UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended July 31, 2004

OR

Commission file number 0-21296

PACIFIC SUNWEAR OF CALIFORNIA, INC.

(714) 414-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes [x]   No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [x]   No [  ]

The number of shares outstanding of the registrant’s Common Stock, par value $.01 per share, at August 27, 2004, was 74,137,806.

PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended July 31, 2004

Index

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See accompanying notes

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

See accompanying notes

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

Supplemental disclosures of non-cash transactions (in thousands): During the first half ended July 31, 2004, the Company recorded an increase to additional paid-in capital of $4,853 related to the issuance of restricted stock to satisfy certain deferred compensation liabilities (see Note 6).

See accompanying notes

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

NOTE 1 – BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its subsidiaries, Pacific Sunwear Stores Corp. and ShopPacSun.com Corp. (the “Company”). All intercompany transactions have been eliminated in consolidation.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. “Fiscal 2004” is the 52-week period ending January 29, 2005. “Fiscal 2003” was the 52-week period ended January 31, 2004. The second quarter and first half of fiscal 2004 were the 13- and 26-week periods ended July 31, 2004, respectively. The second quarter and first half of fiscal 2003 were the 13- and 26-week periods ended August 2, 2003, respectively.

In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of consolidated financial statements in conformity with GAAP 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. The results of operations for the second quarter and first half ended July 31, 2004 are not necessarily indicative of the results that may be expected for fiscal 2004. For further information, refer to the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended January 31, 2004.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Information regarding the Company’s significant accounting policies is contained in Note 1, “Summary of Significant Accounting Policies and Nature of Business,” to the consolidated financial statements in the Company’s Form 10-K for the fiscal year ended January 31, 2004. Presented below in this and the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated Financial Statements” included in that report.

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, less other than temporary impairments in value. Cost is determined by specific identification. At July 31, 2004, the market value of the Company’s portfolio was $49.6 million, consisting of corporate debentures of $23.5 million, U.S. agency debentures of $17.7 million, corporate commercial paper of $4.4 million and U.S. Treasury notes of $4.0 million.

Stock Split – In August 2003, the Company effected a three-for-two stock split. All share and per share amounts have been restated to give effect to the stock split in prior periods.

Stock-Based Compensation – The Company accounts for stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25 and, accordingly, does not currently include compensation expense related to stock options in reported net income. The Company follows the disclosure provisions of Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 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 financials statements. The Company is

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required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS 148 for the second quarter and first half ended July 31, 2004 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 ranges of weighted average assumptions: expected life, 5 years; stock volatility of 37.0% to 37.8% for fiscal 2004 and 45.3% to 53.7% for fiscal 2003; risk-free interest rates of 3.6% to 3.7% for fiscal 2004 and 2.9% to 3.3% for fiscal 2003; 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 2004 and fiscal 2003 awards had been amortized to expense over the vesting period of the awards, net income and earnings per share for the second quarter and first half ended July 31, 2004 and August 2, 2003, respectively, would have been reduced to the pro forma amounts indicated below:

New Accounting Pronouncements – In January 2003, the Financial Accounting Standards Board (“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 ARB No. 51, “Consolidated Financial

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Statements,” 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 March 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 interest in variable interest entities.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” for which the measurement and recognition provisions are effective for reporting periods beginning after June 15, 2004. EITF 03-1 provides a three-step process for determining whether investments, including debt securities, are other than temporarily impaired and requires additional disclosures in annual financial statements. An investment is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investor’s intent. In addition, the severity and duration of the impairment should also be considered in determining whether the impairment is other-than-temporary. The Company does not expect the adoption of EITF 03-1 to have a material impact on its financial position or results of operations because the Company has the ability and intent to hold any of its held-to-maturity marketable securities with gross unrealized losses until a recovery of fair value at maturity.

Reclassifications – Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 3 – 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. The deferred compensation asset balance represents the investments held by the Company to cover the vested participant balances in the Executive Plan of $12,062 and $10,925 included in long-term liabilities as of July 31, 2004 and January 31, 2004, respectively.

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NOTE 4 – ACCRUED LIABILITIES

Accrued liabilities consist of the following:

NOTE 5 – COMMON STOCK REPURCHASE AND RETIREMENT

The Company’s Board of Directors has authorized a common stock repurchase plan in three separate authorizations. The Company’s stock repurchase activity under this plan is as follows:

(all amounts in thousands, except per share amounts)

(1) On January 28, 2004, the Company announced that the Board of Directors had authorized the Company to purchase up to $50 million or 2.5 million shares of the Company’s common stock in open market transactions. There was no expiration date specified for this authorization. During the first quarter of fiscal 2004, the Company had substantially completed its repurchase and retirement of shares pursuant to this authorization.

(2) On May 10, 2004, the Company announced that the Board of Directors had authorized the Company to purchase up to an additional $25 million of the Company’s common stock in open market transactions. There was no expiration date specified for this authorization. During the second quarter of fiscal 2004, the Company had substantially completed its repurchase and retirement of shares pursuant to this authorization.

(3) On August 18, 2004, the Company’s Board of Directors authorized the Company to purchase up to an additional $50 million of the Company’s common stock in open market transactions. There was no expiration date specified for this authorization.

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NOTE 6 – RESTRICTED STOCK

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 Chief Executive Officer (“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 the first quarter of fiscal 2004, the Company’s Board of Directors verified that the final cumulative annual earnings per share growth target for this award had been met. Accordingly, the CEO became immediately vested in and received 75% of the total share award, or 84,375 shares. The remaining 25%, or 28,125 shares, will become fully vested and be delivered to the CEO on September 17, 2004. As a result of the delivery of 84,375 shares to the CEO during the first quarter of fiscal 2004, the Company reclassified previously recognized compensation expense of $1.9 million from accrued liabilities to additional paid-in capital. At July 31, 2004, the Company had accrued $.5 million to recognize the cumulative vested fair value of the remaining 28,125 shares to be delivered on September 17, 2004. This amount is included in accrued liabilities (see Note 4) on the balance sheet. The Company will be required to account for these final 28,125 shares under variable accounting rules, which will require adjustments to compensation expense until the delivery date 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 July 31, 2004 of $20.40, the Company would be required to record additional compensation expense of approximately $.1 million through September 17, 2004. Additionally, based on any change in the market price of the Company’s stock until the delivery date, the cumulative compensation expense recognized for this portion of this award will continue to be adjusted.

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 CEO. 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 the first quarter of fiscal 2004, the Company’s Board of Directors verified that the third cumulative annual earnings per share growth target for this award had been met. Accordingly, the CEO became immediately vested in and received 75% of the total share award, or 126,563 shares. 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 annual earnings per share growth target has been met by the Company. As a result of the delivery of 126,563 shares to the CEO during the first quarter of fiscal 2004, the Company reclassified previously recognized compensation expense of $2.9 million from accrued liabilities to additional paid-in capital. At July 31, 2004, the Company had accrued $.4 million to recognize the cumulative vested fair value of the remaining 42,187 shares. This amount is included in accrued liabilities (see Note 4) on the balance sheet. The Company will be required to account for these final 42,187 shares under variable accounting rules, which will require adjustments to compensation expense until the delivery date 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 July 31, 2004 of $20.40, the Company would be required to record additional compensation expense of approximately $.5 million through March 15, 2005. Additionally, based on any change in the market price of the Company’s stock until the delivery date, the cumulative compensation expense recognized for this portion of this award will continue to be adjusted.

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NOTE 7 – NET INCOME PER SHARE, BASIC AND DILUTED

The following table summarizes the computation of EPS (all amounts in thousands except share and per share amounts):

Second Quarter Ended:

First Half Ended: