UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended April 30, 2005

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.

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

The number of shares outstanding of the registrant’s Common Stock, par value $.01 per share, at May 31, 2005, was 75,036,900.

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PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarterly Period Ended April 30, 2005

Index

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

See accompanying notes to condensed consolidated financial statements

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

See accompanying notes to condensed consolidated financial statements

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

See accompanying notes to condensed consolidated financial statements

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PACIFIC SUNWEAR OF CALIFORNIA, INC.

1. BASIS OF PRESENTATION AND NATURE OF BUSINESS

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 Rules 5-02 and 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 Miraloma Corp. (the “Company”). All intercompany transactions have been eliminated in consolidation.

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 first quarter ended April 30, 2005 are not necessarily indicative of the results that may be expected for fiscal 2005. 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 29, 2005.

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 (PacSun) 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, footwear and related accessories catering to teens and young adults. In addition, the Company operates a website (www.pacsun.com) which sells PacSun merchandise online, provides content and community for its target customers, and provides information about the Company. The Company will begin selling d.e.m.o. merchandise through a new website (www.demostores.com) during fiscal 2005.

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. “Fiscal 2005” is the 52-week period ending January 28, 2006. “Fiscal 2004” was the 52-week period ended January 29, 2005. The first quarter of fiscal 2005 was the 13-week period ended April 30, 2005. The first quarter of fiscal 2004 was the 13-week period ended May 1, 2004.

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 annual report on Form 10-K for the fiscal year ended January 29, 2005. 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.

Marketable Securities – Marketable securities consists of auction rate securities of $45.0 million, classified as available for sale, and other short-term investments of $36.4 million, classified as held-to-maturity.

Auction rate securities have long-term stated contractual maturities, but have variable interest rates that reset at each auction period (typically 7 days, or as long as 28 or 35 days in some cases). These securities trade in a broad, highly liquid market and the Company has never had difficulty being able to liquidate any such investment at the end of a given auction period. The Company typically reinvests these securities multiple times during each reporting period at each new auction date. As a result of the resetting variable rates, the Company had no cumulative gross unrealized or realized gains or losses from these investments. All income from these investments was recorded as interest income for each period presented.

Marketable securities, other than auction rate securities, 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. At April 30, 2005, the fair value of the Company’s held-to-maturity portfolio was $36.4 million, consisting of corporate debentures of $26.8 million and U.S. treasury/agency debentures of $9.6 million. Cost is

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determined by specific identification, which approximates fair value at April 30, 2005 due to the relatively short maturity period of such investments.

Stock-Based Compensation – The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion 25 and related interpretations. Accordingly, no compensation expense has been recognized related to employee stock options for the periods presented. The Company follows the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” The Company will begin expensing stock options in accordance with SFAS 123(R) beginning January 29, 2006 (see “New Accounting Pronouncements”). The Company has provided the pro-forma disclosures required by SFAS 123 and SFAS 148 for the first quarter of each of fiscal 2005 and fiscal 2004 below.

Pro-forma net income and earnings per share related to the fair value of the Company’s stock option awards were determined using the
Black-Scholes option-pricing model with the following weighted average assumptions:

New Accounting Pronouncements – 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. The adoption of EITF 03-1 did not have a material impact on the Company’s financial position or results of operations because the Company has the ability and intent to hold all of its held-to-maturity marketable securities until maturity.

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment.” SFAS 123(R) requires that companies recognize compensation expense equal to the fair value of stock options or other share-based payments over the requisite service period. The standard is effective for the Company at the beginning of its next fiscal year, which starts on January 29, 2006. The Company’s net income will be reduced as a result of the recognition of the remaining amortization of the fair value of existing options (currently disclosed as pro-forma expense above in this Note 1) as well as the recognition of the fair value of all newly

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issued stock options, which is contingent upon the number of future options granted and other variables. The adoption of this standard will have no impact on the Company’s cash flows.

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

3. RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS

As disclosed in the Company’s Form 10-K for the fiscal year ended January 29, 2005, the Company restated its prior year financial statements to reflect the impact of certain lease accounting corrections and certain reclassifications related to auction rate securities and e-commerce shipping revenues and expenses. A summary of the impact of those changes to the Company’s financial statements for the first quarter of fiscal 2004 is as follows:

4. OTHER CURRENT LIABILITIES

As of the dates presented, other current liabilities consisted of the following:

5. ACCRUED SUBLEASE LOSS CHARGES

The Company remains liable under an operating lease covering a former store location. The Company has subleased approximately 85% of the total square footage of these premises to third parties at rates that are somewhat less than the Company’s required lease payments. Accordingly, at April 30, 2005, the Company had $1.7 million recorded in other current liabilities to recognize its net remaining contractual lease obligations, net of sublease income, related to these premises. The term

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of the lease ends December 31, 2012. On a quarterly basis, the Company updates its sublease income assumptions for the remaining portion of the premises not yet subleased based on its review of current real estate market conditions and current on-going negotiations. 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 April 30, 2005, the gross remaining contractual obligation under the Company’s original lease, exclusive of any sublease income, was approximately $5.9 million.

The Company also remains secondarily liable under a guarantee issued related to the assignment of an operating lease covering another former store location. The term of the lease ends December 31, 2014. The Company had $0.4 million recorded in other current liabilities to recognize the remaining estimated fair value of this guarantee, assuming that another assignee would be found within one year should the original assignee default. The aggregate payments remaining on the master lease agreement at April 30, 2005, were $5.3 million.

6. RESTRICTED STOCK

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 was 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 had been satisfied. Under the award agreement, shares that did not vest at a given vesting date due to the cumulative annual earnings per share growth targets not being met remained available for future vesting if the cumulative annual earnings per share growth targets were met as of a subsequent vesting date. During the first quarter of fiscal 2004, the CEO became vested in and received 75% of the total share award, or 126,563 shares. During the first quarter of fiscal 2005, 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 vested in and received the remaining 42,187 shares related to this award in March 2005. As a result of the delivery of the final 42,187 shares to the CEO, the Company reclassified previously recognized accrued compensation of $1.1 million from accrued liabilities to additional paid-in capital.

7. COMMITMENTS AND CONTINGENCIES

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 likely 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 probable 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 a material adverse affect on the Company’s operating results.

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 commercial letters of credit, of which there were $14.7 million outstanding at April 30, 2005, as security for merchandise shipments from overseas. 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 disclosed elsewhere in this quarterly report.

8. COMMON STOCK REPURCHASES

During fiscal 2004, the Company’s Board of Directors authorized the Company to repurchase up to $125.0 million of the Company’s common stock in open market transactions. All repurchase activity conducted by the Company pursuant to this plan has been previously disclosed in the Company’s annual report on Form 10-K for the year ended January 29, 2005 and no additional repurchases were made during the first quarter of fiscal 2005. At April 30, 2005, the maximum value of shares that may yet be purchased under this plan is approximately $15.5 million.

In May 2005, the Company announced that its Board of Directors had authorized the Company to repurchase up to an additional $100.0 million of the Company’s common stock in open market transactions. There was no expiration date specified for this plan. During May 2005, the Company made the following repurchases of shares subject to this plan:

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9. NET INCOME PER SHARE, BASIC AND DILUTED

The following table summarizes the computation of earnings per share (“EPS”):

Options to purchase 533,835 and 735,152 shares of common stock in the first quarter of fiscal 2005 and fiscal 2004, respectively, were not included in the computation of diluted earnings per share because the option exercise price was greater than the average market price of the Company’s common stock.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the condensed consolidated financial statements and notes thereto of the Company included elsewhere in this Form 10-Q. As discussed in Note 3 to the condensed consolidated financial statements included at Item 1, the fiscal 2004 financial statements have been restated for the effects of an error in our accounting for leases. This MD&A gives effect to the restatement.

Cautionary Note Regarding Forward-Lookin