actual and budgeted sales by store, district and region, transaction
information and payroll data. The Company believes its management information
systems are adequate to support its planned expansion at least through fiscal
2004. Competition The retail apparel, footwear and accessory business is highly competitive.
PacSun stores, PacSun Outlets and d.e.m.o. stores compete on a national level
with certain leading department stores and national chains that offer the same
or similar brands and styles of merchandise. The Companys stores also compete
with a wide variety of regional and local specialty stores, such as Abercrombie
and Fitch, American Eagle Outfitters, The Gap, Aeropostale and Hot Topic. Many
of the Companys competitors are larger and have significantly greater
resources than the Company. The Company believes the principal competitive
factors in its industry are fashion, merchandise assortment, quality, price,
store location, environment and customer service. 7




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Trademarks and Service Marks The Company is the owner in the United States of the marks Pacific Sunwear of
California, PacSun, Pacific Sunwear, and d.e.m.o. The Company also uses
and has registered, or has a pending registration on, a number of other marks.
The Company has also registered many of its marks outside of the United States.
The Company believes its rights in its marks are important to its business and
intends to maintain its marks and the related registrations. Employees At the end of fiscal 2003, the Company had approximately 12,200 employees, of
whom approximately 8,800 were part-time. Of the total employees, approximately
450 were employed at the Companys corporate headquarters and distribution
center. A significant number of seasonal employees are hired during peak
selling periods. None of the Companys employees is represented by a labor
union, and the Company believes that its relationships with its employees are
good. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and titles of persons serving as executive
officers of the Company as of March 26, 2004: Executive Officers
    
    Age
    
    PositionGreg H. Weaver
    
    
    50
    
    
    Chairman of the Board and Chief Executive
OfficerTimothy M. Harmon
    
    
    52
    
    
    President and Chief Merchandising OfficerCarl W. Womack
    
    
    52
    
    
    Senior Vice President, Chief Financial Officer
and Secretary
 Set forth below is certain information with respect to the executive officers
of the Company: Greg H. Weaver, who joined the Company in July 1987, has served as
Chairman of the Board and Chief Executive Officer since November 1997. He
served as President and Chief Executive Officer from October 1996 to November
1997 and as a director since February 1996. Prior to October 1996, Mr. Weaver
served in various senior level executive positions since joining the Company.
Prior to joining the Company, he was employed for 13 years by Jaeger Sportswear
Ltd. in both operational and merchandising capacities for the U.S. and Canadian
stores. Timothy M. Harmon,who joined the Company in September 1991, has served as
President and Chief Merchandising Officer since November 1997. Prior to
November 1997, he served in various senior level executive merchandising
positions since joining the Company. Prior to joining the Company, Mr. Harmon
served in various merchandising positions at Wideworld/MTV Sportswear, a
domestic apparel manufacturer, Chauvin International, an import apparel
manufacturer, Anchor Blue, a teen apparel retailer, and Federated Department
Stores. Carl W. Womack,who joined the Company in May 1986, has served as Senior
Vice President and Chief Financial Officer since October 1994. He served as
Vice President of Finance and Chief Financial Officer from May 1986 to
September 1994. He has served as Secretary of the Company since November 1992.
Prior to joining the Company, Mr. Womack served in several positions in public
and private accounting. Mr. Womack is a certified public accountant. 
 ITEM 2. PROPERTIES In January 2002, the Company completed construction of and relocated to
its current corporate office and distribution center located in Anaheim,
California. The Companys facilities encompass approximately 8




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550,000 square feet. The Company believes the current facilities are capable
of servicing approximately 1,500 stores. The Company continues to lease its former facilities under an operating lease
covering approximately 176,000 square feet. The lease expires in February
2008. The Company is currently seeking a tenant to sublease the remaining
square footage of its former facilities for the remainder of the lease term
(see note 7 to the consolidated financial statements). The Company leases substantially all of its stores under operating lease
agreements with initial terms ranging from approximately eight to ten years
(see note 7 to the consolidated financial statements). Substantially all
leases for the Companys stores provide for percentage rent, in excess of
specified minimums, based upon net sales. 
 ITEM 3. LEGAL PROCEEDINGS During fiscal 2003, the Company reached an agreement to settle all claims
related to two lawsuits concerning overtime pay for a total of $4.0 million.
The Company had accrued $3.9 million related to these matters at the end of
fiscal 2002. The suits are Auden v. Pacific Sunwear of California, Inc., which
was filed September 17, 2001, and Adams v. Pacific Sunwear of California, Inc.,
which was filed August 2, 2002. The complaints alleged that the Company
improperly classified certain California-based employees as exempt from
overtime pay. In February 2004, the Company made a $3.1 million payment on the
aggregate settlement amount with the remaining amounts expected to be paid in
the first half of fiscal 2004. The settlement did not have a material impact
on results of operations for fiscal 2003. The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect upon the results of operations or financial
condition of the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Companys shareholders during
the fourth quarter of the fiscal year covered by this report. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Companys common stock trades on the NASDAQ National Market under the
symbol PSUN. The following table sets forth for the quarterly periods
indicated the high and low bid prices per share of the common stock as reported
by NASDAQ (as adjusted to reflect the Companys 3-for-2 stock splits in
December 2002 and August 2003): Fiscal 2003
    
    High
    
    Low1st Quarter
    
    $
    15.67
    
    
    $
    10.742nd Quarter
    
    
    20.43
    
    
    
    13.073rd Quarter
    
    
    24.22
    
    
    
    19.004th Quarter
    
    
    24.56
    
    
    
    19.49
 Fiscal 2002
    
    High
    
    Low1st Quarter
    
    $
    11.91
    
    
    $
    8.922nd Quarter
    
    
    11.05
    
    
    
    7.213rd Quarter
    
    
    11.19
    
    
    
    7.214th Quarter
    
    
    13.41
    
    
    
    10.15
 As of March 26, 2004, the number of holders of record of common stock of
the Company was approximately 140, and the number of beneficial holders of the
common stock was in excess of 24,000. The Company has never declared or paid any dividends on its common stock.
The Companys current credit facility prohibits the payment of cash dividends
on its capital stock. 9




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ITEM 6. SELECTED FINANCIAL DATA The selected balance sheet and income statement data as of January 31,
2004, and February 1, 2003, and for each of the three fiscal years in the
period ended January 31, 2004, are derived from audited consolidated financial
statements of the Company included herein and should be read in conjunction
with such financial statements. Such data and the selected consolidated
operating data below should also be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in this report. The consolidated balance sheet data as of February 2,
2002, February 4, 2001 (fiscal 2000), and January 30, 2000 (fiscal 1999),
and the consolidated income statement data for each of the two fiscal years in
the period ended February 4, 2001, are derived from audited consolidated
financial statements of the Company, which are not included herein. Fiscal Year Ended (1)Jan. 31,
    
    Feb. 1,
    
    Feb. 2,
    
    Feb. 4,
    
    Jan. 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands, except per share and selected operating data)Consolidated Income Statement Data:Net sales
    
    $
    1,040,294
    
    
    $
    846,393
    
    
    $
    684,840
    
    
    $
    589,438
    
    
    $
    436,808Cost of goods sold (including buying,
distribution and occupancy costs)
    
    
    676,977
    
    
    
    562,710
    
    
    
    464,660
    
    
    
    391,816
    
    
    
    284,187Gross margin
    
    
    363,317
    
    
    
    283,683
    
    
    
    220,180
    
    
    
    197,622
    
    
    
    152,621Selling, general and administrative expenses
    
    
    235,068
    
    
    
    202,445
    
    
    
    175,898
    
    
    
    133,999
    
    
    
    96,117Operating income
    
    
    128,249
    
    
    
    81,238
    
    
    
    44,282
    
    
    
    63,623
    
    
    
    56,504Net interest income/(expense)
    
    
    732
    
    
    
    (594
    )
    
    
    470
    
    
    
    1,344
    
    
    
    916Income before income tax expense
    
    
    128,981
    
    
    
    80,644
    
    
    
    44,752
    
    
    
    64,967
    
    
    
    57,420Income tax expense
    
    
    48,768
    
    
    
    30,967
    
    
    
    17,186
    
    
    
    25,213
    
    
    
    22,119Net income
    
    $
    80,213
    
    
    $
    49,677
    
    
    $
    27,566
    
    
    $
    39,754
    
    
    $
    35,301Net income per share, diluted (2)
    
    $
    1.02
    
    
    $
    0.66
    
    
    $
    0.37
    
    
    $
    0.54
    
    
    $
    0.49Weighted average shares outstanding, diluted (2)
    
    
    78,850
    
    
    
    75,147
    
    
    
    74,488
    
    
    
    73,234
    
    
    
    72,427Selected Consolidated Operating Data:Stores open at end of period
    
    
    877
    
    
    
    791
    
    
    
    718
    
    
    
    589
    
    
    
    450Stores opened during period
    
    
    90
    
    
    
    85
    
    
    
    135
    
    
    
    142
    
    
    
    111Stores closed during period
    
    
    4
    
    
    
    12
    
    
    
    6
    
    
    
    3
    
    
    
    3Capital expenditures (000s)
    
    $
    40,211
    
    
    $
    40,423
    
    
    $
    92,936
    
    
    $
    61,869
    
    
    $
    40,219Average net sales per gross square foot (3) (4)
    
    $
    363
    
    
    $
    330
    
    
    $
    321
    
    
    $
    368
    
    
    $
    398Average net sales per store (000s) (3) (4)
    
    $
    1,229
    
    
    $
    1,102
    
    
    $
    1,031
    
    
    $
    1,082
    
    
    $
    1,084Square footage of gross store space
    
    
    2,996,635
    
    
    
    2,647,343
    
    
    
    2,319,149
    
    
    
    1,764,123
    
    
    
    1,254,373Comparable store net sales increase/
(decrease) (4) (5)
    
    
    13.1
    %
    
    
    9.7
    %
    
    
    (2.5
    )%
    
    
    3.5
    %
    
    
    7.8
    %Consolidated Balance Sheet Data:Working capital
    
    $
    242,992
    
    
    $
    109,305
    
    
    $
    78,899
    
    
    $
    79,799
    
    
    $
    67,351Total assets
    
    
    575,261
    
    
    
    399,743
    
    
    
    355,440
    
    
    
    277,453
    
    
    
    209,342Long-term debt
    
    
    228
    
    
    
    1,102
    
    
    
    24,597
    
    
    
    
    
    
    
    Shareholders equity
    
    $
    428,762
    
    
    $
    302,391
    
    
    $
    247,955
    
    
    $
    213,131
    
    
    $
    161,826
   (1)
    
    Except for the fiscal year ended February 4, 2001, which included 53
weeks, all fiscal years presented included 52 weeks. Effective February
1, 2002, the Company changed its fiscal year end from the Sunday closest
to the end of January to the Saturday closest to the end of January. As a
result, the last day of fiscal 2001 was Saturday, February 2, 2002.(2)
    
    Adjusted to give effect to the three-for-two stock splits effected as of
August 25, 2003, December 18, 2002, and June 8, 1999. 10




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(3)
    
    For purposes of calculating these amounts, the number of stores and the
amount of square footage reflect the number of months during the period
that new stores and closed stores were open.(4)
    
    These amounts have been adjusted to exclude the fifty-third week in the
fiscal year ended February 4, 2001.(5)
    
    Stores are deemed comparable stores on the first day of the first month
following the one-year anniversary of their opening, relocation, expansion
or conversion. In conjunction with the expansion or relocation of certain
stores to a larger format with a square footage increase of 15% or more or
with the conversion of certain PacSun stores to the d.e.m.o. format, the
Company excludes each such stores net sales results from the first day of
the month of its expansion, relocation or conversion. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company included
elsewhere in this Form 10-K. The following Managements Discussion and
Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. The Companys
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under Cautionary Note Regarding Forward-Looking Statements and Risk
Factors in this section. Executive Overview Management of the Company considers the following items to be key performance
indicators in evaluating Company performance: Comparable (or same store) sales- Stores are deemed comparable stores on the
first day of the month following the one-year anniversary of their opening or
expansion/relocation. Management of the Company considers same store sales to
be an important indicator of current Company performance. Same store sales
results are important in achieving operating leverage of certain expenses such
as store payroll, store occupancy, depreciation, general and administrative
expenses, and other costs that are somewhat fixed. Positive same store sales
results generate greater operating leverage of expenses while negative same
store sales results negatively impact operating leverage. Same store sales
results also have a direct impact on the Companys total net sales, cash, and
working capital. Net merchandise margins- Management analyzes the components of net merchandise
margins, specifically initial markup and markdowns as a percentage of net
sales. Any inability to obtain acceptable levels of initial markups or any
significant increase in the Companys use of markdowns could have an adverse
impact on the Companys gross margin results and results of operations. Operating margin- Management views operating margin as a key indicator of the
Companys success. The key drivers of operating margins are comparable store
net sales, net merchandise margins, and the Companys ability to control
operating expenses. Operating margin for fiscal 2003, 2002 and 2001, was
12.3%, 9.6% and 6.5%, respectively. The Companys highest historical operating
margin was 12.9% for fiscal 1999. Store sales trends- Management evaluates store sales trends in assessing the
operational performance of the Companys store expansion strategies. Important
store sales trends include average net sales per store, average net sales per
square foot, and average trend sales for new stores. Average net sales per
store (in thousands) for fiscal 2003, 2002 and 2001 were $1,229, $1,102 and
$1,031, respectively. Average net sales per square foot were $363, $330 and
$321, respectively. Cash flow and liquidity (working capital)- Management evaluates cash flow from
operations, liquidity and working capital to determine the Companys short-term
operational financing needs. Cash flows from operations were significantly
higher in fiscal 2003 as compared to fiscal 2002, primarily due to higher net
income driven by the 13.1% comparable store net sales increase in fiscal 2003.
Management expects cash flows from operations will be sufficient to finance
operations without borrowing under the Companys credit facility. 11




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Critical Accounting Policies The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported revenues and expenses during the reported period. Actual results
could differ from these estimates. The accounting policies that the Company
believes are the most critical to aid in fully understanding and evaluating
reported financial results include the following: Revenue Recognition- Sales are recognized upon purchase by customers at the
Companys retail store locations or upon shipment for orders placed through the
Companys website. The Company records the sale of gift cards as a current
liability and recognizes a sale when a customer redeems a gift card. The
amount of the gift card liability is determined taking into account the
Companys estimate of the portion of gift cards that will not be redeemed or
recovered. The Company accrues for estimated sales returns by customers based
on historical sales return results. Actual return rates have historically been
within managements expectations and the reserves established. However, in the
event that the actual rate of sales returns by customers increased
significantly, the Companys operational results could be adversely affected.
The Company accrued $.6 million at the end of fiscal 2003 for estimated sales
returns by customers based on historical sales return results. Inventory Valuation- Merchandise inventories are stated at the lower of cost
(first-in, first-out method) or market. Cost is determined using the retail
inventory method. At any one time, inventories include items that have been
marked down to managements best estimate of their fair market value.
Management bases the decision to mark down merchandise primarily upon its
current rate of sale and the age of the item, among other factors. To the
extent that management estimates differ from actual results, additional
markdowns may have to be recorded, which could reduce the Companys gross
margins and operating results. Long-Lived Assets- In the normal course of business, the Company acquires
tangible and intangible assets. The Company periodically evaluates the
recoverability of the carrying amount of its long-lived assets (including
property, plant and equipment, and other intangible assets) whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. Impairment is assessed when the undiscounted expected
future cash flows derived from an asset or asset group are less than its
carrying amount. Impairments are recognized in operating earnings. The
Company uses its best judgment based on the most current facts and
circumstances surrounding its business when applying these impairment rules to
determine the timing of the impairment test, the undiscounted cash flows used
to assess impairments, and the fair value of a potentially impaired asset.
Changes in assumptions used could have a significant impact on the Companys
assessment of recoverability. Numerous factors, including changes in the
Companys business, industry segment, and the global economy, could
significantly impact managements decision to retain, dispose of, or idle
certain of its long-lived assets. Goodwill and Other Intangible Assets- The Company evaluates the recoverability
of goodwill at least annually based on a two-step impairment test. The first
step compares the fair value of each reporting unit with its carrying amount,
including goodwill. If the carrying amount of a reporting unit exceeds fair
value, then the second step of the impairment test is performed to measure the
amount of any impairment loss. Fair value is determined based on estimated
future cash flows, discounted at a rate that approximates the Companys cost of
capital. Such estimates are subject to change and the Company may be required
to recognize impairment losses in the future. Insurance Reserves- The Company is responsible for workers compensation
insurance claims up to a specified aggregate stop loss amount. The Company
maintains a reserve for estimated claims, both reported and incurred but not
reported, based on historical claims experience and other estimated
assumptions. Actual claims activity has historically been within managements
expectations and the reserves established. To the extent claims experience or
managements estimates change, additional charges may be recorded in the future
up to the aggregate stop loss amount for each policy year. 12




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Accrued Sublease Loss Charges- The Company remains liable under two operating
leases covering its former corporate offices and a former store location.
These facilities remain vacant as of the date of this filing. At the end of
fiscal 2002, the Company had accrued $3.6 million to account for the difference
between the Companys remaining contractual lease obligations and the rate and
timeframe within which the Company expected to be able to sublease these
properties. During fiscal 2003, based on a review of real estate market
conditions and on-going negotiations, the Company revised its sublease
assumptions and increased its accrued sublease loss charges by $1.9 million to
a total of $5.5 million. To the extent managements estimates relating to the
Companys ability to sublease these facilities at the assumed rates or within
the assumed timeframes changes or is incorrect, additional charges or reversals
of previous charges may be recorded in the future. At January 31, 2004, the
aggregate remaining obligations under these leases were approximately $5.4
million for the former corporate offices and approximately $6.7 million for the
former store location. These amounts are included in the contractual
obligations table within Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, Liquidity and Capital
Resources. Income Taxes- Current income tax expense is the amount of income taxes
expected to be payable for the current year. The combined federal and state
income tax expense was calculated using estimated effective annual tax rates.
A deferred income tax asset or liability is established for the expected future
consequences of temporary differences in the financial reporting and tax bases
of assets and liabilities. The Company considers future taxable income and
ongoing prudent and feasible tax planning in assessing the value of its
deferred tax assets. Evaluating the value of these assets is necessarily based
on the Companys judgment. If the Company determines that it is more likely
than not that these assets will not be realized, the Company would reduce the
value of these assets to their expected realizable value through a valuation
allowance, thereby decreasing net income. If the Company subsequently
determined that the deferred tax assets, which had been written down, would be
realized in the future, the value of the deferred tax assets would be
increased, thereby increasing net income in the period when that determination
was made. Litigation- The Company is involved from time to time in litigation incidental
to its business. Management believes that the outcome of current litigation
will not have a material adverse effect upon the results of operations or
financial condition of the Company and, from time to time, may make provisions
for potential litigation losses. Depending on the actual outcome of pending
litigation, charges in excess of any provisions could be recorded in the
future, which may have an adverse effect on the Companys operating results
(see note 7 to the consolidated financial statements). Results of Operations The following table sets forth selected income statement data of the
Company expressed as a percentage of net sales for the fiscal years indicated.
The discussion that follows should be read in conjunction with the following
table:  13




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##### Table of Contents



As a Percentage of Net Sales,Fiscal Year EndedJan. 31,
    
    Feb. 1,
    
    Feb. 2,2004
    
    2003
    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold (including buying, distribution
and occupancy costs)
    
    
    65.1
    
    
    
    66.5
    
    
    
    67.8Gross margin
    
    
    34.9
    
    
    
    33.5
    
    
    
    32.2Selling, general and administrative expenses
    
    
    22.6
    
    
    
    23.9
    
    
    
    25.7Operating income
    
    
    12.3
    
    
    
    9.6
    
    
    
    6.5Interest income/(expense), net
    
    
    0.1
    
    
    
    (0.1
    )
    
    
    0.1Income before income tax expense
    
    
    12.4
    
    
    
    9.5
    
    
    
    6.6Income tax expense
    
    
    4.7
    
    
    
    3.6
    
    
    
    2.6Net income
    
    
    7.7
    %
    
    
    5.9
    %
    
    
    4.0
    %Number of stores open at end of period
    
    
    877
    
    
    
    791
    
    
    
    718
 Fiscal 2003 Compared to Fiscal 2002 Net Sales Net sales increased to $1.04 billion in fiscal 2003 from $846.4 million in
fiscal 2002, an increase of $193.9 million, or 22.9%. The components of this
$193.9 million increase in net sales are as follows: Amount
    
    Attributable to$104.3 million
    
    13.1% increase in comparable store net sales in fiscal 2003 compared to fiscal 200249.2 million
    
    90 new stores opened in fiscal 2003 not yet included in the comparable store base25.1 million
    
    Net sales from stores opened in fiscal 2002 while not yet included in the
comparable store base20.0 million
    
    Other non-comparable sales (net sales from expanded or relocated stores not yet
included in the comparable store base and internet net sales)(4.7) million
    
    4 closed stores in fiscal 2003 and 12 closed stores in fiscal 2002$193.9 million
    
    Total
 Of the 13.1% increase in comparable store net sales in fiscal 2003, PacSun and
PacSun Outlet comparable store net sales increased a combined 12.3% and
d.e.m.o. comparable store net sales increased 21.0%. The increase in
comparable store net sales within PacSun and PacSun Outlet was primarily
attributable to increases in comparable store net sales of footwear,
accessories, juniors and, to a lesser extent, young mens merchandise. The
increase in comparable store net sales within d.e.m.o. was primarily
attributable to increases in comparable store net sales of juniors,
accessories, footwear and, to a lesser extent, young mens merchandise.
Average retail prices of merchandise sold remained relatively unchanged in
fiscal 2003 compared to fiscal 2002 and had no significant impact on the net
sales increase for fiscal 2003. Gross Margin Gross margin, after buying, distribution and occupancy costs, increased to
$363.3 million in fiscal 2003 from $283.7 million in fiscal 2002, an increase
of $79.6 million, or 28.1%. As a percentage of net sales, gross margin was
34.9% for fiscal 2003 compared to 33.5% for fiscal 2002. The components of
this 1.4% increase in gross margin as a percentage of net sales are as follows: 14




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%
    
    Attributable to1.4 %
    
    Decrease in occupancy costs, primarily due to leveraging these costs over higher total sales.1 %
    
    Increase in net merchandise margins, primarily due to a higher initial markup rate
partially offset by a higher markdown rate.1 %
    
    Decrease in distribution costs(.2)%
    
    Increase in buying costs1.4%
    
    Total
 Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $235.1 million
in fiscal 2003 from $202.4 million in fiscal 2002, an increase of $32.7
million, or 16.2%. As a percentage of net sales, these expenses decreased to
22.6% from 23.9%. The components of this 1.3% net decrease as a percentage of
net sales are as follows: %
    
    Attributable to1.1 %
    
    Decrease in store payroll, primarily due to leveraging these costs over higher total sales.7 %
    
    Decrease in other store expenses due to leveraging these costs over higher total sales.2 %
    
    Decrease in store closing, expansion and relocation expenses(.7)%
    
    Increase in general and administrative expenses, primarily due to $5.1 million restricted
stock expense (see note 9 to the consolidated financial statements)1.3%
    
    Total
 Net Interest Income/Expense Net interest income was $.7 million in fiscal 2003 compared to net
interest expense of $.6 million in fiscal 2002, an increase of $1.3 million in
net interest income. This increase was primarily the result of higher average
cash balances in fiscal 2003. Average cash balances were higher in fiscal 2003
primarily due to higher net income driven by the comparable store net sales
increase in fiscal 2003 as well as the absence of the construction loan related
to the Companys new corporate offices and distribution center that was
outstanding for a portion of fiscal 2002. Income Tax Expense Income tax expense was $48.8 million in fiscal 2003 compared to $31.0 million
in fiscal 2002. The effective income tax rate was 37.8% in fiscal 2003 and
38.4% in fiscal 2002. The lower effective income tax rate for fiscal 2003 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 number of factors, such as differing income tax rates and
net sales by state. Fiscal 2002 Compared to Fiscal 2001 Net Sales Net sales increased to $846.4 million in fiscal 2002 from $684.8 million
in fiscal 2001, an increase of $161.6 million, or 23.6%. The components of
this $161.6 million increase in net sales are as follows: 15




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Amount
    
    Attributable to$61.0 million
    
    9.7% increase in comparable store net sales in fiscal 2002 compared to fiscal 200150.6 million
    
    85 new stores opened in fiscal 2002 not yet included in the comparable store base40.9 million
    
    Net sales from stores opened in fiscal 2001 while not yet included in the
comparable store base13.7 million
    
    Other non-comparable sales (net sales from expanded or relocated stores not yet
included in the comparable store base and internet net sales)1.4 million
    
    Additional shopping day in fiscal 2002 due to the one day change in fiscal year
end from Sunday to Saturday at the end of fiscal 2001(6.0) million
    
    12 closed stores in fiscal 2002 and 6 closed stores in fiscal 2001$161.6 million
    
    Total
 Of the 9.7% increase in comparable store net sales in fiscal 2002, PacSun and
PacSun Outlet comparable store net sales increased 9.4% and d.e.m.o. comparable
store net sales increased 12.4%. The increase in comparable store net sales
within PacSun and PacSun Outlet was primarily attributable to increases in
comparable store net sales of footwear, juniors, and accessories. The increase
in comparable store net sales within d.e.m.o. was primarily attributable to
increases in comparable store net sales of juniors and accessories merchandise.
Average retail prices of merchandise sold remained relatively unchanged in
fiscal 2002 compared to fiscal 2001 and had no significant impact on the net
sales increase for fiscal 2002. Gross Margin Gross margin, after buying, distribution and occupancy costs, increased to
$283.7 million in fiscal 2002 from $220.2 million in fiscal 2001, an increase
of $63.5 million, or 28.8%. As a percentage of net sales, gross margin was
33.5% for fiscal 2002 compared to 32.2% for fiscal 2001. The components of
this 1.3% increase in gross margin are as follows: %
    
    Attributable to.4 %
    
    Decrease in occupancy costs, primarily due to leveraging these costs over higher total sales.4 %
    
    Decrease in buying costs, primarily due to leveraging these costs over higher total sales.3 %
    
    Decrease in distribution costs, primarily due to freight and labor efficiencies in the new
distribution center as well as leveraging these costs over higher total sales.2 %
    
    Increase in net merchandise margins, primarily due to a higher initial markup rate
partially offset by a higher markdown rate1.3%
    
    Total
 Selling, General and Administrative Expenses Selling, general and administrative expenses increased to $202.4 million
in fiscal 2002 from $175.9 million in fiscal 2001, an increase of $26.5
million, or 15.1%. As a percentage of net sales, these expenses decreased to
23.9% from 25.7%. The components of this 1.8% net decrease as a percentage of
net sales are as follows: %
    
    Attributable to.8 %
    
    Decrease in advertising expenses, primarily due to the elimination of television
advertising and a sports game sponsorship.6 %
    
    Decrease in store closing, expansion and relocation expenses.4 %
    
    Decrease in store payroll, primarily due to leveraging these costs over higher total sales1.8%
    
    Total
 Selling, general and administrative expenses include provisions made by the
Company for the wage and hour litigation (see Item 3, Legal Proceedings, and
note 7 to the consolidated financial statements). These amounts are included
in store payroll. 16




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Net Interest Expense/Income Net interest expense was $.6 million in fiscal 2002 compared to interest
income of $.5 million in fiscal 2001, a decrease of $1.1 million. This
decrease was primarily the result of interest expense arising from a
construction loan related to the construction of the Companys new corporate
offices and distribution center in fiscal 2002 as well as lower average cash
balances during fiscal 2002 as compared to fiscal 2001. Income Tax Expense Income tax expense was $31.0 million in fiscal 2002 compared to $17.2 million
in fiscal 2001. The effective income tax rate in fiscal 2002 and fiscal 2001
was 38.4%. Liquidity and Capital Resources The Company has financed its operations primarily from internally
generated cash flow, with occasional short-term and long-term borrowings and
equity financing in past years. The Companys primary capital requirements
have been for the construction of new stores, remodeling, expansion, or
relocation of selected stores, financing of inventories and, in fiscal 2001,
construction of the Companys new corporate offices and distribution center.
Management believes that the Companys working capital, cash flows from
operating activities and credit facility will be sufficient to meet the
Companys operating and capital expenditure requirements for fiscal 2004. Operating Cash Flows Net cash provided by operating activities for fiscal 2003, fiscal 2002 and
fiscal 2001 was $151.6 million, $76.6 million and $58.4 million, respectively.
The $75.0 million increase in cash provided by operations in fiscal 2003 as
compared to fiscal 2002 was attributable to the following: Amount
    
    Attributable to$30.5 million
    
    Increase in net income24.9 million
    
    Increase in accrued income taxes and deferred income taxes15.9 million
    
    Increase in accounts payable leverage compared to fiscal 2002 (1)3.7 million
    
    Other items netting to a cash flow increase$75.0 million
    
    Total
 (1)Accounts payable as a percentage of inventories increased to 26.2% at
January 31, 2004, as compared to 23.1% at February 1, 2003, primarily due to
timing of payments. The Companys success is largely dependent upon its ability to gauge the
fashion tastes of its customers and provide merchandise that satisfies customer
demand. Any inability to provide appropriate merchandise in sufficient
quantities in a timely manner could have a material adverse effect on the
Companys business, operating results, cash flows from operations and financial
condition. Any economic downturn that affects the retail industry as a whole
could also adversely affect the Companys business, operating results, cash
flows from operations and financial condition. Working Capital Working capital at the end of fiscal 2003, fiscal 2002 and fiscal 2001 was
$243.0 million, $109.3 million and $78.9 million, respectively. The $133.7
million increase in working capital at January 31, 2004 as compared to February
1, 2003 was attributable to the following: 17




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Amount
    
    Attributable to$139.4 million
    
    Increase in cash and short-term investments, primarily due
to higher net income driven by the 13.1% comparable store
net sales increase for fiscal 200314.1 million
    
    Increase in inventories, net of accounts payable,
primarily due to square footage growth of 13%, as well as
inventory increases in comparable stores.6 million
    
    Other items netting to a working capital increase(20.4) million
    
    Increase in accrued liabilities, primarily due to
increased accruals for restricted stock expenses, sales
taxes, capital expenditures for stores not yet open, bonus expense and store closing expenses$133.7 million
    
    Total
 Investing Cash Flows Net cash used in investing activities in fiscal 2003, fiscal 2002 and fiscal
2001 was $73.2 million, $40.4 million and $92.9 million, respectively. The
components of the $73.2 million of net cash used in investing activities in
fiscal 2003 are as follows: Amount
    
    Attributable to$33.0 million
    
    Purchases of short-term investments classified as held-to-maturity22.9 million
    
    Capital expenditures for 90 new stores and 27 expansions/relocations in fiscal 20038.5 million
    
    Construction costs of new, expanded and relocated stores to open in fiscal 20042.4 million
    
    Maintenance capital expenditures on existing stores6.4 million
    
    Other capital expenditures, including computer hardware and software$73.2 million
    
    Total
 In fiscal 2004, capital expenditures are expected to be approximately $56
million, of which approximately $48 million will be for opening new and
relocated/expanded stores, and approximately $8 million will be used for other
capital expenditures, including maintenance capital on existing stores and
computer hardware and software. On January 27, 2004, the Board of Directors of the Company adopted a resolution
authorizing the Company to purchase up to 2.5 million shares of the Companys
common stock in open market transactions. As of January 31, 2004, no purchases
had been made pursuant to the resolution. Subsequent to January 31, 2004, the
Company repurchased shares as follows: # of Shares
    
    Maximum # of SharesPurchased as Part
    
    that May Yet be# of Shares
    
    
    
    
    
    of Publicly
    
    Purchased Under thePeriod
    
    Purchased
    
    Average Price/Share
    
    Announced Plan
    
    PlanFebruary 23, 2004
    
    
    75,000
    
    
    $
    23.99
    
    
    
    75,000
    
    
    
    2,425,000
 Financing Cash Flows Net cash provided by financing activities in fiscal 2003 was $28.0 million
as compared to cash used of $22.9 million in fiscal 2002 and cash provided of
$28.7 million in fiscal 2001, respectively. Of the $28.0 million of net cash
provided by financing activities in fiscal 2003, $30.4 million was due to
proceeds received from the exercise of stock options, offset by principal
payments under capital lease and long-term debt obligations of $2.4 million. The Company has a credit facility with a bank, which expires April 1, 2007.
The credit facility provides for a $45.0 million line of credit (the Credit
Line) through March 31, 2005 to be used for cash advances, commercial letters
of credit and shipside bonds. The Credit Line increases to $50.0 million from
April 1, 2005 through March 31, 2006, and $60.0 million from April 1, 2006
through expiration on April 1, 2007. Interest on the Credit Line is payable
monthly at the banks prime rate (4.0% at January 31, 2004) or at optional
interest rates that are primarily dependent upon the London Inter-bank Offered
Rates for the time 18




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period chosen. The Company did not borrow under the credit facility at any
time during fiscal 2003. The Company had $13.1 million outstanding in letters
of credit at January 31, 2004. The credit facility subjects the Company to
various restrictive covenants, including maintenance of certain financial
ratios, and prohibits payment of cash dividends on common stock. At January
31, 2004, the Company was in compliance with all of the covenants. A significant decrease in the Companys operating results could adversely
affect the Companys ability to maintain the required financial ratios under
the Companys credit facility. Required financial ratios include total
liabilities to tangible net worth, limitations on capital expenditures and
achievement of certain rolling four-quarter EBITDA requirements. If these
financial ratios are not maintained, the bank will have the option to require
immediate repayment of all amounts outstanding under the credit facility, if
any. The most likely result would require the Company to renegotiate certain
terms of the credit agreement, obtain a waiver from the bank, or obtain a new
credit agreement with another bank, which may contain different terms. At
January 31, 2004, the Company had no borrowings outstanding under its credit
facility. Contractual Obligations The Company has minimum annual rental commitments under existing store leases,
the lease for its former corporate offices and distribution center, capital
leases for computer equipment, and other long-term debt obligations for
multi-year computer maintenance contracts. The Companys financial obligations
under these arrangements are approximately $83.0 million in fiscal 2004 and
similar amounts annually thereafter. The Company leases all of its retail
store locations under operating leases. The Company leases equipment, from
time to time, under capital leases. In addition, at any time, the Company is
contingently liable for open letters of credit with foreign suppliers of
merchandise. At January 31, 2004, the Companys future financial commitments
under these arrangements are as follows: Payments Due by PeriodContractual Obligations
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    More than(in millions)
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating lease obligations
    
    $
    615.8
    
    
    $
    81.1
    
    
    $
    164.3
    
    
    $
    157.8
    
    
    $
    212.6Capital lease obligations
    
    
    2.2
    
    
    
    1.0
    
    
    
    1.2
    
    
    
    
    
    
    
    Long-term debt obligations
    
    
    1.1
    
    
    
    0.9
    
    
    
    0.2
    
    
    
    
    
    
    
    Letters of credit
    
    
    13.1
    
    
    
    13.1
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    632.2
    
    
    $
    96.1
    
    
    $
    165.7
    
    
    $
    157.8
    
    
    $
    212.6
 The Company reviews the operating performance of its stores on an ongoing basis
to determine which stores, if any, to expand, relocate or close. Most leases
contain cancellation or kick-out clauses in the Companys favor that relieve
the Company of any future obligation under a lease if specified sales levels
are not achieved by a specified date. The Company closed four stores in fiscal
2003 and anticipates closing approximately five stores in fiscal 2004. New Store Costs The Companys average cost to build a new store in fiscal 2003, including
leasehold improvements, furniture and fixtures, and net of landlord allowances,
was approximately $241,000 for PacSun stores, approximately $247,000 for PacSun
Outlet stores, and approximately $248,000 for d.e.m.o. stores. The average
cost of expanding or relocating a PacSun store was approximately $407,000 and
the average cost of expanding or relocating a d.e.m.o. store was approximately
$369,000 in fiscal 2003. The average total cost to build new stores and
relocate or expand stores will vary in the future depending on various factors,
including square footage, changes in store design, local construction costs and
landlord allowances. The Companys average cost for initial inventory for new
stores opened in fiscal 2003 was approximately $128,000 for PacSun stores,
approximately $202,000 for PacSun Outlet stores, and approximately $167,000 for
d.e.m.o. stores. The Companys initial inventory for new stores will vary in
the future depending on various factors, including store concept and square
footage. 19




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New Accounting Pronouncements Information regarding new accounting pronouncements is contained in note 1 to
the consolidated financial statements for the year ended January 31, 2004,
which note is incorporated herein by this reference. Inflation The Company does not believe that inflation has had a material effect on
the results of operations in the recent past. There can be no assurance that
the Companys business will not be affected by inflation in the future. Seasonality and Quarterly Results The Companys business is seasonal by nature, with the Christmas and
back-to-school periods historically accounting for the largest percentage of
annual net sales. The Companys first quarter historically accounts for the
smallest percentage of annual net sales. In each of fiscal 2003 and fiscal
2002, excluding sales generated by new and relocated/expanded stores, the
Christmas and back-to-school periods together accounted for approximately 36%
of the Companys annual net sales and a higher percentage of the Companys
operating income. In fiscal 2003, excluding net sales generated by new and
relocated/expanded stores, approximately 43% of the Companys annual net sales
occurred in the first half of the fiscal year and approximately 57% in the
second half. The Companys quarterly results of operations may also fluctuate
significantly as a result of a variety of factors, including the timing of
store openings; 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. Cautionary Note Regarding Forward-Looking Statements and Risk Factors This report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Exchange Act, 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. All forward-looking statements included in this report, including
forecasts of fiscal 2004 planned new store openings, are based on information
available to the Company as of the date hereof, and the Company assumes no
obligation to update or revise any such forward-looking statements to reflect
events or circumstances that occur after such statements are made. Such
uncertainties include, among others, the following factors: 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
same store sales results, operating margins, financial condition and results of
operations. Misjudgments or unanticipated fashion changes could also have a
material adverse effect on the Companys image with its customers. See Item 1,
Business - Merchandising. Private Label Merchandise.Sales from private label merchandise accounted for
approximately 32% and 33% of net sales in fiscal 2003 and fiscal 2002,
respectively. The Company may increase the percentage of net sales in private
label merchandise in the future, although there can be no assurance that the
Company will be able to achieve increases in private label merchandise sales as
a percentage of net sales. Because 20




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##### Table of Contents



the Companys private label merchandise 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 label
merchandise, particularly if the percentage of net sales derived from private
label merchandise increases, may have a material adverse effect on the
Companys same store sales results, operating margins, financial condition and
results of operations. See Item 1, Business - Merchandising. 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. Expansion and Management of Growth.PacSun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.
The Company has previously announced plans to operate 1,400 stores by the end
of 2007, of which approximately 900 will be PacSun stores, approximately 100
will be PacSun Outlet stores, and approximately 400 will be d.e.m.o. stores.
As of March 26, 2004, the Company operated 888 stores, of which 682 were PacSun
stores, 79 were PacSun Outlet stores, and 127 were d.e.m.o. stores. The
Companys planned expansion is dependent upon a number of factors, including
the ability of the Company to locate and obtain favorable store sites,
negotiate acceptable lease terms, obtain adequate supplies of merchandise 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,
that such expansion will be profitable, or 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. Reliance on Key Personnel.The continued success of the Company is dependent
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. Dependence on Single Distribution Facility.The Companys distribution
functions for all of its stores and for internet sales are handled from a
single facility in Anaheim, California. Any significant interruption in the
operation of the distribution facility due to natural disasters, accidents,
system failures or other unforeseen causes would have a material adverse effect
on the Companys business, financial condition and results of operations.
There can be no assurance that the Companys new corporate office and
distribution center will be adequate to support the Companys future growth. Internet Sales. The Companys internet operations are subject to numerous
risks that could have a material adverse effect on the Companys operational
results, including unanticipated operating problems, reliance on third party
computer hardware and software providers, system failures and the need to
invest in additional computer systems. Specific risks include: (i) diversion
of sales from PacSun stores; (ii) rapid technological change; (iii) liability
for online content; and (iv) risks related to the failure of the computer
systems that operate the website and its related support systems, including
computer viruses, telecommunication failures and electronic break-ins and
similar disruptions. In addition, internet operations involve risks which are
beyond the Companys control that could have a material adverse effect on the
Companys operational results, 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 21




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regulation; (v) online security breaches; (vi) credit card fraud; and (vii)
competition and general economic conditions specific to the internet, online
commerce and the apparel industry. Economic Impact of Terrorist Attacks or War/Threat of War.The majority of the
Companys stores are located in regional shopping malls. Any threat of
terrorist attacks or actual terrorist events, particularly in public areas,
could lead to lower customer traffic in regional shopping malls. In addition,
local authorities or mall management could close regional shopping malls in
response to any immediate security concern. Mall closures, as well as lower
customer traffic due to security concerns, could result in decreased sales.
Additionally, war or the threat of war could significantly diminish consumer
spending, resulting in decreased sales for the Company. Decreased sales would
have a material adverse effect on the Companys business, financial condition
and results of operations. Reliance on Foreign Sources of Production.The Company purchases merchandise
directly in foreign markets for its private label brands. In addition, the
Company purchases merchandise from domestic vendors, some of which is
manufactured overseas. The Company does not have any long-term merchandise
supply contracts and its imports are subject to existing or potential duties,
tariffs and quotas. The Company faces competition from other companies for
production facilities and import quota capacity. The Company also faces a
variety of other risks generally associated with doing business in foreign
markets and importing merchandise from abroad, such as: (i) political
instability; (ii) enhanced security measures at United States ports, which
could delay delivery of imports; (iii) imposition of new legislation relating
to import quotas that may limit the quantity of goods which may be imported
into the United States from countries in a region that the Company does
business; (iv) imposition of duties, taxes, and other charges on imports; (v)
delayed receipt or non-delivery of goods due to the failure of foreign-source
suppliers to comply with applicable import regulations; and (vi) local business
practice and political issues, including issues relating to compliance with
domestic or international labor standards which may result in adverse
publicity. New initiatives may be proposed that may have an impact on the
trading status of certain countries and may include retaliatory duties or other
trade sanctions that, if enacted, would increase the cost of products purchased
from suppliers in countries that the Company does business with. The inability
of the Company to rely on its foreign sources of production due to any of the
factors listed above could have a material adverse effect on the Companys
business, financial condition and results of operations. Credit Facility Financial Covenants.A significant decrease in the Companys
operating results could adversely affect the Companys ability to maintain
required financial ratios under the Companys credit facility. Required
financial ratios include a rolling four-quarter EBITDA requirement, total
liabilities to tangible net worth ratio, and limitations on capital
expenditures. If these financial ratios are not maintained, the bank will have
the option to require immediate repayment of all amounts outstanding under the
credit facility, if any. The most likely result would require the Company to
renegotiate certain terms of the credit agreement, obtain a waiver from the
bank, or obtain a new credit agreement with another bank, which may contain
different terms. Stock Options.A number of publicly traded companies have recently announced
that they will begin expensing stock option grants to employees. In addition,
the FASB and the Commission have indicated that possible rule changes requiring
expensing of stock options may be adopted in the near future. Currently, the
Company includes such expenses on a pro forma basis in the notes to the
Companys quarterly and annual financial statements in accordance with
accounting principles generally accepted in the United States of America but
does not include compensation expense related to stock options in the Companys
reported financial statements. If accounting standards are changed to require
the Company to expense stock options, the Companys reported earnings will
decrease and its stock price could decline. Litigation.The Company is involved from time to time in litigation incidental
to its business. Management believes that the outcome of current litigation
will not have a material adverse effect upon the results of operations or
financial condition of the Company. However, managements assessment of the
Companys current litigation could change in light of the discovery of facts
with respect to legal actions pending against the Company not presently known
to the Company or determinations by judges, juries or other finders of fact
which do not accord with managements evaluation of the possible liability or
outcome of such litigation. 22




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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, net sales and profitability results, quarterly 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. 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 smaller public companies for reasons frequently unrelated to
the operating performance of the specific companies. See Item 5, Market for
Registrants Common Equity and Related Stockholder Matters. ************* 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. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK To the extent the Company borrows under its credit facility, the Company is
exposed to market risk related to changes in interest rates. At January 31,
2004, there were no borrowings outstanding under the Companys credit facility.
Based on the weighted average interest rate of 3.67% on the Companys credit
facility during fiscal 2002, if interest rates on the credit facility were to
increase by 10%, and to the extent borrowings were outstanding, for every
$1,000,000 outstanding on the Companys credit facility, net income would be
reduced by approximately $3,000 per year. See Summary of Significant
Accounting Policies and Nature of Business. The Company is not a party with
respect to derivative financial instruments. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this item is set forth in Index to Financial
Statements. 
  ITEM 9.
    CHANGES IN, AND DISAGREEMENTS WITH, ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Chief Executive Officer
and Chief Financial Officer of the Company (collectively, the certifying
officers) evaluated the effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). These disclosure controls and procedures are designed to ensure
that the information required to be disclosed by the Company in its periodic
reports filed with the Commission is recorded, processed, summarized and
reported within the time periods specified by the Commissions rules and forms,
and that the information is communicated to the certifying officers on a timely
basis. The certifying officers concluded, based on their evaluation, that the
Companys disclosure controls and procedures were effective for the Company as
of the end of the period covered by this report, taking into consideration the
size and nature of the Companys business and operations. No change in the Companys internal control over financial reporting occurred
during the last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over 23




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financial reporting. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to this item is incorporated by reference from
the Registrants definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrants fiscal year. 
 ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item is incorporated by reference from the
Registrants definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrants fiscal year. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item is incorporated by reference from the
Registrants definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrants fiscal year. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item is incorporated by reference from
the Registrants definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrants fiscal year. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information with respect to this item is incorporated by reference from the
Registrants definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrants fiscal year. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)
    
    
    1.
    
    
    The financial statements listed in the Index to Consolidated
Financial Statements at page F-1 are filed as a part of this report.2.
    
    
    Financial statement schedules are omitted because they are
not applicable or the required information is shown in the financial
statements or notes thereto.3.
    
    
    Exhibits included or incorporated herein:See Index to Exhibits.(b)
    
    
    
    
    
    Reports on Form 8-K:
 On November 10, 2003, the Company filed an 8-K furnishing a press release
announcing results of operations for the third quarter and 39 weeks ended
November 1, 2003. 24




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on March
23, 2004, on its behalf by the undersigned, thereunto duly authorized. PACIFIC SUNWEAR OF CALIFORNIA, INC.By:
    
    /s/ GREG H. WEAVERGreg H. Weaver
Chairman of the Board and
Chief Executive Officer
 Each person whose signature appears below hereby authorizes Greg H. Weaver and
Carl W. Womack or either of them, as attorneys-in-fact to sign on his behalf,
individually, and in each capacity stated below and to file all amendments
and/or supplements to the Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ GREG H. WEAVER
Greg H. Weaver
    
    Chairman of the Board and Chief
Executive Officer (Principal Executive
Officer)
    
    March 23, 2004/s/ CARL W. WOMACK
Carl W. Womack
    
    Sr. Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
    
    March 23, 2004/s/ JULIUS JENSEN III
Julius Jensen III
    
    Director
    
    March 23, 2004/s/ PEARSON C. CUMMIN III
Pearson C. Cummin III
    
    Director
    
    March 23, 2004/s/ SALLY FRAME KASAKS
Sally Frame Kasaks
    
    Director
    
    March 23, 2004/s/ PETER STARRETT
Peter Starrett
    
    Director
    
    March 23, 2004/s/ THOMAS M. MURNANE
Thomas M. Murnane
    
    Director
    
    March 23, 2004
 25




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PACIFIC SUNWEAR OF CALIFORNIA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 31, 2004, FEBRUARY 1, 2003, AND FEBRUARY 2, 2002: CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors Report
    
    
    F - 2Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003
    
    
    F - 3Consolidated Statements of Income and Comprehensive Income for each of the three fiscal years
in the period ended January 31, 2004
    
    
    F - 4Consolidated Statements of Shareholders Equity for each of three fiscal years
in the period ended January 31, 2004
    
    
    F - 5Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended January 31, 2004
    
    
    F - 6Notes to Consolidated Financial Statements
    
    
    F - 7
 F-1




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##### Table of Contents



INDEPENDENT AUDITORS REPORT The Board of Directors and Shareholders
Pacific Sunwear of California, Inc.
Anaheim, California We have audited the accompanying consolidated balance sheets of Pacific Sunwear
of California, Inc. and its subsidiaries as of January 31, 2004 and February 1,
2003, and the related consolidated statements of income and comprehensive
income, shareholders equity, and cash flows for each of the three fiscal years
in the period ended January 31, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pacific Sunwear of California,
Inc. and its subsidiaries as of January 31, 2004 and February 1, 2003, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 31, 2004, in conformity with accounting
principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for goodwill and other intangible assets during the year
ended February 1, 2003, as a result of adopting Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective
February 3, 2002. DELOITTE & TOUCHE LLP
Costa Mesa, California
March 19, 2004 F-2




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PACIFIC SUNWEAR OF CALIFORNIA, INC. CONSOLIDATED BALANCE SHEETS
 (in thousands, except share amounts)
 January 31,
    
    February 1,2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    142,840
    
    
    $
    36,438Short-term investments
    
    
    33,035
    
    
    
    Accounts receivable
    
    
    5,194
    
    
    
    2,916Merchandise inventories
    
    
    147,751
    
    
    
    123,433Prepaid expenses, includes $10,711 and $9,664 of prepaid rent, respectively
    
    
    16,492
    
    
    
    14,871Deferred income taxes
    
    
    8,224
    
    
    
    4,975Total current assets
    
    
    353,536
    
    
    
    182,633PROPERTY AND EQUIPMENT:Land
    
    
    12,156
    
    
    
    12,156Buildings and building improvements
    
    
    26,686
    
    
    
    26,680Leasehold improvements
    
    
    119,210
    
    
    
    111,431Furniture, fixtures and equipment
    
    
    173,222
    
    
    
    148,377Total property and equipment
    
    
    331,274
    
    
    
    298,644Less accumulated depreciation and amortization
    
    
    (127,630
    )
    
    
    (97,131
    )Net property and equipment
    
    
    203,644
    
    
    
    201,513OTHER ASSETS:Goodwill
    
    
    6,492
    
    
    
    6,492Deferred compensation and other assets
    
    
    11,589
    
    
    
    9,105Total other assets
    
    
    18,081
    
    
    
    15,597Total assets
    
    $
    575,261
    
    
    $
    399,743LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    38,668
    
    
    $
    28,456Accrued liabilities
    
    
    54,966
    
    
    
    34,522Current portion of capital lease obligations
    
    
    1,008
    
    
    
    1,521Current portion of long-term debt
    
    
    878
    
    
    
    829Income taxes payable
    
    
    15,024
    
    
    
    8,000Total current liabilities
    
    
    110,544
    
    
    
    73,328LONG-TERM LIABILITIES:Long-term debt, net of current portion
    
    
    228
    
    
    
    1,102Long-term capital lease obligations, net of current portion
    
    
    1,227
    
    
    
    2,236Deferred compensation
    
    
    10,925
    
    
    
    7,097Deferred rent
    
    
    12,046
    
    
    
    10,574Deferred income taxes
    
    
    11,529
    
    
    
    3,015Total long-term liabilities
    
    
    35,955
    
    
    
    24,024Commitments and contingencies (Note 7)SHAREHOLDERS EQUITY:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and
Outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 170,859,375 shares authorized; 78,351,302 and
74,233,146 shares issued and outstanding, respectively
    
    
    784
    
    
    
    742Additional paid-in capital
    
    
    138,877
    
    
    
    92,761Retained earnings
    
    
    289,101
    
    
    
    208,888Total shareholders equity
    
    
    428,762
    
    
    
    302,391Total liabilities and shareholders equity
    
    $
    575,261
    
    
    $
    399,743
 See notes to consolidated financial statements F-3




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##### Table of Contents



PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share and per share amounts) Fiscal Year EndedJanuary 31,
    
    February 1,
    
    February 2,2004
    
    2003
    
    2002Net sales
    
    $
    1,040,294
    
    
    $
    846,393
    
    
    $
    684,840Cost of goods sold, including buying,
distribution and occupancy costs
    
    
    676,977
    
    
    
    562,710
    
    
    
    464,660Gross margin
    
    
    363,317
    
    
    
    283,683
    
    
    
    220,180Selling, general and administrative expenses
    
    
    235,068
    
    
    
    202,445
    
    
    
    175,898Operating income
    
    
    128,249
    
    
    
    81,238
    
    
    
    44,282Interest income/(expense), net
    
    
    732
    
    
    
    (594
    )
    
    
    470Income before income tax expense
    
    
    128,981
    
    
    
    80,644
    
    
    
    44,752Income tax expense
    
    
    48,768
    
    
    
    30,967
    
    
    
    17,186Net income
    
    $
    80,213
    
    
    $
    49,677
    
    
    $
    27,566Comprehensive income
    
    $
    80,213
    
    
    $
    49,677
    
    
    $
    27,566Net income per share, basic
    
    $
    1.05
    
    
    $
    0.67
    
    
    $
    0.37Net income per share, diluted
    
    $
    1.02
    
    
    $
    0.66
    
    
    $
    0.37Weighted average shares outstanding, basic
    
    
    76,595,758
    
    
    
    73,931,520
    
    
    
    73,532,687Weighted average shares outstanding, diluted
    
    
    78,849,651
    
    
    
    75,146,991
    
    
    
    74,488,048
 See notes to consolidated financial statements F-4




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PACIFIC SUNWEAR OF CALIFORNIA, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (in thousands, except share amounts)
 Common
    
    Common
    
    AdditionalStock
    
    Stock
    
    Paid-in
    
    RetainedShares
    
    Amount
    
    Capital
    
    Earnings
    
    TotalBALANCE, February 4, 2001
    
    
    72,993,230
    
    
    $
    730
    
    
    $
    80,755
    
    
    $
    131,645
    
    
    $
    213,130Exercise of stock options and shares
sold under employee stock purchase plan
and restricted stock grant
    
    
    740,400
    
    
    
    7
    
    
    
    4,254
    
    
    
    
    
    
    
    4,261Restricted stock award, vesting of shares
    
    
    
    
    
    
    
    
    
    
    290
    
    
    
    
    
    
    
    290Tax benefits related to exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    2,708
    
    
    
    
    
    
    
    2,708Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,566
    
    
    
    27,566BALANCE, February 2, 2002
    
    
    73,733,630
    
    
    
    737
    
    
    
    88,007
    
    
    
    159,211
    
    
    
    247,955Exercise of stock options and shares
sold under employee stock purchase plan
    
    
    500,704
    
    
    
    5
    
    
    
    3,439
    
    
    
    
    
    
    
    3,444Cancellation of fractional shares due to
3-for-2 stock split
    
    
    (1,188
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )Restricted stock award, vesting of shares
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    291Tax benefits related to exercise of stock
Options
    
    
    
    
    
    
    
    
    
    
    1,038
    
    
    
    
    
    
    
    1,038Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,677
    
    
    
    49,677BALANCE, February 1, 2003
    
    
    74,233,146
    
    
    
    742
    
    
    
    92,761
    
    
    
    208,888
    
    
    
    302,391Exercise of stock options and shares
sold under employee stock
purchase plan
    
    
    4,119,753
    
    
    
    42
    
    
    
    30,339
    
    
    
    
    
    
    
    30,381Cancellation of fractional shares due to
3-for-2 stock split
    
    
    (1,597
    )
    
    
    
    
    
    
    (33
    )
    
    
    
    
    
    
    (33
    )Tax benefits related to exercise of
stock options
    
    
    
    
    
    
    
    
    
    
    15,810
    
    
    
    
    
    
    
    15,810Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,213
    
    
    
    80,213BALANCE, January 31, 2004
    
    
    78,351,302
    
    
    $
    784
    
    
    $
    138,877
    
    
    $
    289,101
    
    
    $
    428,762
 See notes to consolidated financial statements F-5




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PACIFIC SUNWEAR OF CALIFORNIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Fiscal Year EndedJanuary 31,
    
    February 1,
    
    February 2,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    80,213
    
    
    $
    49,677
    
    
    $
    27,566Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    36,246
    
    
    
    32,453
    
    
    
    27,146Loss on disposal of equipment
    
    
    1,834
    
    
    
    4,240
    
    
    
    7,451Tax benefits related to exercise of stock options
    
    
    15,810
    
    
    
    1,038
    
    
    
    2,708Change in operating assets and liabilities:Accounts receivable
    
    
    (2,278
    )
    
    
    128
    
    
    
    (290
    )Merchandise inventories
    
    
    (24,318
    )
    
    
    (20,921
    )
    
    
    (19,819
    )Prepaid expenses
    
    
    (1,621
    )
    
    
    (1,949
    )
    
    
    (1,669
    )Deferred compensation and other assets
    
    
    1,344
    
    
    
    231
    
    
    
    (127
    )Accounts payable
    
    
    10,212
    
    
    
    (9,037
    )
    
    
    5,861Accrued liabilities
    
    
    20,444
    
    
    
    16,751
    
    
    
    4,492Income taxes
payable and deferred income taxes
    
    
    12,289
    
    
    
    2,197
    
    
    
    3,495Deferred rent
    
    
    1,472
    
    
    
    1,815
    
    
    
    1,548Net cash provided by operating activities
    
    
    151,647
    
    
    
    76,623
    
    
    
    58,362CASH FLOWS FROM INVESTING ACTIVITIES:Investment in property and equipment
    
    
    (40,211
    )
    
    
    (40,423
    )
    
    
    (92,936
    )Purchases of short-term investments
    
    
    (33,035
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (73,246
    )
    
    
    (40,423
    )
    
    
    (92,936
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    30,381
    
    
    
    3,444
    
    
    
    4,260Cash paid in lieu of fractional shares due to 3-for-2 stock split
    
    
    (33
    )
    
    
    (14
    )
    
    
    (Repayments)/borrowings under long-term debt obligations
    
    
    (825
    )
    
    
    (25,504
    )
    
    
    24,998Principal payments under capital lease obligations
    
    
    (1,522
    )
    
    
    (824
    )
    
    
    (519
    )Net cash provided by/(used in) financing activities
    
    
    28,001
    
    
    
    (22,898
    )
    
    
    28,739NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS:
    
    
    106,402
    
    
    
    13,302
    
    
    
    (5,835
    )CASH AND CASH EQUIVALENTS, beginning of fiscal year
    
    
    36,438
    
    
    
    23,136
    
    
    
    28,971CASH AND CASH EQUIVALENTS, end of fiscal year
    
    $
    142,840
    
    
    $
    36,438
    
    
    $
    23,136SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONCash paid during the period for:Interest, including $428 of capitalized interest paid in fiscal 2001
    
    $
    226
    
    
    $
    944
    
    
    $
    515Income taxes
    
    $
    20,669
    
    
    $
    27,732
    
    
    $
    10,983
 Supplemental disclosures of non-cash transactions: During the fiscal years
ended February 1, 2003 and February 2, 2002, the Company recorded an increase
to additional paid-in capital of $291 and $290, respectively, related to the
issuance of stock to satisfy certain deferred compensation liabilities. During
the year ended February 1, 2003, the Company purchased a three-year computer
maintenance agreement under a long-term debt obligation for $2,413. During the
years ended February 1, 2003 and February 2, 2002, the Company acquired
property pursuant to capital lease obligations in the amount of $3,016 and
$493, respectively. Additionally, during the year ended February 2, 2002, the
Company financed the purchase of a vehicle for $24. See notes to consolidated financial statements F-6




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##### Table of Contents



PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended January 31, 2004, February 1, 2003, and February 2, 2002
(all amounts in thousands, except share and per share amounts, unless otherwise indicated)  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF BUSINESS Nature of Business  Pacific Sunwear of California, Inc. and its subsidiaries
(the Company) is a leading specialty retailer of everyday casual apparel,
footwear and accessories designed to meet the needs of active teens and young
adults. The Company operates three nationwide, primarily mall-based chains of
retail stores, under the names Pacific Sunwear (as well as PacSun),
Pacific Sunwear Outlet and d.e.m.o. Pacific Sunwear and Pacific Sunwear
Outlet stores specialize in board-sport inspired casual apparel, footwear and
related accessories catering to teens and young adults. d.e.m.o. specializes
in hip-hop inspired casual apparel and related accessories catering to teens
and young adults. In addition, the Company operates a website through a
subsidiary which sells PacSun merchandise online, provides content and
community for its target customers, and provides information about the Company. The Companys fiscal year is the 52- or 53-week period ending on the Saturday
closest to January 31. Fiscal 2003 was the 52-week period ended January 31,
2004. Fiscal 2002 was the 52-week period ended February 1, 2003. Fiscal 2001
was the 52-week period ended February 2, 2002. Fiscal 2004 will be the 52-week
period ending January 29, 2005. Principles of Consolidation The consolidated financial statements include the
accounts of Pacific Sunwear of California, Inc. and its subsidiaries, Pacific
Sunwear Stores Corp. and ShopPacSun.com Corp. All intercompany transactions
have been eliminated in consolidation. Basis of Presentation  The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Use of Estimates  The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America necessarily requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements as well as the reported revenues and expenses during the reporting
period. Actual results could differ from these estimates. Fair Value of Financial Instruments  Statement of Financial Accounting
Standards No. 107 (SFAS 107), Disclosures about Fair Value of Financial
Instruments, requires management to disclose the estimated fair value of
certain assets and liabilities defined by SFAS 107 as financial instruments.
Financial instruments are generally defined by SFAS 107 as cash, evidence of
ownership interest in an entity, or a contractual obligation that both conveys
to one entity a right to receive cash or other financial instruments from
another entity and imposes on the other entity the obligation to deliver cash
or other financial instruments to the first entity. At January 31, 2004,
management believes that the carrying amounts of cash, short-term investments,
receivables and payables approximate fair value because of the short maturity
of these financial instruments. Cash and Cash Equivalents  The Company considers all highly liquid financial
instruments purchased with an original maturity of three months or less to be
cash equivalents. Short-term Investments  Short-term investments are classified as
held-to-maturity and consist of marketable corporate and U.S. agency debt
instruments with original maturities of three months to one year and are
carried at amortized cost. Cost is determined by specific identification. At
January 31, 2004, the market value of the Companys portfolio is $32.7 million,
consisting of U.S. agency debentures of $16.8 million and corporate debentures
of $15.9 million. Merchandise Inventories  Merchandise inventories are stated at the lower of
cost (first-in, first-out method) or market. Cost is determined using the
retail inventory method. At any one time, inventories include items that have
been marked down to managements best estimate of their fair market value.
Management bases the decision to mark down merchandise primarily upon its
current rate of sale and the age of the item, among other factors. Property and Equipment  Leasehold improvements and furniture, fixtures and
equipment are stated at cost. Amortization of leasehold improvements is
computed on the straight-line method over the lesser of an assets estimated
useful life or the life of the related stores lease (generally 10 years).
Depreciation on furniture, fixtures and equipment is computed on the
straight-line method over five years. F-7




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Goodwill and Other Intangible Assets  On February 3, 2002, the Company
adopted SFAS 142, Goodwill and Intangible Assets, which revised the
accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives are no longer amortized
but are tested for impairment annually and also in the event of an impairment
indicator. The Company completed the required transitional impairment test and
the annual test and determined that no impairment existed. Any subsequent
impairment losses will be reflected in operating income. With the adoption of
SFAS 142, the Company discontinued amortization of goodwill. The Company evaluates the recoverability of goodwill at least annually based on
a two-step impairment test. The first step compares the fair value of each
reporting unit with its carrying amount, including goodwill. If the carrying
amount exceeds fair value, then the second step of the impairment test is
performed to measure the amount of any impairment loss. Fair value is
determined based on estimated future cash flows, discounted at a rate that
approximates the Companys cost of capital. Such estimates are subject to
change and the Company may be required to recognize impairment losses in the
future. Other Long-Lived Assets  On February 3, 2002, the Company adopted SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
superseded previous guidance on financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a business to
be disposed of. Upon adoption of SFAS 144, the Company reviewed long-lived
assets and determined that no impairment existed. Under SFAS 144, long-lived
assets, including amortizing intangible assets, will be tested for impairment
whenever events or changes in circumstances indicate that the carrying value of
such assets may not be recoverable. Insurance Reserves  The Company is responsible for workers compensation
insurance claims up to a specified aggregate stop loss amount. The Company
maintains a reserve for estimated claims, both reported and incurred but not
reported, based on historical claims experience and other estimated
assumptions. Income Taxes  Current income tax expense is the amount of income taxes
expected to be payable for the current year. The combined federal and state
income tax expense was calculated using estimated effective annual tax rates.
A deferred income tax asset or liability is established for the expected future
consequences of temporary differences in the financial reporting and tax bases
of assets and liabilities. The Company considers future taxable income and
ongoing prudent and feasible tax planning in assessing the value of its
deferred tax assets. Evaluating the value of these assets is necessarily based
on the Companys judgment. If the Company determines that it is more likely
than not that these assets will not be realized, the Company would reduce the
value of these assets to their expected realizable value through a valuation
allowance, thereby decreasing net income. If the Company subsequently
determined that the deferred tax assets, which had been written down, would be
realized in the future, the value of the deferred tax assets would be
increased, thereby increasing net income in the period when that determination
was made. Litigation  The Company is involved from time to time in litigation
incidental to its business. Management believes that the outcome of current
litigation will not have a material adverse effect upon the results of
operations or financial condition of the Company and, from time to time, may
make provisions for potential litigation losses. Depending on the actual
outcome of pending litigation, charges in excess of any provisions could be
recorded in the future, which may have an adverse affect on the Companys
operating results (see note 7). Stock Split  On August 25, 2003, the Company effected a three-for-two stock
split. Shareholders equity was restated to give retroactive recognition to
the stock split in prior periods by reclassifying the par value ($247) of the
additional shares arising from the split from additional paid-in capital to
common stock. Additionally, all share and per share amounts were restated to
give effect to the stock split in prior periods. Revenue Recognition  Sales are recognized upon purchase by customers at the
Companys retail store locations or upon shipment for orders placed through the
Companys website. The Company records the sale of gift cards as a current
liability and recognizes a sale when a customer redeems a gift card. The
amount of the gift card liability is determined taking into account the
Companys estimate of the portion of gift cards that will not be redeemed or
recovered. The Company accrues for estimated sales returns by customers based
on historical sales return results. Sales return accrual activity for each of
the three fiscal years in the period ended January 31, 2004 is as follows: F-8




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##### Table of Contents



Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Beginning balance
    
    $
    460
    
    
    $
    113
    
    
    $
    113Provisions
    
    
    20,629
    
    
    
    17,363
    
    
    
    13,657Usage
    
    
    (20,508
    )
    
    
    (17,016
    )
    
    
    (13,657
    )Ending balance
    
    $
    581
    
    
    $
    460
    
    
    $
    113
 Advertising Costs  Costs associated with the production of advertising, such
as photography, design, creative talent, editing and other costs, are expensed
the first time the advertising becomes publicly available. Costs associated
with placing advertising that has been produced, such as television and
magazine advertising, are expensed when the advertising becomes publicly
available. Advertising costs were $10,430, $8,897 and $12,967 in fiscal 2003,
2002 and 2001, respectively. Earnings per Share  The Company reports earnings per share in accordance with
the provisions of SFAS 128, Earnings Per Share. Basic earnings per common
share is computed using the weighted average number of shares outstanding.
Diluted earnings per common share is computed using the weighted average number
of shares outstanding adjusted for the incremental shares attributed to
outstanding options to purchase common stock. Incremental shares of 2,253,893,
1,215,471 and 955,362, in fiscal 2003, 2002 and 2001, respectively, were used
in the calculation of diluted earnings per common share. Options to purchase
31,996, 2,033,399 and 2,377,778 shares of common stock in fiscal 2003, 2002 and
2001, 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 during the respective period. Stock-Based Compensation  The Company accounts for stock-based compensation
in accordance with Accounting Principles Board Opinion No. 25 (APB 25). In
March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 of APB 25, Accounting for Certain Transactions Involving
Stock Compensation, which, among other things, addressed accounting
consequences of a modification that reduces the exercise price of a fixed stock
option award (otherwise known as repricing). The adoption of this
interpretation did not impact the Companys consolidated financial statements. In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS 148 amends SFAS 123,
Accounting for Stock-Based Compensation, to provide alternative methods for
voluntary transition to SFAS 123s fair value method of accounting for
stock-based employee compensation (the fair value method). SFAS 148 also
requires disclosure of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net income (loss) and
earnings (loss) per share in annual and interim financial statements. The
Company is required to follow the prescribed disclosure format and has provided
the additional disclosures required by SFAS 148 for fiscal 2003, 2002 and 2001
below. SFAS 123, Accounting for Stock-Based Compensation, requires the disclosure of
pro forma net income and earnings
per share. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of option-pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Companys stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Companys
calculations were made using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected life, 5 years from option
date; stock volatility, 37.1% in fiscal 2003, 55.2% in fiscal 2002 and 71.4% in
fiscal 2001; risk-free interest rates, 3.2% in fiscal 2003, 3.0% in fiscal 2002
and 4.4% in fiscal 2001; and no dividends during the expected term. The
Companys calculations are based on a single-option valuation approach and
forfeitures are recognized as they occur. If the computed fair values of the
fiscal 2003, 2002 and 2001 awards had been amortized to expense over the
vesting period of the awards, pro forma net income and earnings per share would
have been reduced to the pro forma amounts indicated in the following table: F-9




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##### Table of Contents



Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Net IncomeAs reported
    
    $
    80,213
    
    
    $
    49,677
    
    
    $
    27,566Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (5,785
    )
    
    
    (5,589
    )
    
    
    (5,153
    )Pro forma
    
    $
    74,428
    
    
    $
    44,088
    
    
    $
    22,413Net Income Per Share, BasicAs reported
    
    $
    1.05
    
    
    $
    0.67
    
    
    $
    0.37Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (0.08
    )
    
    
    (0.07
    )
    
    
    (0.07
    )Pro forma
    
    $
    0.97
    
    
    $
    0.60
    
    
    $
    0.30Net Income Per Share, DilutedAs reported
    
    $
    1.02
    
    
    $
    0.66
    
    
    $
    0.37Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    (0.07
    )Pro forma
    
    $
    0.95
    
    
    $
    0.59
    
    
    $
    0.30
 Comprehensive Income  The Company reports comprehensive income in accordance
with the provisions of SFAS 130, Reporting Comprehensive Income. SFAS 130
established 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. There was no difference between net income and
comprehensive income for fiscal 2003, 2002 and 2001. Segment Information  The Company operates exclusively in the retail apparel
industry in which the Company distributes, designs and produces clothing,
accessories and related products. Operating results of the Companys retail
concepts and sales channels have been aggregated due to the similarities of
economic and operating characteristics among the retail concepts and sales
channels as well as their reliance on shared operating functions, including the
sourcing, merchandising and distribution functions. Merchandise Risk  The Companys success is largely dependent upon its ability
to gauge the fashion tastes of its customers and provide merchandise that
satisfies customer demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect
on the Companys business, operating results and financial condition. New Accounting Pronouncements  In April 2002, the FASB issued SFAS 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. SFAS 145 amended certain provisions of
SFAS 13 and requires the fair value recognition of guarantee obligations under
which the Company may become secondarily liable. The Company adopted SFAS 145
during fiscal 2002. The adoption of SFAS 145 resulted in the recognition of a
$.5 million liability related to the Companys guarantee of an assignees
performance under a lease obligation (see note 7). In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires that costs associated with exit or
disposal activities be recognized when they are incurred rather than at the
date of commitment to an exit or disposal plan. SFAS 146 also establishes that
the liability should initially be measured and recorded at fair value. The
Company adopted the provisions of SFAS 146 for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS 146 has not had a
material impact on the Companys financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others. FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements are effective for financial statements of interim or annual
reports ending after December 15, 2002. The adoption of FIN 45 has not had a
material impact on the Companys financial position or results of operations. F-10




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##### Table of Contents



In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest
Entities and in December 2003, issued FIN 46(R) (revised December 2003)
Consolidation of Variable Interest Entities  An Interpretation of ARB No.
51. In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support
its activities. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the investors in the
entity do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46(R) clarifies the application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements (ARB 51), to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without subordinated financial support from other parties. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply
to older entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. FIN 46(R) applies immediately to variable
interest entities created after December 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It
applies no later than the first reporting period ending after December 15,
2004, to variable interest entities in which an enterprise holds a variable
interest (other than special purpose) that it acquired before January 1, 2004.
FIN 46(R) applies to public enterprises as of the beginning of the applicable
interim or annual period. The Company believes that the adoption of FIN 46 and
FIN 46(R) will not have a material impact on its financial position or results
of operations because the Company has no variable interest entities. On February 2, 2003, the Company adopted EITF 02-16, Accounting by a Reseller
for Cash Consideration Received from a Vendor. The consensus reached by the
EITF addressed the accounting for cash consideration received from a vendor,
which includes vendor allowances, rebates, cooperative advertising payments,
etc. The consensus of the EITF establishes an overall presumption that cash
received from a vendor is a reduction in the price of a vendors products and
should be recognized accordingly as a reduction in cost of sales at the time
the related inventory is sold. Some consideration could be characterized as a
reduction of expense if the cash received represents a reimbursement of
specific, incremental, identifiable costs incurred by the retailer to sell the
vendors products. The adoption of EITF 02-16 did not have a material impact
on the Companys financial position or results of operations. Reclassifications  Certain prior year amounts have been reclassified to
conform to the current year presentation.  2.
    
    DEFERRED COMPENSATION AND OTHER ASSETS The Company maintains an Executive Deferred Compensation Plan (the Executive
Plan) covering Company officers that is funded by participant contributions
and periodic Company discretionary contributions. For fiscal 2003, 2002 and
2001, the Company made contributions of $256, $206 and $175, respectively, to
the Executive Plan. The deferred compensation asset balance represents the
investments held by the Company to cover the vested participant balances in the
Executive Plan, which is represented by the deferred compensation liability of
$10,925 and $7,097 in long-term liabilities as of January 31, 2004 and February
1, 2003, respectively. For a description of other employee compensation
arrangements, see note 9. Deferred compensation and other assets consist of
the following: January 31,
    
    February 1,2004
    
    2003Deferred compensation
    
    $
    10,919
    
    
    $
    7,565Long-term maintenance contracts
    
    
    502
    
    
    
    1,359Other assets
    
    
    168
    
    
    
    181$
    11,589
    
    
    $
    9,105
  3.
    
    GOODWILL On February 3, 2002, the Company adopted SFAS 142, Goodwill and Other
Intangible Assets, which eliminated amortization of goodwill and other
intangible assets with indefinite useful lives. SFAS 142 requires, among other
items, disclosure of the after-tax impact to reported net income and earnings
per share of the adoption of the statement for all periods presented. The
following table recognizes the after-tax impact to the Companys operating
results of the adoption of SFAS 142 as if the non-amortization provisions of
the standard had been in effect for all periods presented: F-11




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##### Table of Contents



Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Reported net income
    
    $
    80,213
    
    
    $
    49,677
    
    
    $
    27,566Add back goodwill amortization (tax effected)
    
    
    
    
    
    
    
    
    
    
    192Adjusted net income
    
    $
    80,213
    
    
    $
    49,677
    
    
    $
    27,758Basic earnings per share:Reported net income
    
    
    1.05
    
    
    
    0.67
    
    
    
    0.37Add back goodwill amortization (tax
effected)
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.01Adjusted net income
    
    $
    1.05
    
    
    $
    0.67
    
    
    $
    0.38Diluted earnings per share:Reported net income
    
    
    1.02
    
    
    
    0.66
    
    
    
    0.37Add back goodwill amortization (tax
effected)
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Adjusted net income
    
    $
    1.02
    
    
    $
    0.66
    
    
    $
    0.37
  4.
    
    CREDIT FACILITY The Company has a credit facility with a bank, which expires April 1, 2007.
The credit facility provides for a $45.0 million line of credit (the Credit
Line) through March 31, 2005 to be used for cash advances, commercial letters
of credit and shipside bonds. The Credit Line increases to $50.0 million from
April 1, 2005 through March 31, 2006, and $60.0 million from April 1, 2006
through expiration on April 1, 2007. Interest on the Credit Line is payable
monthly at the banks prime rate (4.0% at January 31, 2004) or at optional
interest rates that are primarily dependent upon the London Inter-bank Offered
Rates for the time period chosen. The Company did not borrow under the credit
facility at any time during fiscal 2003. The Company had $13.1 million
outstanding in letters of credit at January 31, 2004. The credit facility
subjects the Company to various restrictive covenants, including maintenance of
certain financial ratios, and prohibits payment of cash dividends on common
stock. At January 31, 2004, the Company was in compliance with all of the
covenants.  5.
    
    ACCRUED LIABILITIES Accrued liabilities consist of the following: January 31,
    
    February 1,2004
    
    2003Accrued compensation and benefits
    
    $
    17,578
    
    
    $
    14,420Accrued capital expenditures
    
    
    6,489
    
    
    
    2,775Accrued sales tax payable
    
    
    6,189
    
    
    
    2,290Accrued sublease loss charges (Note 7)
    
    
    5,543
    
    
    
    3,550Accrued restricted stock compensation (Note 9)
    
    
    5,118
    
    
    
    Accrued gift cards and store merchandise
credits
    
    
    4,618
    
    
    
    5,967Other
    
    
    9,431
    
    
    
    5,520$
    54,966
    
    
    $
    34,522
 F-12




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##### Table of Contents



6.
    
    INCOME TAXES The components of income tax expense are as follows: Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Current income taxes:Federal
    
    $
    38,134
    
    
    $
    23,938
    
    
    $
    18,040State
    
    
    5,369
    
    
    
    3,396
    
    
    
    2,65943,503
    
    
    
    27,334
    
    
    
    20,699Deferred income taxes:Federal
    
    
    5,318
    
    
    
    3,231
    
    
    
    (3,066
    )State
    
    
    (53
    )
    
    
    402
    
    
    
    (447
    )5,265
    
    
    
    3,633
    
    
    
    (3,513
    )$
    48,768
    
    
    $
    30,967
    
    
    $
    17,186
 A reconciliation of income tax expense to the amount of income tax expense that
would result from applying the federal statutory rate to income before income
taxes is as follows: Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Provision for income taxes at statutory rate
    
    $
    45,143
    
    
    $
    28,225
    
    
    $
    15,663State income taxes,net of federal income
tax benefit
    
    
    3,455
    
    
    
    2,469
    
    
    
    1,438Other
    
    
    170
    
    
    
    273
    
    
    
    85$
    48,768
    
    
    $
    30,967
    
    
    $
    17,186
 The major components of the Companys overall net deferred tax liability of
$3,305 at January 31, 2004 and net deferred tax asset of $1,960 at February 1,
2003, respectively, are as follows: January 31,
    
    February 1,2004
    
    2003Current net deferred tax asset
    
    $
    8,224
    
    
    $
    4,975Long-term net deferred tax liability
    
    
    (11,529
    )
    
    
    (3,015
    )Overall net deferred tax (liability)/asset
    
    $
    (3,305
    )
    
    $
    1,960Components:Depreciation
    
    $
    (20,691
    )
    
    $
    (10,127
    )State income taxes
    
    
    549
    
    
    
    468Inventory cost capitalization
    
    
    1,992
    
    
    
    2,189Reserve for store expansion/relocation and closing costs
    
    
    2,866
    
    
    
    1,745Deferred rent
    
    
    4,712
    
    
    
    4,198Deferred compensation
    
    
    6,275
    
    
    
    2,817Other
    
    
    992
    
    
    
    670$
    (3,305
    )
    
    $
    1,960
  7.
    
    COMMITMENTS AND CONTINGENCIES Operating Leases  The Company leases its retail stores, former corporate
offices and distribution facilities, and certain equipment under operating
lease agreements expiring at various dates through December 2016.
Substantially all of the leases require the Company to pay maintenance,
insurance, property taxes and percentage rent ranging from 5% to 7% based on
sales volumes exceeding certain minimum sales levels. F-13




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##### Table of Contents



Minimum future annual rental commitments under non-cancelable operating leases
are as follows: Fiscal year ending:January 29, 2005
    
    $
    81,091January 28, 2006
    
    
    82,291February 3, 2007
    
    
    81,970February 2, 2008
    
    
    81,978February 1, 2009
    
    
    75,867Thereafter
    
    
    212,627$
    615,824
 Rental expense, including common area maintenance, was $129,269, $117,847 and
$91,480, of which $4,608, $2,151 and $1,062 was paid as percentage rent based
on sales volume for fiscal 2003, 2002 and 2001, respectively. Capital Leases  During each of fiscal 2002, 2001 and the fiscal year ended
February 4, 2001 (fiscal 2000), the Company acquired computer equipment
pursuant to capital lease obligations. The leases bear interest at average
rates of 3.8%, 6.0% and 6.6%, respectively; require monthly principal and
interest payments of $90, $22 and $51, respectively; and expire at various
dates through March 2006. The net book value of capital lease assets was
$3,318 and $4,356, respectively, at January 31, 2004, and February 1, 2003.
Future commitments under capital lease obligations are as follows: Fiscal year ending:January 29, 2005
    
    $
    1,077January 28, 2006
    
    
    1,076February 3, 2007
    
    
    179Total payments, including interest
    
    
    2,332Less interest portion
    
    
    (97
    )Total principal payments remaining at January 31, 2004
    
    $
    2,235Current portion of capital lease obligations from balance sheet
    
    $
    1,008Long-term portion of capital lease obligations from balance sheet
    
    
    1,227Total capital lease obligations outstanding at January 31, 2004
    
    $
    2,235
 Letters of Credit  The Company was contingently liable for $13.1 million in
open letters of credit with foreign suppliers at January 31, 2004. Other Long-Term Debt Obligations  During fiscal 2002, the Company purchased a
three-year computer maintenance agreement under a long-term debt obligation for
$2,413. The debt obligation bears interest at 6.2% and requires quarterly
principal and interest payments of $231 through March 2005. Future commitments
under this long-term debt obligation are as follows: Fiscal year ending:January 29, 2005
    
    $
    927January 28, 2006
    
    
    231Total payments, including interest
    
    
    1,158Less interest portion
    
    
    (52
    )Total principal payments remaining at January 31, 2004
    
    $
    1,106Current portion of long-term debt from balance sheet
    
    $
    878Long-term portion of long-term debt from balance sheet
    
    
    228Total long-term debt outstanding at January 31, 2004
    
    $
    1,106
 F-14




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##### Table of Contents



Litigation  During fiscal 2003, the Company reached an agreement to settle
all claims related to two lawsuits concerning overtime pay for a total of $4.0
million. The Company had accrued $4.0 million and $3.9 million related to
these matters at the end of fiscal 2003 and fiscal 2002, respectively. The
suits are Auden v. Pacific Sunwear of California, Inc., which was filed
September 17, 2001, and Adams v. Pacific Sunwear of California, Inc., which was
filed August 2, 2002. The complaints alleged that the Company improperly
classified certain California-based employees as exempt from overtime pay.
In February 2004, the Company made a payment of $3.1 million on the aggregate
settlement amount with the remaining amounts expected to be paid in the first
half of fiscal 2004. The settlement did not have a material impact on results
of operations for fiscal 2003. The Company is involved from time to time in litigation incidental to its
business. Management believes that the outcome of current litigation will not
have a material adverse effect upon the results of operations or financial
condition of the Company. Indemnities, Commitments, and Guarantees  During its normal course of
business, the Company has made certain indemnities, commitments and guarantees
under which it may be required to make payments in relation to certain
transactions. These indemnities include those given to various lessors in
connection with facility leases for certain claims arising from such facility
or lease and indemnities to directors and officers of the Company to the
maximum extent permitted under the laws of the State of California. The
Company has issued guarantees in the form of standby letters of credit as
security for merchandise shipments from overseas. There were $13.1 million of
these letters of credit outstanding at January 31, 2004. The Company has also
issued a guarantee within a sublease on one of its store locations under which
the Company remains secondarily liable on the sublease should the sublessee
default on its lease payments. The term of the sublease ends December 31,
2014. The Company has recorded $.5 million in accrued liabilities to recognize
the estimated fair value of this guarantee, assuming that another sublessee
would be found within one year should the original sublessee default. The
aggregate rental payments remaining on the master lease agreement at January
31, 2004, were $6.0 million. The duration of these indemnities, commitments
and guarantees varies, and in certain cases, is indefinite. The majority of
these indemnities, commitments and guarantees do not provide for any limitation
of the maximum potential future payments the Company could be obligated to
make. The Company has not recorded any liability for these indemnities,
commitments and guarantees in the accompanying consolidated balance sheets
other than as noted. The Company maintains a private label credit card through a third party to
promote the PacSun brand image and lifestyle. The third party services the
customer accounts and retains all risk and financial obligation associated with
any outstanding balances on customer accounts. The Company has no financial
obligation and does not provide any guarantee related to any outstanding
balances resulting from the use of these private label credit cards by its
customers. Sublease Loss Charges  The Company remains liable under two operating leases
covering its former corporate offices and a former store location. These
facilities remain vacant at January 31, 2004. At the end of fiscal 2002, the
Company had accrued $3.6 million to account for the difference between the
Companys remaining contractual lease obligations and the rate and timeframe
within which the Company expected to be able to sublease these properties.
During fiscal 2003, based on a review of real estate market conditions and
on-going negotiations, management of the Company revised its sublease
assumptions and increased its accrued sublease loss charges by $1.9 million to
a total of $5.5 million. To the extent managements estimates relating to the
Companys ability to sublease these facilities at the assumed rates or within
the assumed timeframes changes or is incorrect, additional charges or reversals
of previous charges may be recorded in the future. At January 31, 2004, the
aggregate remaining obligations under these leases were approximately $5.4
million for the former corporate offices and approximately $6.7 million for the
former store location. These amounts are included in the minimum future rental
commitments table above within this note 7.  8.
    
    COMMON STOCK Stock Split  On August 25, 2003, the Company effected a three-for-two stock
split. Shareholders equity was restated to give retroactive recognition to
the stock split in prior periods by reclassifying the par value ($247) of the
additional shares arising from the split from additional paid-in capital to
common stock. Additionally, all share and per share amounts were restated to
give effect to the stock split in prior periods. Common Stock Purchase and Retirement  On January 27, 2004, the Board of
Directors of the Company adopted a resolution authorizing the Company to
purchase up to 2.5 million shares of the Companys common stock in open market
transactions. As of January 31, 2004, no purchases had been made pursuant to
the resolution. Subsequent to January 31, 2004, the Company repurchased shares
as follows: F-15




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##### Table of Contents



# of Shares Purchased
    
    Maximum # of Shares that# of Shares
    
    Average
    
    as Part of Publicly
    
    May Yet be PurchasedPeriod
    
    Purchased
    
    Price/Share
    
    Announced Plan
    
    Under the PlanFebruary 23, 2004
    
    
    75,000
    
    
    $
    23.99
    
    
    
    75,000
    
    
    
    2,425,000
 Shareholder Rights Plan  In December 1998, the Board of Directors approved
the adoption of a Shareholder Rights Plan (the Rights Plan). The Rights Plan
provides for the distribution to the Companys shareholders of one preferred
stock purchase Right for each outstanding share of the Companys common
stock. The Rights have an exercise price of $75 per Right, subject to
subsequent adjustment. Initially, the Rights will trade with the Companys
common stock, and will not be exercisable until the occurrence of certain
takeover-related events, as defined. The Rights Plan provides that if a person
or group acquires more than 15% of the Companys stock without prior approval
of the Board of Directors, holders of the Rights will be entitled to purchase
the Companys stock at half of market value. The Rights Plan also provides
that if the Company is acquired in a merger or other business combination after
a person or group acquires more than 15% of the Companys stock without prior
approval of the Board of Directors, holders of the Rights will be entitled to
purchase the acquirers stock at half of market value. The Rights were
distributed to holders of the Companys common stock of record on December 29,
1998, as a dividend, and will expire, unless earlier redeemed, on December 29,
2008.  9.
    
    STOCK OPTION AND RETIREMENT PLANS Under the Companys stock option plans, incentive and nonqualified options have
been granted to employees and directors to purchase common stock at prices
equal to the fair value of the Companys shares at the grant dates. At January 31, 2004, outstanding incentive and nonqualified options had
exercise prices ranging from $.68 to $23.97 per share, with an average exercise
price of $10.47 per share, and generally begin vesting one year after the grant
date. On the initial vesting date, 25% of the options vest and, thereafter,
options generally continue to vest at 2.08% each calendar month. The options
generally expire ten years from the date of grant or 90 days after employment
or services are terminated. At January 31, 2004, incentive and nonqualified options to purchase 5,473,087
shares were outstanding and 4,066,804 shares were available for future grant
under the Companys stock option plans. During fiscal 2003, 2002 and 2001, the
Company recognized tax benefits of $15,810, $1,038 and $2,708, respectively,
resulting from the exercise of certain nonqualified stock options. Stock option (incentive and nonqualified) activity for each of the three fiscal
years ended January 31, 2004, was as follows: Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Beginning options outstanding
    
    
    8,691,197
    
    
    
    7,198,026
    
    
    
    6,194,601Options granted
    
    
    1,101,351
    
    
    
    2,289,238
    
    
    
    2,458,125Options canceled
    
    
    (254,921
    )
    
    
    (354,282
    )
    
    
    (775,543
    )Options exercised
    
    
    (4,064,540
    )
    
    
    (441,785
    )
    
    
    (679,157
    )Ending options outstanding
    
    
    5,473,087
    
    
    
    8,691,197
    
    
    
    7,198,026Ending options exercisable
    
    
    2,272,058
    
    
    
    4,576,850
    
    
    
    3,488,505Beginning weighted average exercise price
    
    $
    8.56
    
    
    $
    7.98
    
    
    $
    7.79Options granted
    
    
    13.92
    
    
    
    10.23
    
    
    
    8.54Options canceled
    
    
    10.65
    
    
    
    9.91
    
    
    
    10.38Options exercised
    
    
    7.31
    
    
    
    6.68
    
    
    
    5.50Ending weighted average exercise price
    
    $
    10.47
    
    
    $
    8.56
    
    
    $
    7.98Ending weighted average exercise price
of exercisable options
    
    $
    9.68
    
    
    $
    7.59
    
    
    $
    6.89Weighted average fair value of options
granted during the fiscal year
    
    $
    5.27
    
    
    $
    5.09
    
    
    $
    5.24
 F-16




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##### Table of Contents



Additional information regarding options outstanding as of January 31, 2004, is
as follows: Options Outstanding
    
    Options ExercisableNumber
    
    
    
    
    
    
    
    
    
    NumberOutstanding
    
    Weighted Average
    
    Weighted
    
    Exercisable
    
    WeightedRange of
    
    as of Jan. 31,
    
    Remaining
    
    Average
    
    as of Jan. 31,
    
    AverageExercise Prices
    
    2004
    
    Contractual Life
    
    Exercise Price
    
    2004
    
    Exercise Price$
    0.68 -   $8.92
    
    
    
    1,446,270
    
    
    
    6.30
    
    
    $
    7.13
    
    
    
    677,332
    
    
    $
    6.659.00 -   10.58
    
    
    
    1,561,297
    
    
    
    6.88
    
    
    
    9.76
    
    
    
    858,443
    
    
    
    9.9510.61 -   12.50
    
    
    
    1,821,621
    
    
    
    8.39
    
    
    
    12.03
    
    
    
    535,133
    
    
    
    11.5612.67 -   23.97
    
    
    
    643,899
    
    
    
    8.08
    
    
    
    15.31
    
    
    
    201,150
    
    
    
    13.71$
    0.68 - $23.97
    
    
    
    5,473,087
    
    
    
    7.37
    
    
    $
    10.47
    
    
    
    2,272,058
    
    
    $
    9.68
 During the year ended February 1, 1998, the Company granted a restricted stock
award of 427,141 shares with a purchase price of $0.01 per share to its Chief
Executive Officer (CEO). The award vested 25% on each of March 31, 1999,
2000, 2001 and 2002, as, in each instance, certain cumulative earnings per
share growth targets had been satisfied. The Company recorded $40 and $240 of
deferred compensation expense for this award during fiscal 2002 and 2001,
respectively. During the year ended January 30, 2000, the Company granted a restricted stock
award of 112,500 shares with a purchase price of $0.01 per share to its CEO.
The award is scheduled to vest 25% on each of September 17, 2001, 2002, 2003
and 2004, if, in each instance, certain cumulative annual earnings per share
growth targets have been satisfied. Under the award agreement, shares that do
not vest at a given vesting date due to the cumulative annual earnings per
share growth targets not being met remain available for future vesting if the
cumulative annual earnings per share growth targets are met as of a subsequent
vesting date. During fiscal 2003, the Company recorded compensation expense of
$2.3 million to recognize the cumulative vested value of the award as of
January 31, 2004. This expense accrual is included in accrued liabilities (see
Note 5) on the balance sheet. The Company will be required to adjust
compensation expense related to this award in future quarters based on
additional vesting of the shares and changes in the market price of the
Companys stock. For example, based on the closing market price of the
Companys stock at January 31, 2004 of $23.05, the Company would be required to
record additional compensation expense of approximately $.1 million per quarter
based on additional vesting of the shares until September 17, 2004.
Additionally, based on any change in the market price of the Companys stock in
future quarters, the cumulative compensation expense recognized for this award
will continue to be adjusted for any shares not yet delivered to the CEO. The
CEO became immediately vested in and received 75% of the total share award, or
84,375 shares, in March 2004. The remaining 25%, or 28,125 shares, will vest
and be received by the CEO in September 2004. During the year ended February 4, 2001, the Company granted a restricted stock
award of 168,750 shares with a purchase price of $0.01 per share to its Chief
Executive Officer. The award is scheduled to vest 25% on each of March 15,
2002, 2003, 2004 and 2005, if, in each instance, certain cumulative annual
earnings per share growth targets have been satisfied. Under the award
agreement, shares that do not vest at a given vesting date due to the
cumulative annual earnings per share growth targets not being met remain
available for future vesting if the cumulative annual earnings per share growth
targets are met as of a subsequent vesting date. During fiscal 2003, the
Company recorded compensation expense of $2.8 million to recognize the
cumulative vested value of the award as of January 31, 2004. This expense
accrual is included in accrued liabilities (see Note 5) on the balance sheet.
The Company will be required to adjust compensation expense related to this
award in future quarters based on additional vesting of the shares and changes
in the market price of the Companys stock. For example, based on the market
price of the Companys stock at January 31, 2004 of $23.05, the Company would
be required to record additional compensation expense of approximately $.2
million per quarter based on additional vesting of the shares until March 15,
2005. Additionally, based on any change in the market price of the Companys
stock in future quarters, the cumulative compensation expense recognized for
this award will continue to be adjusted for any shares not yet delivered to the
CEO. The CEO became immediately vested in and received 75% of the total share
award, or 126,563 shares, in March 2004. The remaining 25%, or 42,187 shares,
will vest and be received by the CEO in March 2005 upon confirmation by the
Board of Directors that the fiscal 2004 cumulative earnings per share growth
target has been met by the Company. The Company accounts for its stock-based awards issued to employees using the
intrinsic value method in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements, other than described above. The Company maintains an Employee Stock Purchase Plan (the ESPP), which
provides a method for Company employees to voluntarily purchase Company common
stock at a 10% discount from fair market value as of the beginning or the end
of each six- F-17




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##### Table of Contents



month purchasing period, whichever is lower. The ESPP covers substantially all
employees, except officers, who have three months of service with the Company.
The ESPP is intended to constitute an employee stock purchase plan within the
meaning of Section 423 of the Internal Revenue Code of 1986, as amended, and
therefore the Company does not recognize compensation expense related to the
ESPP. In fiscal 2003 and 2002, 55,293 and 59,091 shares were issued at an
average price of $12.46 and $8.36, respectively, under the ESPP. The Company also maintains an Employee Savings Plan (the 401(k) Plan). The
401(k) Plan is a defined contribution plan covering substantially all employees
who have reached age 21 and have one year of service with the Company. The
401(k) Plan is funded by employee contributions and periodic Company
discretionary contributions, which are subject to approval by the Companys
Board of Directors. For fiscal 2003, 2002 and 2001, the Company made
contributions, net of forfeitures, of $516, $328 and $364, respectively, to the
401(k) Plan. F-18




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##### Table of Contents



10.
    
    QUARTERLY FINANCIAL DATA (UNAUDITED) First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    QuarterFiscal year ended January 31, 2004:Net sales
    
    $
    198,331
    
    
    $
    234,392
    
    
    $
    281,253
    
    
    $
    326,318Gross margin
    
    
    63,855
    
    
    
    79,834
    
    
    
    100,617
    
    
    
    119,011Operating income
    
    
    12,893
    
    
    
    21,654
    
    
    
    39,259
    
    
    
    54,442Net income
    
    
    7,979
    
    
    
    13,380
    
    
    
    24,509
    
    
    
    34,346Net income per share, basic
    
    $
    0.11
    
    
    $
    0.18
    
    
    $
    0.32
    
    
    $
    0.44Net income per share, diluted
    
    $
    0.10
    
    
    $
    0.17
    
    
    $
    0.31
    
    
    $
    0.43Wtd. avg. shares outstanding, basic (Note 1)
    
    
    74,524,548
    
    
    
    75,885,641
    
    
    
    77,685,516
    
    
    
    78,287,219Wtd. avg. shares outstanding, diluted (Note 1)
    
    
    76,472,511
    
    
    
    78,104,037
    
    
    
    79,876,426
    
    
    
    80,226,072Fiscal year ended February 1, 2003:Net sales
    
    $
    161,710
    
    
    $
    190,854
    
    
    $
    228,239
    
    
    $
    265,590Gross margin
    
    
    49,166
    
    
    
    60,605
    
    
    
    78,915
    
    
    
    94,997Operating income
    
    
    5,453
    
    
    
    12,151
    
    
    
    25,956
    
    
    
    37,677Net income
    
    
    3,269
    
    
    
    7,296
    
    
    
    15,902
    
    
    
    23,209Net income per share, basic
    
    $
    0.04
    
    
    $
    0.10
    
    
    $
    0.22
    
    
    $
    0.31Net income per share, diluted
    
    $
    0.04
    
    
    $
    0.10
    
    
    $
    0.21
    
    
    $
    0.31Wtd. avg. shares outstanding, basic (Note 1)
    
    
    73,795,705
    
    
    
    73,886,061
    
    
    
    73,955,606
    
    
    
    74,088,657Wtd. avg. shares outstanding, diluted (Note 1)
    
    
    75,176,161
    
    
    
    74,766,990
    
    
    
    74,923,747
    
    
    
    75,765,821
 Earnings per basic and diluted share are computed independently for each of the
quarters presented based on diluted shares outstanding per quarter and,
therefore, may not sum to the totals for the year. Additionally, the sum of
the four quarterly amounts for any line item may not agree to the fiscal year
total in the consolidated financial statements due to rounding. F-19




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##### Table of Contents



INDEX TO EXHIBITS Exhibit Number
    
    Description of Exhibit3.1
    
    
    Third Amended and Restated Articles of Incorporation of the Company
(1)3.2
    
    
    Certificate of Amendment, dated December 17, 2002, of Third Amended and
Restated Articles of Incorporation of the Company (9)3.3
    
    
    Certificate of Correction, dated February 28, 2003, of Third Amended and
Restated Articles of Incorporation of the Company (9)3.4
    
    
    Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of the Company (4)3.5
    
    
    Second Amended and Restated Bylaws of the Company (1)3.6
    
    
    Amendment, dated March 25, 2003, to the Second Amended and Restated Bylaws of the Company (9)4.1
    
    
    Specimen stock certificate (1)10.1
    
    
    Form of Indemnity Agreement between the Company and each of its executive officers and directors (1) *10.2
    
    
    1986-87 Stock Option Plan dated as of December 11, 1986, as amended (the Option Plan) (1) *10.3
    
    
    Amended and Restated 1992 Stock Award Plan dated June 8, 1999 (the Award Plan) (8) *10.4
    
    
    Amended and Restated 1999 Stock Award Plan dated December 31, 2002 (9) *10.5
    
    
    Pacific Sunwear of California, Inc. Executive Deferred Compensation Plan and Trust Agreement (2) *10.6
    
    
    Amended and Restated Pacific Sunwear of California, Inc. Employee Stock Purchase Plan dated
December 31, 2002 (9) *10.7
    
    
    Restricted Stock Award Agreement dated September 18, 1996, by and between the Company and Greg H.
Weaver (8) *10.8
    
    
    Restricted Stock Award Agreement dated September 17, 1999, by and between the Company and Greg H.
Weaver (7) *10.9
    
    
    Restricted Stock Award Agreement dated January 3, 2001, by and between the
Company and Greg H. Weaver (8) *10.10
    
    
    Amended and Restated Employment Agreement dated February 5, 2001, between the Company and Greg H.
Weaver (8) *10.11
    
    
    Severance Agreements, dated October 27, 1997, and November 6, 1996, by and between Pacific Sunwear of California, Inc.
and Timothy M.
Harmon and Carl W.
Womack,
respectively (3) *10.12
    
    

Standard Industrial Lease - Net, dated September 30, 1997, between the
Company and Bank of America National Trust and Savings Association, as
amended, and Standard Industrial Lease - Net, dated January 12, 1998
between the Company and The Realty Associates Fund IV, L.P., a Delaware
limited partnership, as amended for the Companys former corporate
headquarters and distribution center located in Anaheim, California (3)10.13
    
    

Standard Sublease - dated December 22, 1998, between the Company and
Bekins Moving and Storage Company, LLC (6)10.14
    
    
    Rights Agreement, dated as of December 16, 1998, between the Company and
U.S. Stock Transfer Corporation (5)




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##### Table of Contents



Exhibit Number
    
    Description of Exhibit10.15
    
    
    Master Continuing and Unconditional Guaranty to Bank of America N.A.
from Pacific Sunwear Stores Corp. and ShopPacSun.com Corp.10.16
    
    
    Business Loan Agreement, dated January 30, 2004 between the Company and Bank of America, N.A.21
    
    
    Subsidiaries of the Registrant (9)23.1
    
    
    Consent of Deloitte & Touche LLP31
    
    
    Written statements of Greg H. Weaver and Carl W. Womack pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.32
    
    
    Written statement of Greg H. Weaver and Carl W. Womack pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
   (1)
    
    Incorporated by reference from the Companys Form S-1 Registration
Statement (No. 33-57860) as filed with the Securities and Exchange
Commission on February 4, 1993.(2)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on March 17, 1995.(3)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on April 9, 1998.(4)
    
    Incorporated by reference from the Companys Current Report on Form 8-K
as filed with the Securities and Exchange Commission on December 24, 1998.(5)
    
    Incorporated by reference from the Companys Form 8-A Registration
Statement as filed with the Securities and Exchange Commission on December
24, 1998.(6)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on April 8, 1999.(7)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on April 6, 2000.(8)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on March 30, 2001.(9)
    
    Incorporated by reference from the Companys Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on March 28, 2003.*
    
    Management contract or compensatory plan or arrangement.