NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Pacific Sunwear of California, Inc. (together with its wholly-owned subsidiaries, the “Company” or “PacSun”) is a leading specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. The Company sells a combination of branded and proprietary casual apparel, accessories and footwear designed to appeal to teens and young adults. It operates a nationwide, primarily mall-based chain of retail stores under the names “Pacific Sunwear” and “PacSun.” In addition, the Company operates an e-commerce website at www.pacsun.com which sells PacSun merchandise online, provides content and community for its target customers and provides information about the Company. The Company, a California corporation, was incorporated in August 1982. As of
February 1, 2014
, the Company leased and operated
618
stores in each of the
50
states and Puerto Rico.
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The results of continuing operations for all periods presented in these consolidated financial statements exclude the financial impact of discontinued operations. See Note 15, “Discontinued Operations” for further discussion related to discontinued operations presentation.
Principles of Consolidation and Financial Reporting Period
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (Pacific Sunwear Stores Corp., a California corporation (“PacSun Stores”) and Miraloma Borrower Corporation, a Delaware corporation (“Miraloma”)). 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 31st. Fiscal year-end dates for all periods presented or discussed herein are as follows:
|
|
|
|
|
|
Fiscal Year
|
|
Year-End Date
|
|
# of Weeks
|
2013
|
|
February 1, 2014
|
|
52
|
2012
|
|
February 2, 2013
|
|
53
|
2011
|
|
January 28, 2012
|
|
52
|
All references herein to "fiscal 2013", represent the results of the 52-week fiscal year ended February 1, 2014; to “fiscal 2012”, represent the results of the 53-week fiscal year ended February 2, 2013; and to “fiscal 2011”, represent the results of the 52-week fiscal year ended January 28, 2012. In addition, all references herein to “fiscal 2014”, represent the 52-week fiscal year that will end on January 31, 2015.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP 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 sales and expenses during the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments purchased with an original maturity of
3 months
or less to be cash equivalents. Cash and cash equivalents consist primarily of money market funds.
Merchandise Inventories
Merchandise inventories are stated at the lower of average cost or market utilizing the retail method. At any given time, inventories include items that have been marked down to management’s best estimate of their fair market value. These estimates are based on a combination of factors, including current selling prices, current and projected inventory levels, current and projected rates of sell-through, known markdown and/or promotional events expected to create a permanent decrease in inventory value, estimated inventory shrink and aging of specific items. Allowances of approximately
$2.9 million
and
$1.4 million
have been recorded to
PACIFIC SUNWEAR OF CALIFORNIA, INC.
write-down the carrying value of existing inventory at
February 1, 2014
and
February 2, 2013
, respectively, and can vary from year to year depending on the timing and nature of markdowns.
Property and Equipment
All property and equipment are stated at cost. Depreciation is recognized on a straight-line basis over the following estimated useful lives:
|
|
|
|
Property Category
|
|
Depreciation Term
|
Buildings
|
|
39 years
|
Building improvements
|
|
Lesser of remaining estimated useful life of the building or estimated useful life of the improvement
|
Leasehold improvements
|
|
Lesser of remaining lease term (at inception, generally 10 years) or estimated useful life of the improvement
|
Furniture, fixtures and equipment
|
|
Generally 5 years (ranging from 3 to 15 years), depending on the nature of the asset
|
Other Long-Lived Assets
The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets (or asset group) may not be recoverable. Based on management’s review of the historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of the Company’s stores, the Company determines whether certain stores will be able to generate sufficient cash flows over the remaining term of the related leases to recover the Company’s investment in the respective stores. Based on that determination, the Company will record an impairment charge within selling, general and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Operations, to write-down the carrying value of its long-lived store assets to their estimated fair values. See Note 4, “Impairment of Long-Lived Assets,” for a discussion of asset impairment charges.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Deferred income tax assets are reduced by a valuation allowance if, in the judgment of the Company’s management, it is more likely than not that all or a portion of a deferred tax asset will not be realized. In making such determination, the Company considers all available positive and negative evidence, including recent financial operating results, projected future taxable income, scheduled reversals of deferred tax liabilities, tax planning strategies, and the length of tax asset carryforward periods. The realization of deferred tax assets is primarily dependent upon the Company’s ability to generate sufficient future taxable earnings in certain jurisdictions. If the Company subsequently determines that the carrying value of these assets, for which a valuation allowance has been established, would be realized in the future, the value of the deferred tax assets would be increased by reducing the valuation allowance, thereby increasing net income in the period when that determination was made. See Note 10, “Income Taxes,” for further discussion regarding the realizability of the Company’s deferred tax assets and assessment of a need for a valuation allowance.
The Company accounts for uncertain tax positions in accordance with authoritative guidance for income taxes. This guidance prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in the Company’s tax return. The literature also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions.
Insurance Reserves
The Company uses a combination of third-party insurance and self-insurance for workers’ compensation, employee medical and general liability insurance. For each type of insurance, the Company has defined stop-loss or deductible provisions that limit the Company’s maximum exposure to claims. The Company maintains reserves for estimated claims associated with these programs, both reported and incurred but not reported, based on historical claims experience and other estimated assumptions.
Revenue Recognition
PACIFIC SUNWEAR OF CALIFORNIA, INC.
Sales are recognized upon purchase by customers at the Company’s retail store locations or upon delivery to and acceptance by the customer 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 (“gift card breakage”). Gift card breakage is generally recognized as revenue after
24
months, at which time the likelihood of redemption is considered remote based on the Company’s historical redemption data. Gift card breakage has never been more than
1.0%
of sales in any fiscal year. 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
February 1, 2014
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
(In thousands)
|
Beginning balance
|
$
|
360
|
|
|
$
|
347
|
|
|
$
|
389
|
|
Provisions
|
15,485
|
|
|
14,945
|
|
|
14,410
|
|
Usage
|
(15,406
|
)
|
|
(14,932
|
)
|
|
(14,452
|
)
|
Ending balance
|
$
|
439
|
|
|
$
|
360
|
|
|
$
|
347
|
|
Derivative Liability
The Company’s derivative liability requires bifurcation from the debt host and is remeasured at fair value at each reporting period. Changes in the related fair value are recorded in loss on derivative liability in the Company’s accompanying Statement of Operations and Comprehensive Operations.
E-commerce Shipping and Handling Revenues and Expenses
Shipping and handling revenues and expenses relate to sales activity generated from the Company’s website. Amounts charged to the Company’s e-commerce customers for shipping and handling revenues are included in net sales. Amounts paid by the Company for e-commerce shipping and handling expenses are included in cost of goods sold and encompass payments to third party shippers and costs to store, move and prepare merchandise for shipment.
Cost of Goods Sold, including Buying, Distribution and Occupancy Costs
Cost of goods sold includes the landed cost of merchandise and all expenses incurred by the Company’s buying and distribution functions. These costs include inbound freight, purchasing and receiving costs, inspection costs, warehousing costs, depreciation, internal transfer costs, and any other costs borne by the Company’s buying department and distribution center. Occupancy costs include store rents, common area maintenance (“CAM”), as well as store expenses related to telephone service, supplies, repairs and maintenance, insurance, loss prevention, and taxes and licenses. Store rents, including CAM, were approximately
$134 million
,
$130 million
and
$131 million
in fiscal
2013
,
2012
and
2011
, respectively.
Vendor Allowances
Cash consideration received from vendors primarily includes discounts, vendor allowances and rebates. The Company recognizes cash received from vendors as a reduction in the price of the vendor’s products and, accordingly, as a reduction in cost of sales at the time the related inventory is sold.
Straight-Line Rent
Rent expense under the Company’s store operating leases is recognized on a straight-line basis over the original term of each store’s lease, inclusive of rent holiday periods during store construction and excluding any lease renewal options. Accordingly, the Company expenses pre-opening rent.
Deferred Lease Incentives
Amounts received from landlords to fund tenant improvements are recorded as a deferred lease incentive liability and then amortized as a credit to rent expense over the related store’s lease term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include payroll, depreciation and amortization, advertising, credit authorization charges, expenses associated with the counting of physical inventories, and all other general and administrative expenses not directly related to merchandise or operating the Company’s stores.
Advertising Costs
PACIFIC SUNWEAR OF CALIFORNIA, INC.
Costs associated with the production or placement of advertising and other in-store visual and promotional materials, such as signage, banners, photography, design, creative talent, editing, magazine insertion fees and other costs associated with such advertising, are expensed the first time the advertising appears publicly. Advertising costs were approximately
$12 million
in fiscal
2013
, and
$14 million
in each of fiscal
2012
and
2011
.
Stock-Based Compensation
The Company recognizes compensation expense for all stock-based payment arrangements, net of an estimated forfeiture rate and generally recognizes compensation cost for those shares expected to vest over the requisite service period of the award using the straight-line method of amortization. For stock options and stock appreciation rights, the Company generally determines the grant date fair value using the Black-Scholes option pricing model which requires the input of certain assumptions, including the expected life of the stock-based payment awards, stock price volatility and interest rates. For restricted stock unit valuation, the Company determines the fair value using the grant date price of the Company’s common stock.
The Company recorded non-cash, stock-based compensation in the consolidated statement of operations for fiscal
2013
,
2012
and
2011
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
(In thousands)
|
Stock-based compensation expense included in cost of goods sold
|
$
|
635
|
|
|
$
|
666
|
|
|
$
|
992
|
|
Stock-based compensation expense included in selling, general and administrative expenses
|
2,008
|
|
|
2,170
|
|
|
2,184
|
|
Total stock-based compensation expense
|
$
|
2,643
|
|
|
$
|
2,836
|
|
|
$
|
3,176
|
|
Earnings Per Share
Basic earnings per common share is computed using the weighted-average number of common shares outstanding. Diluted earnings per share is computed in accordance to ASC Topic 260, "Earnings Per Share" (“ASC 260”), using the weighted-average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock and nonvested restricted stock using the treasury stock method, if dilutive. In periods where a net loss is reported, incremental shares are excluded as their effect would be anti-dilutive. In such circumstances, the weighted-average number of shares outstanding in the basic and diluted earnings per share calculations will be the same. Anti-dilutive options and nonvested shares excluded from the diluted earnings per share calculations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
Anti-dilutive options and nonvested shares
|
6,558,028
|
|
|
2,443,976
|
|
|
2,745,350
|
|
Vendor and Merchandise Concentrations
In fiscal 2013, Nike, Inc. (which includes the Hurley brand) accounted for 10% of net sales. No other vendor accounted for more than 10% of total net sales in fiscal 2013. In fiscal 2012 and fiscal 2011, no individual vendor accounted for more than
10%
of total net sales.
The merchandise assortment for the Company as a percentage of net sales was as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
Men’s Apparel
|
46
|
%
|
|
48
|
%
|
|
49
|
%
|
Women’s Apparel
|
39
|
%
|
|
37
|
%
|
|
37
|
%
|
Accessories and Footwear
|
15
|
%
|
|
15
|
%
|
|
14
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Recent Accounting Pronouncements
In July 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)." The ASU provides guidance on financial statement presentation of an
PACIFIC SUNWEAR OF CALIFORNIA, INC.
unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. Based on the Company’s evaluation of this ASU, the adoption of this guidance is not expected to have a material impact on the Company’s financial position or results of operation.
2. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
February 1, 2014
|
|
February 2, 2013
|
|
(In thousands)
|
Leasehold improvements
|
$
|
214,287
|
|
|
$
|
219,060
|
|
Furniture, fixtures and equipment
|
206,883
|
|
|
210,775
|
|
Buildings and building improvements
|
40,632
|
|
|
40,571
|
|
Land
|
11,228
|
|
|
11,228
|
|
Total gross property and equipment
|
473,030
|
|
|
481,634
|
|
Less: Accumulated depreciation and amortization
|
(376,233
|
)
|
|
(370,902
|
)
|
Property and equipment, net
|
$
|
96,797
|
|
|
$
|
110,732
|
|
3. INTANGIBLE ASSETS, NET
The Company's intangible assets consist of costs capitalized incurred in connection with developing or obtaining software for internal use. Costs incurred in the preliminary project stage are expensed as incurred. All direct internal and external costs incurred to develop internal use software during the development stage are capitalized and amortized using the straight-line method over a period of
5
to
10
years. Costs such as maintenance and training are expensed as incurred. The following summarizes the Company's intangible assets:
|
|
|
|
|
|
|
|
|
|
February 1, 2014
|
|
February 2, 2013
|
|
(In thousands)
|
Internal use software costs
|
$
|
50,428
|
|
|
$
|
47,089
|
|
Less: Accumulated amortization
|
(37,460
|
)
|
|
(33,028
|
)
|
Intangible assets, net
|
$
|
12,968
|
|
|
$
|
14,061
|
|
The Company recorded amortization expense of
$4 million
,
$6 million
, and
$5 million
during fiscal
2013
,
2012
and
2011
, respectively.
Based on the Company's intangible assets as of February 1, 2014, the future estimated intangible amortization expense is approximately
$4 million
in fiscal 2014,
$3 million
in each of fiscal 2015 and 2016,
$2 million
in fiscal 2017, and
$1 million
in fiscal 2018.
4. IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets (or asset group) may not be recoverable. Based on management’s review of the historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of the Company’s stores, the Company determined that certain stores would not be able to generate sufficient cash flows over the remaining term of the related leases to recover the Company’s investment in the respective stores. As a result, the Company recorded the following non-cash impairment charges related to its retail stores within the accompanying Consolidated Statements of Operations and Comprehensive Operations, to write-down the carrying value of its long-lived store assets to their estimated fair values.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter Ended
|
|
Fiscal Year Ended
|
|
(Unaudited)
|
|
|
|
|
|
|
|
(In thousands)
|
|
February 1, 2014
|
|
February 2, 2013
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
Impairment charges from continuing operations
|
$
|
1,168
|
|
|
$
|
1,242
|
|
|
$
|
3,190
|
|
|
$
|
5,174
|
|
|
$
|
8,698
|
|
Impairment charges from discontinued operations
|
5
|
|
|
26
|
|
|
14
|
|
|
167
|
|
|
6,089
|
|
Total impairment charges
|
$
|
1,173
|
|
|
$
|
1,268
|
|
|
$
|
3,204
|
|
|
$
|
5,341
|
|
|
$
|
14,787
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2014
|
|
February 2, 2013
|
|
(In thousands)
|
Carrying value of assets tested for impairment
|
$
|
3,661
|
|
|
$
|
6,612
|
|
Carrying value of assets with impairment
|
$
|
1,500
|
|
|
$
|
1,673
|
|
Fair value of assets impaired
|
$
|
327
|
|
|
$
|
405
|
|
Number of stores tested for impairment
|
56
|
|
|
99
|
|
Number of stores with impairment
|
12
|
|
|
25
|
|
The long-lived assets disclosed above that were written down to their respective fair values consisted primarily of leasehold improvements, furniture, fixtures and equipment. The Company recognized impairment charges of
$1.2 million
and
$1.3 million
, respectively, during the fourth fiscal quarters ended
February 1, 2014
and
February 2, 2013
, respectively, and
$3.2 million
,
$5.3 million
and
$14.8 million
, during the fiscal years ended
February 1, 2014
,
February 2, 2013
and
January 28, 2012
, respectively. The decrease in the number of stores tested for impairment year-over-year was primarily related to the Company’s recent closure of certain underperforming stores and the improved financial performance of the remaining store base. Based on historical operating performance and the projected outlook for a subset of the stores tested for impairment as of
February 1, 2014
, the Company believes that the remaining asset value of approximately
$0.3 million
, is recoverable.
5. OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
February 1, 2014
|
|
February 2, 2013
|
|
(In thousands)
|
Accrued compensation and benefits
|
$
|
7,858
|
|
|
$
|
13,222
|
|
Accrued gift cards
|
9,036
|
|
|
9,520
|
|
Sales taxes payable
|
1,549
|
|
|
2,353
|
|
Other
|
18,843
|
|
|
18,464
|
|
Total other current liabilities
|
$
|
37,286
|
|
|
$
|
43,559
|
|
6. CREDIT FACILITY
On December 7, 2011, the Company entered into a new
five
-year,
$100 million
revolving credit facility with Wells Fargo Bank, N.A (the “Wells Credit Facility”), which replaced the Company’s previous revolving credit facility with JPMorgan Chase (the “Former Credit Facility”). Borrowings under the Wells Credit Facility bear interest at a floating rate which, at the Company’s option, may be determined by reference to a LIBOR Rate or a Base Rate, plus
1.75%
or
0.75%
, respectively, (as defined in the Wells Credit Facility,
1.91%
as of
February 1, 2014
). Extensions of credit under the Wells Credit Facility are limited to a borrowing base consisting of specified percentages of eligible categories of assets. The Wells Credit Facility is available for direct borrowings and allows for the issuance of letters of credit, and up to
$12.5 million
is available for swing-line loans. The Wells Credit Facility is secured by liens and security interests with (a) a first priority security interest in the current and certain related assets of the Company including cash, cash equivalents, deposit accounts, securities accounts, credit card receivables and inventory, and (b) a second priority security interest in all assets and properties of the Company that are not secured by a first lien and security interest. The Wells Credit Facility also contains covenants that, subject to specified exceptions, restrict the Company’s ability to, among other things, incur additional indebtedness, incur liens, liquidate or dissolve, sell, transfer, lease or dispose of assets, or make loans, investments or guarantees. The Wells Credit Facility is scheduled to mature on
December 7, 2016
. Although the Company made progress with respect to its comparable store net sales and gross margins in fiscal 2013 and fiscal 2012, if the Company is unable to continue to grow its same-store sales and improve its gross margins in the future, it may be required to access most, if not all, of the Wells Credit Facility and would potentially require other sources of financing to fund our operations, which sources might not be available. Based on current forecasts, the Company believes that its cash flows from operations and working capital will be
PACIFIC SUNWEAR OF CALIFORNIA, INC.
sufficient to meet its operating and capital expenditure needs for the next twelve months. At
February 1, 2014
, the Company had
no
direct borrowings and
$10 million
in letters of credit outstanding under the Wells Credit Facility. The remaining availability under the Wells Credit Facility at
February 1, 2014
was approximately
$25 million
. The Company is not subject to any financial covenant restrictions under the Wells Credit Facility.
7. DEBT
Term Loan
On December 7, 2011, the Company obtained the
$60 million
Term Loan funded by an affiliate of Golden Gate Capital. The Term Loan bears interest at a rate of
5.5%
per annum to be paid in cash, due and payable quarterly in arrears, and
7.5%
per annum, due and payable-in-kind (“PIK”) annually in arrears, with such PIK interest then due and payable being added to the outstanding principal balance of the Term Loan at the end of each fiscal year, and with adjustments to the cash and PIK portion of the interest rate in accordance with the Term Loan agreement, following principal prepayments. During fiscal 2013, the Company recorded
$9 million
of interest expense, including approximately
$5 million
of accrued PIK interest, related to the Term Loan. In fiscal 2012, the Company recorded
$8 million
of interest expense, including approximately
$5 million
of accrued PIK interest, related to the Term Loan. Annual interest related to the Term Loan for fiscal 2014 is expected to be approximately
$9 million
, including approximately
$5 million
of accrued PIK interest. The Term Loan is guaranteed by each of the Company’s subsidiaries and will be guaranteed by any future domestic subsidiaries of the Company. The Term Loan is secured by liens and security interests with (a) a first priority security interest in all long-term assets of the Company and PacSun Stores and all other assets not subject to a first lien and security interest pursuant to the Wells Credit Facility, (b) a first priority pledge of the equity interests of Miraloma and (c) a second priority security interest in all assets of the Company and PacSun Stores subject to a first lien and security interest pursuant to the Wells Credit Facility. The Term Loan also contains covenants substantially identical to those in the Wells Credit Facility. The principal balance and any unpaid interest related to the Term Loan is due on
December 7, 2016
. The Company is not subject to any financial covenant restrictions under the Term Loan.
Mortgage Debt
On August 20, 2010, the Company, through its wholly-owned subsidiaries, Miraloma and PacSun Stores, executed
two
promissory notes pursuant to which borrowings in an aggregate amount of
$29.8 million
from American National Insurance Company (“Anico”) were incurred. The note executed by Miraloma (the “Miraloma Note”) is in the amount of
$16.8 million
and bears interest at the rate of
6.50%
per annum. Monthly principal and interest payments under the Miraloma Note commenced on
October 1, 2010
, and are
$113,435
. The principal and interest payments are based on a
25
-year amortization schedule. The remaining principal balance of the Miraloma Note, and any accrued but unpaid interest thereon (estimated to be
$14.4 million
), will be due in full on
September 1, 2017
. The Miraloma Note is secured by a deed of trust on the building and land comprising the Company’s principal executive offices in Anaheim, California and is non-recourse to the Company. The Miraloma Note does not contain any financial covenants. In connection with this transaction, the Company transferred the building and related land securing the Miraloma Note to Miraloma and entered into a lease for the building and land with Miraloma. Miraloma paid a prepayment fee to Anico equal to
1.00%
of the principal amount of the Miraloma Note on the closing date of the transaction. As a result, Miraloma may prepay the Miraloma Note, in whole, but not in part, at any time without penalty upon
30 days
prior written notice to Anico.
The note executed by PacSun Stores (the “PacSun Stores Note”) is in the amount of
$13.0 million
and bears interest at the rate of
6.50%
per annum. Monthly principal and interest payments under the PacSun Stores Note commenced on
October 1, 2010
, and are
$87,777
. The principal and interest payments are based on a
25
-year amortization schedule. The remaining principal balance of the PacSun Stores Note, and any accrued but unpaid interest thereon (estimated to be
$11.2 million
), will be due in full on
September 1, 2017
. The PacSun Stores Note is secured by a mortgage on the Company’s leasehold interest in the building and land comprising the Company’s distribution center in Olathe, Kansas, and is unconditionally guaranteed by the Company. The PacSun Stores Note does not contain any financial covenants. PacSun Stores paid a prepayment fee to Anico equal to
1.00%
of the principal amount of the PacSun Stores Note on the closing date of the transaction. As a result, PacSun Stores may prepay the PacSun Stores Note, in whole, but not in part, at any time without penalty upon
30 days
prior written notice to Anico.
As of
February 1, 2014
, the remaining aggregate principal payments due under the Term Loan and the Mortgage Debt are as follows:
PACIFIC SUNWEAR OF CALIFORNIA, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
Total
|
Mortgage Debt
|
$
|
614
|
|
|
$
|
655
|
|
|
$
|
699
|
|
|
$
|
26,010
|
|
|
$
|
27,978
|
|
Term Loan
(1)
|
—
|
|
|
—
|
|
|
70,293
|
|
|
—
|
|
|
70,293
|
|
Total
|
$
|
614
|
|
|
$
|
655
|
|
|
$
|
70,992
|
|
|
$
|
26,010
|
|
|
$
|
98,271
|
|
|
|
|
Less: Term Loan discount
|
|
(11,582
|
)
|
|
|
|
Less: current portion of long-term debt
|
|
(614
|
)
|
|
|
|
Total long-term debt
|
|
$
|
86,075
|
|
(1)
Upon maturity of the Term Loan,
$26.7 million
of PIK interest will become due and payable, of which,
$10.3 million
is included in the Term Loan as of
February 1, 2014
.
The Company recorded interest expense of
$14.1 million
,
$13.3 million
and
$4.4 million
during fiscal
2013
,
2012
and
2011
, respectively.
8. INDUSTRIAL REVENUE BOND TRANSACTION – OLATHE, KANSAS
On July 17, 2007, PacSun Stores, completed an industrial revenue bond financing transaction with the city of Olathe, Kansas (the “City”) that will provide property tax savings for
10
years on the Company’s new distribution center located in the City. In the transaction, the City purchased the land and building from PacSun Stores through the issuance to PacSun Stores of approximately
$23 million
in industrial revenue bonds due
January 1, 2018
(“Bonds”) and contemporaneously leased the land and building to PacSun Stores for an identical term. PacSun Stores can call the Bonds at any time it chooses, but would lose its property tax benefit in the event this transaction was to be canceled. In the Company’s Consolidated Balance Sheet, the land and building remain a component of property and equipment, the investment in the Bonds is included in other assets, and the related long-term lease obligation is included in other long-term liabilities.
PacSun Stores, as holder of the Bonds, is due interest at
7%
per annum with interest payable semi-annually in arrears on January 1 and July 1. This interest income is directly offset by the interest-only lease payments on the distribution center, which are due at the same time and in the same amount as the interest income. Both the Bonds and the corresponding lease have
10
-year terms. If, at any time, PacSun Stores chooses to call the Bonds, the proceeds from the Bonds would be required to immediately terminate the lease. PacSun Stores’ intention is to maintain the property tax benefit related to the Olathe facility. Accordingly, both the Bonds and the lease are classified as long-term due to PacSun Stores’ intent to hold the Bonds until maturity and the structure of the lease, which includes a balloon principal payment and bargain purchase requirement at the end of the lease term.
9. SHAREHOLDERS’ EQUITY
Common Stock
In connection with certain lease modifications during fiscal 2011, the Company issued
900,000
shares of its common stock to one of its landlords. The fair value on the date of issuance was approximately
$1.6 million
, which has been amortized on a straight-line basis as a component of occupancy costs over the respective rent reduction period.
Preferred Stock
In conjunction with the Term Loan, the Company issued convertible series B preferred stock (the "Series B Preferred") to an affiliate of Golden Gate Capital which, based on the initial conversion ratio, gives that affiliate the right to purchase up to
13.5 million
shares of the Company’s common stock. The Series B Preferred shares have an exercise price initially equal to
$1.75
per share of the Company’s underlying common stock. The initial holder of the Series B Preferred is entitled to customary registration rights with respect to the underlying common stock. See Note 11, “Fair Value Measurements – Recurring Fair Value Measurements” for further discussion on the accounting treatment of the Series B Preferred.
Shareholder Protection Rights Plan
On March 22, 2013, the Company’s Board of Directors adopted a new Shareholder Protection Rights Agreement (the “New Rights Plan”) and declared a dividend of
one
preferred share purchase right (a “Right”) on each outstanding share of common stock, par value
$0.01
per share. The New Rights Plan replaces the previous Shareholder Protection Rights Agreement that was adopted on December 7, 2011, which was amended to expire upon adoption of the New Rights Plan. The dividend was paid to shareholders of record on April 1, 2013, upon certification by the Nasdaq Global Select Market to the SEC that the Rights were approved for listing. The New Rights Plan was approved by the Company's shareholders at the 2013 annual meeting of shareholders.
If any person or group acquires between
20%
and
50%
of the Company’s common stock, the Board of Directors may, at its option, exchange one share of the Company’s common stock for each Right. Under the New Rights Plan, among other things, a person or
PACIFIC SUNWEAR OF CALIFORNIA, INC.
group which acquires
20%
or more of the common stock of the Company will trigger the ability of the shareholders (other than the
20%
holder) to exercise the Rights for an exercise price of
$10.00
per Right (subject to certain adjustments from time to time) and to purchase a number of shares of common stock with a market value of twice the exercise price of the Rights exercised. The Rights are redeemable at any time by the Company at
$0.01
per Right. In addition to the Board of Directors’ redemption, in connection with a “Qualified Offer” (as defined in the New Rights Plan), holders of
10%
of the common stock of the Company then outstanding (excluding shares held by the offeror and its affiliates and associates), upon providing proper written notice, may direct the Board of Directors to call a special meeting of shareholders for the purposes of voting on a resolution authorizing the redemption of the Rights pursuant to the provisions of the New Rights Plan. Such meeting must be held on or prior to the 90
th
business day following the Company’s receipt of such written notice. The New Rights Plan will expire on
March 22, 2016
.
Stock-Based Compensation
The Company maintains
two
stock-based incentive plans: (1) the 2005 Performance Incentive Plan (the “Performance Plan”) and (2) the amended and restated Employee Stock Purchase Plan (the “ESPP”). The types of awards that may be granted under the Performance Plan include stock options, stock appreciation rights, restricted stock, and other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock. Persons eligible to receive awards under the Performance Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards under the Performance Plan is determined at the date of grant. Each award expires on a date determined at the date of grant; however, the maximum term of options and stock appreciation rights under the Performance Plan is
ten
years after the grant date of the award. As of
February 1, 2014
, the maximum number of shares of the Company’s common stock that was available for award grants under the Performance Plan was
2.6 million
shares. Any shares subject to awards under prior stock plans that are canceled, forfeited or otherwise terminate without having vested or been exercised, as applicable, will become available for future award grants under the Performance Plan. The Performance Plan will terminate on
March 22, 2015
, unless terminated earlier by the Company’s Board of Directors.
The Company accounts for stock-based compensation expense in accordance with ASC Topic 718, “Stock Compensation” (“ASC 718”). The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of its stock options. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense to be recognized during the vesting period. The expected term of options granted is derived primarily from historical data on employee exercises adjusted for expected changes to option terms, if any. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based primarily on the historical volatility of the Company’s common stock. The Company records stock-based compensation expense using the straight-line method over the vesting period, which is generally
three
to
four years
. The Company’s stock-based awards generally begin vesting
one year
after the grant date and, for stock options, expire in
seven
to
ten years
or
three months
after termination of employment with the Company. The Company’s stock-based compensation expense resulted from awards of stock options, restricted stock, and stock appreciation rights, as well as from shares issued under the ESPP.
Stock Options
The fair value of the Company’s stock-based compensation activity was determined using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
Stock Options
|
|
ESPP
|
|
Stock Options
|
|
ESPP
|
|
Stock Options
|
|
ESPP
|
Expected life
|
NA
|
|
1 year
|
|
4 years
|
|
0.5 years
|
|
4 years
|
|
0.5 years
|
Expected volatility
|
NA
|
|
63%
|
|
87% - 88%
|
|
71%
|
|
83% - 87%
|
|
54% - 87%
|
Risk-free interest rate
|
NA
|
|
0.1%
|
|
0.5% - 0.9%
|
|
0.1% - 0.2%
|
|
0.6% - 1.6%
|
|
0.2% - 0.6%
|
Expected dividends
|
NA
|
|
$—
|
|
$—
|
|
$—
|
|
$—
|
|
$—
|
Under the Performance Plan, incentive and nonqualified stock 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 respective grant dates. No stock options were granted by the Company during fiscal 2013. A summary of stock option (incentive and nonqualified) activity for fiscal
2013
is presented below:
PACIFIC SUNWEAR OF CALIFORNIA, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Yrs.)
|
|
Aggregate
Intrinsic
Value
($000s)
|
Outstanding at February 2, 2013
|
2,388,048
|
|
|
$
|
5.66
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(10,375
|
)
|
|
1.65
|
|
|
|
|
|
Forfeited or expired
|
(168,294
|
)
|
|
13.05
|
|
|
|
|
|
Outstanding at February 1, 2014
|
2,209,379
|
|
|
$
|
5.11
|
|
|
2.7
|
|
$
|
163
|
|
Vested and expected to vest at February 1, 2014
|
2,203,801
|
|
|
$
|
5.12
|
|
|
2.7
|
|
$
|
160
|
|
Exercisable at February 1, 2014
|
2,091,991
|
|
|
$
|
5.19
|
|
|
2.6
|
|
$
|
137
|
|
At
February 1, 2014
, incentive and nonqualified options to purchase
2,209,379
shares were outstanding and
2,596,620
shares were available for future grant under the Company’s stock compensation plans. In each of fiscal
2013
,
2012
and
2011
, the Company did not recognize tax benefits related to stock-based compensation due to a full valuation allowance against various deferred tax assets. See “Income Taxes” in Notes 1 and 10 for further discussion regarding the realizability of the Company’s deferred tax assets and its assessment of a need for a valuation allowance.
The weighted-average grant-date fair value per share of options granted during each of fiscal
2012
and
2011
was
$1.07
and
$1.65
, respectively. There were no stock options granted during fiscal 2013. There were
10,375
,
143,900
, and
70,825
stock options exercised during fiscal
2013
,
2012
, and
2011
, respectively. The total intrinsic value of options exercised during fiscal
2012
and
2011
was
$0.3 million
and
$0.2 million
, respectively. The total intrinsic value of options exercised during fiscal 2013 was immaterial.
Restricted Stock Awards
A summary of service-based restricted stock awards activity under the Performance Plan for fiscal
2013
is presented in the following table. Except as described below, such restricted stock awards contain a service-based restriction as to vesting. These awards generally vest over
4 years
with
25%
of the grant vesting each year on the anniversary of the grant date.
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Outstanding at February 2, 2013
|
1,795,943
|
|
|
$
|
2.16
|
|
Granted
|
175,000
|
|
|
2.53
|
|
Vested
|
(492,709
|
)
|
|
2.34
|
|
Forfeited
|
(158,663
|
)
|
|
2.28
|
|
Outstanding at February 1, 2014
|
1,319,571
|
|
|
$
|
2.13
|
|
The weighted-average grant-date fair value per share of service-based restricted stock awards granted during each of fiscal
2013
,
2012
and
2011
was
$2.53
,
$1.75
and
$3.46
, respectively. The total fair value of awards vested during fiscal
2013
,
2012
and
2011
was
$1.2 million
,
$0.4 million
and
$0.4 million
, respectively.
During fiscal 2012, the Company granted
675,000
performance-based restricted stock awards which only vest upon the achievement of certain financial targets. The weighted-average grant-date fair value per share of performance-based restricted stock awards granted during fiscal 2012 was
$1.77
. There were no performance-based restricted stock awards granted in either fiscal 2013 or 2011.
Restricted Stock Units
PACIFIC SUNWEAR OF CALIFORNIA, INC.
A summary of restricted stock units activity under the Performance Plan for fiscal
2013
is presented below. Restricted stock units contain a service-based restriction as to vesting. These awards generally vest
100%
on the first anniversary of the grant date.
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
Outstanding at February 2, 2013
|
125,000
|
|
|
$
|
1.57
|
|
Granted
|
122,480
|
|
|
3.47
|
|
Vested
|
(125,000
|
)
|
|
1.57
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at February 1, 2014
|
122,480
|
|
|
$
|
3.47
|
|
The weighted-average grant-date fair value per share of restricted stock units granted during each of fiscal
2013
,
2012
and
2011
was
$3.47
,
$1.57
and
$3.19
, respectively. The total fair value of the restricted stock units vested during each of fiscal
2013
,
2012
and
2011
was
$0.4 million
,
$0.2 million
, and
$0.5 million
, respectively.
Stock-based compensation expense recognized related to nonvested stock options, restricted stock awards and restricted stock units during fiscal
2013
,
2012
and
2011
, was
$2.6 million
,
$2.8 million
and
$3.2 million
, respectively. At
February 1, 2014
, the Company had approximately
$2.2 million
of compensation cost related to nonvested stock options, service-based restricted stock awards, performance-based restricted stock awards, and restricted stock units expected to be recognized over a weighted-average period of approximately
2.1
years.
Employee Stock Purchase Plan (“ESPP”)
The Company’s ESPP 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 purchasing period, whichever is lower. Historically, the Company's purchase period has been equal to
six
months; however, following the June 2013 ESPP purchase, the Compensation Committee of the Board of Directors of the Company changed the purchase period to
one
year. The ESPP covers substantially all employees who have
three
months of service with the Company, excluding senior executives. 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. On March 20, 2014, the Board of Directors approved an amendment to the ESPP to increase the number of authorized shares thereunder from
2.1 million
shares to
2.5 million
shares. Such amendment is subject to approval by the shareholders at the 2014 annual meeting of shareholders.
The Company recognized compensation expense related to the ESPP of
$0.1 million
in each of fiscal
2013
,
2012
and
2011
. During fiscal
2013
,
2012
and
2011
, the Company issued
149,398
,
236,668
and
212,025
shares at an average price of
$1.50
,
$1.50
and
$1.58
, respectively, under the ESPP.
10. INCOME TAXES
The components of income tax expense for the fiscal periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
(In thousands)
|
Current income taxes:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(127
|
)
|
State
|
949
|
|
|
819
|
|
|
1,546
|
|
Total current
|
949
|
|
|
819
|
|
|
1,419
|
|
Deferred income taxes:
|
|
|
|
|
|
Federal
|
—
|
|
|
—
|
|
|
—
|
|
State
|
(152
|
)
|
|
15
|
|
|
(365
|
)
|
Total deferred
|
(152
|
)
|
|
15
|
|
|
(365
|
)
|
Total income tax expense
|
$
|
797
|
|
|
$
|
834
|
|
|
$
|
1,054
|
|
Included in fiscal
2013
and
2011
current income taxes, were tax benefits from uncertain tax positions of approximately
$0.3 million
and
$0.2 million
, respectively. In fiscal
2012
, there were no material tax benefits from uncertain tax positions.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
A reconciliation of income tax expense (benefit) to the amount of income tax expense that would result from applying the federal statutory rate to loss from continuing operations before income taxes for the fiscal periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
(In thousands)
|
Benefit for income taxes at statutory rate
|
$
|
(16,163
|
)
|
|
$
|
(18,112
|
)
|
|
$
|
(28,038
|
)
|
State income taxes
,
net of federal income tax benefit
|
(363
|
)
|
|
(900
|
)
|
|
(1,170
|
)
|
Valuation allowance
|
13,271
|
|
|
19,557
|
|
|
28,600
|
|
Derivative liability
|
3,723
|
|
|
2
|
|
|
1,764
|
|
Other
|
329
|
|
|
287
|
|
|
(102
|
)
|
Total income tax expense
|
$
|
797
|
|
|
$
|
834
|
|
|
$
|
1,054
|
|
The major components of the Company’s overall net deferred tax asset of approximately
$4 million
at
February 1, 2014
and
February 2, 2013
respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
February 1, 2014
|
|
February 2, 2013
|
|
(In thousands)
|
Current net deferred tax asset
|
$
|
3,715
|
|
|
$
|
5,238
|
|
Noncurrent net deferred tax asset
|
138,576
|
|
|
122,827
|
|
|
142,291
|
|
|
128,065
|
|
Valuation allowance
|
(138,281
|
)
|
|
(123,920
|
)
|
Total net deferred tax asset
|
$
|
4,010
|
|
|
$
|
4,145
|
|
Deferred tax assets:
|
|
|
|
Net operating loss and tax credit carryforwards
|
$
|
126,213
|
|
|
$
|
113,264
|
|
Deferred lease incentives
|
5,414
|
|
|
6,047
|
|
Deferred rent
|
6,372
|
|
|
6,506
|
|
Deferred and stock-based compensation
|
4,912
|
|
|
4,516
|
|
Inventory cost capitalization
|
2,552
|
|
|
2,635
|
|
Other
|
3,384
|
|
|
4,931
|
|
|
148,847
|
|
|
137,899
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation and amortization
|
$
|
(2,920
|
)
|
|
$
|
(6,165
|
)
|
Prepaid expenses
|
(2,234
|
)
|
|
(2,219
|
)
|
State income taxes
|
(1,402
|
)
|
|
(1,450
|
)
|
|
(6,556
|
)
|
|
(9,834
|
)
|
Net deferred taxes before valuation allowance
|
142,291
|
|
|
128,065
|
|
Less: valuation allowance
|
(138,281
|
)
|
|
(123,920
|
)
|
Total net deferred tax asset
|
$
|
4,010
|
|
|
$
|
4,145
|
|
In accordance with ASC 740, “Income Taxes” (“ASC 740”), and as a result of continued pre-tax operating losses, a full valuation allowance was established by the Company during the fourth quarter of 2009 and continues to be maintained on all federal and the majority of state and local jurisdiction net deferred tax assets. The Company has discontinued recognizing income tax benefits until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. As of the year ended
February 1, 2014
, the Company did not record a valuation allowance against various deferred tax assets related to separate filing jurisdictions of
$4.0 million
as the Company concluded it is more likely than not these deferred tax assets will be utilized before expiration. As of the year ended
February 1, 2014
, federal valuation allowances and state valuation allowances against deferred tax assets were
$113.6 million
and
$24.7 million
, respectively. The Company recorded the
$14.4 million
change in valuation allowance with a continuing operations valuation allowance provision of
$13.3 million
. The
$1.1 million
difference between the balance sheet change in valuation allowance and continuing operations valuation allowance provision relates to the discontinued operations valuation provision and the federal benefit of the state valuation allowance provision.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
As of
February 1, 2014
, the Company had tax effected federal net operating losses (“NOLs”) of approximately
$100.7 million
available to offset future federal taxable income. In addition, as of February 1, 2014 the Company had tax effected state NOLs of approximately
$20.6 million
available to offset future state taxable income. Federal and state NOLs will expire at various times and in varying amounts in the Company's fiscal tax years
2014
through
2033
. The Company also had federal and state credit carryforwards of approximately
$0.4 million
and
$4.5 million
, respectively. The Company’s federal and state carryforwards will begin to expire in
2029
and
2017
, respectively.
The Company continues to monitor whether an ownership change has occurred under Internal Revenue Code Section 382 (“Section 382”). Based on available information at the reporting date, the Company believes it has not experienced an ownership change through the year ended
February 1, 2014
. The determination of whether or not an ownership change under Section 382 has occurred requires the Company to evaluate certain acquisitions and dispositions of ownership interests over a rolling
three
-year period. As a result, future acquisitions and dispositions could result in an ownership change of the Company under Section 382. If an ownership change were to occur, the Company’s ability to utilize federal net operating loss carryforwards could be significantly limited.
On September 13, 2013, the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the "tangible property regulations"). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014. The tangible property regulations will require the Company to make additional tax accounting method changes effective as of February 2, 2014; however, the Company does not anticipate the impact of these changes to be material to the Company’s consolidated financial position, its results of operations, or both.
As of
February 2, 2013
, unrecognized income tax benefits accounted for under ASC 740 totaled approximately
$0.3 million
. Of that amount, approximately
$0.2 million
represents unrecognized tax benefits that would, if recognized, favorably affect the Company’s effective income tax rate in any future periods. There were no material unrecognized income tax benefits as of
February 1, 2014
. The Company does not anticipate that total unrecognized tax benefits will change significantly in the next twelve months.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (including interest and penalties) at
February 1, 2014
,
February 2, 2013
, and
January 28, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
(In thousands)
|
Unrecognized tax benefits, opening balance
|
$
|
324
|
|
|
$
|
313
|
|
|
$
|
493
|
|
Gross increases — tax positions in prior period
|
—
|
|
|
11
|
|
|
271
|
|
Gross decreases — tax positions in prior period
|
(128
|
)
|
|
—
|
|
|
(30
|
)
|
Settlements
|
(185
|
)
|
|
—
|
|
|
(420
|
)
|
Lapse of statute of limitations
|
—
|
|
|
—
|
|
|
(1
|
)
|
Unrecognized tax benefits, ending balance
|
$
|
11
|
|
|
$
|
324
|
|
|
$
|
313
|
|
Estimated interest and penalties related to the underpayment of income taxes are included in income tax expense and totaled less than
$0.1 million
for fiscal
2013
. Accrued interest and penalties were not material as of
February 1, 2014
and
February 2, 2013
, respectively.
The Company files income tax returns in the U.S. federal jurisdiction and multiple other state and local jurisdictions. The Company is no longer subject to U.S. federal examinations for years prior to 2010 and, with few exceptions, is no longer subject to state and local examinations for years before 2009.
11. FAIR VALUE MEASUREMENTS
The Company measures its financial assets and liabilities at fair value on a recurring basis and measures its nonfinancial assets and liabilities at fair value as required or permitted.
Fair value is defined as the price that would be received pursuant to the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. In order to determine the fair value of certain assets and liabilities, the Company applies the three-level hierarchy of valuation techniques based upon whether the inputs reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect the Company’s assumptions of market participant valuation (unobservable inputs) and requires the use of observable inputs if such data is available without undue cost and effort. The hierarchy is as follows:
|
|
•
|
Level 1
— quoted prices for identical instruments in active markets.
|
|
|
•
|
Level 2
— inputs other than Level 1 inputs, which are observable either directly or indirectly.
|
|
|
•
|
Level 3
— unobservable inputs.
|
PACIFIC SUNWEAR OF CALIFORNIA, INC.
Level 3 assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may result in a significantly lower or higher fair value measurement.
Recurring Fair Value Measurements
Derivative Liability
The Series B Preferred shares are required to be measured at fair value each reporting period. The fair value of the Series B Preferred shares was estimated using an option-pricing model that requires Level 3 inputs, which are highly subjective and determined using the following significant assumptions:
|
|
|
|
|
|
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
Stock price
|
$2.88
|
|
$2.02
|
|
$2.02
|
Conversion price
|
$1.75
|
|
$1.75
|
|
$1.75
|
Expected volatility
|
73%
|
|
68%
|
|
64%
|
Expected term (in years)
|
7.9
|
|
8.9
|
|
9.9
|
Risk free interest rate
|
2.40%
|
|
2.04%
|
|
1.93%
|
Expected dividends
|
$—
|
|
$—
|
|
$—
|
The following table presents the activity recorded for the derivative liability during the fiscal periods as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
(In thousands)
|
Beginning balance
|
$
|
20,082
|
|
|
$
|
20,076
|
|
|
$
|
—
|
|
Issuance of Series B Preferred Stock
|
—
|
|
|
—
|
|
|
15,037
|
|
Loss on change in fair value
|
10,638
|
|
|
6
|
|
|
5,039
|
|
Ending balance
|
$
|
30,720
|
|
|
$
|
20,082
|
|
|
$
|
20,076
|
|
Changes in the fair value of the derivative liability are included in loss on derivative liability in the accompanying Consolidated Statement of Operations and Comprehensive Operations.
Money Market Funds
As of
February 1, 2014
, the Company held
$20.0 million
in money market funds compared to none held in money market funds at
February 2, 2013
. The fair value of money market funds is determined based on “Level 1” inputs in accordance with ASC 820, which consist of quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.
Non-Recurring Fair Value Measurements
On a non-recurring basis, using a discounted cash flow model, the Company measures certain of its long-lived assets at fair value based on Level 3 inputs including, but not limited to, moderate comparable store sales and margin growth, projected operating costs based primarily on historical trends, and an estimated weighted-average cost of capital rate. During fiscal
2013
,
2012
and
2011
the Company recorded
$3.2 million
,
$5.3 million
and
$14.8 million
of impairment charges in the accompanying Consolidated Statements of Operations and Comprehensive Operations.
Fair Value of Other Financial Instruments
The provisions of ASC 825, “Financial Instruments” (“ASC 825”), provide companies with an option to report selected financial assets and liabilities at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. We have not elected to apply the fair value option to any specific financial assets or liabilities.
The table below details the fair values and carrying values for mortgage debt and the components of long-term debt as of
February 1, 2014
, and
February 2, 2013
. The Company uses a discounted cash flow model to estimate the fair value of its debt for each reporting period, which contains certain Level 3 inputs, including but not limited to current market interest rates for similar long-term obligations. These fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of these financial instruments.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
|
|
|
|
|
|
|
|
|
|
February 1, 2014
|
|
Carrying value
|
|
Fair value
|
|
(In thousands)
|
Mortgage Debt
|
$
|
27,978
|
|
|
$
|
28,982
|
|
Term Loan
|
70,293
|
|
|
69,252
|
|
Term Loan discount
|
(11,582
|
)
|
|
(11,582
|
)
|
|
$
|
86,689
|
|
|
$
|
86,652
|
|
|
|
|
|
|
February 2, 2013
|
|
Carrying value
|
|
Fair value
|
|
(In thousands)
|
Mortgage Debt
|
$
|
28,554
|
|
|
$
|
28,452
|
|
Term Loan
|
65,338
|
|
|
64,206
|
|
Term Loan discount
|
(13,746
|
)
|
|
(13,746
|
)
|
|
$
|
80,146
|
|
|
$
|
78,912
|
|
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated fair value due to their short maturities. The fair value of long-term debt is estimated based on discounting future cash flows utilizing current rates for debt of a similar type and remaining maturity.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its retail stores and certain equipment under operating lease agreements expiring at various dates through January 2025. Many of its retail store leases require the Company to pay CAM charges, insurance, property taxes and percentage rent ranging from
2%
to
20%
when sales volumes exceed certain minimum sales levels. The initial terms of such leases are typically
8
to
10
years, many of which contain renewal options exercisable at the Company’s discretion. Most leases also contain rent escalation clauses that come into effect at various times throughout the lease term. Rent expense is recorded under the straight-line method over the life of the lease. Other rent escalation clauses can take effect based on changes in primary mall tenants throughout the term of a given lease. Many leases also contain cancellation or kick-out clauses in the Company’s favor that relieve the Company of any future obligation under a lease if specified criteria are met. These cancellation provisions typically apply if annual store sales levels do not exceed certain amounts or mall occupancy targets are not achieved within the first
36 months
of the lease. Generally, the Company is not required to make payments to landlords in order to exercise its cancellation rights under these provisions. The Wells Credit Facility and Term Loan do not preclude the transfer or disposal of assets related to the stores the Company is projecting to close by the end of fiscal 2014. None of the Company’s retail store leases contain purchase options.
As of
February 1, 2014
, minimum future rental commitments under non-cancelable operating leases were as follows (in thousands):
|
|
|
|
|
Fiscal year ending:
|
|
January 31, 2015
|
$
|
78,251
|
|
January 30, 2016
|
66,092
|
|
January 28, 2017
|
52,050
|
|
February 3, 2018
|
44,864
|
|
February 2, 2019
|
36,163
|
|
Thereafter
|
58,752
|
|
Total future operating lease commitments
|
$
|
336,172
|
|
The table above does not include CAM charges, which are also a required contractual obligation under many of the Company’s store operating leases. In many of the Company’s leases, CAM charges are not fixed and can fluctuate significantly from year to year for any particular store. Store rents, including CAM, were approximately
$134 million
,
$130 million
and
$131 million
in fiscal
2013
,
2012
and
2011
, respectively. Of these amounts,
$5 million
in
2013
,
$7 million
in
2012
, and
$4 million
in
2011
, were paid as percentage rent based on sales volume. The Company expects total CAM charges to continue to increase from year to year or as long-term leases come up for renewal at current market rates in excess of original lease terms.
Litigation
PACIFIC SUNWEAR OF CALIFORNIA, INC.
Charles Pfeiffer, individually and on behalf of other aggrieved employees vs. Pacific Sunwear of California, Inc. and Pacific Sunwear Stores Corp., Superior Court of California, County of Riverside, Case No. 1100527.
On January 13, 2011, the plaintiff in this matter filed a lawsuit against the Company under California’s private attorney general act alleging violations of California’s wage and hour, overtime, meal break and rest break rules and regulations, among other things. The complaint seeks an unspecified amount of damages and penalties. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. The Company is currently in the discovery phase of this case. As the ultimate outcome of this matter is uncertain, no amounts have been accrued by the Company as of the date of this report. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on the Company’s operating results.
Tamara Beeney, individually and on behalf of other members of the general public similarly situated vs. Pacific Sunwear of California, Inc. and Pacific Sunwear Stores Corporation, Superior Court of California, County of Orange, Case No. 30-2011-00459346-CU-OE-CXC.
On March 18, 2011, the plaintiff in this matter filed a putative class action lawsuit against the Company alleging violations of California’s wage and hour, overtime, meal break and rest break rules and regulations, among other things. The complaint seeks class certification, the appointment of the plaintiff as class representative, and an unspecified amount of damages and penalties. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. On February 21, 2014, the plaintiff filed her motion to certify a class with respect to several claims. The Company’s opposition to such motion must be filed on or before June 16, 2014. A hearing on the plaintiff’s motion will be held on August 13, 2014. As the ultimate outcome of this matter is uncertain, no amounts have been accrued by the Company as of the date of this report. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on the Company’s operating results.
The Company is also involved from time to time in other litigation incidental to its business. The Company currently cannot assess whether the outcome of current litigation will likely have a material adverse effect on its results of operations or financial condition and, from time to time, the Company 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 effect on the Company’s operating results.
Indemnities, Commitments and Guarantees
During the normal course of business, the Company agreed to certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities, commitments and guarantees 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 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 below.
Letters of Credit
The Company has issued guarantees in the form of commercial letters of credit, of which there were approximately
$10 million
and
$12 million
outstanding at
February 1, 2014
and
February 2, 2013
respectively, as security for merchandise shipments from overseas vendors. All in-transit merchandise covered by letters of credit is accrued for in accounts payable.
13. RETIREMENT PLANS
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. Vested participant balances are included in other long-term liabilities and were approximately
$2 million
as of
February 1, 2014
and
February 2, 2013
.
In fiscal 2009, the Company discontinued any matching contributions to the Executive Plan.
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
. The 401(k) Plan is funded by participant contributions and Company matching contributions. The Company made contributions to the 401(k) Plan, net of forfeitures, of approximately
$1.2 million
,
$1.2 million
, and
$1.1 million
in fiscal
2013
,
2012
, and
2011
, respectively.
14. SEGMENT REPORTING
The Company operates exclusively in the retail apparel industry. The Company designs, produces and distributes clothing and related products catering to teens and young adults through its primarily mall-based PacSun retail stores. The Company has identified
three
operating segments: PacSun stores, PacSun Outlet stores and pacsun.com. The three operating segments have been aggregated into
one
reportable segment based on the similar nature of products sold, production, merchandising and distribution processes involved, target customers, and economic characteristics among the three operating segments.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
15. DISCONTINUED OPERATIONS
In accordance with ASC Topic 205, “Presentation of Financial Statements-Discontinued Operations” (“ASC 205”), the Company has presented the results of operations of its closed stores as discontinued operations for all periods presented. During fiscal
2013
,
2012
and
2011
, the Company closed
30
,
92
and
119
underperforming stores, respectively. If the cash flow of the closed store was determined not to be significant to ongoing operations, and the cash inflows of nearby stores were not expected to increase significantly, the results of operations of the closed store are included in discontinued operations. The following table details the operating results included in discontinued operations for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
February 1, 2014
|
|
February 2, 2013
|
|
January 28, 2012
|
|
(In thousands)
|
Net sales
|
$
|
16,133
|
|
|
$
|
73,532
|
|
|
$
|
137,099
|
|
Cost of goods sold, including buying, distribution and occupancy costs
|
13,033
|
|
|
54,231
|
|
|
112,189
|
|
Gross margin
|
3,100
|
|
|
19,301
|
|
|
24,910
|
|
Selling, general and administrative expenses
|
4,864
|
|
|
18,719
|
|
|
50,834
|
|
Operating (loss) income
|
(1,764
|
)
|
|
582
|
|
|
(25,924
|
)
|
Income tax (benefit) expense
|
(19
|
)
|
|
74
|
|
|
(664
|
)
|
(Loss) income from discontinued operations
|
$
|
(1,745
|
)
|
|
$
|
508
|
|
|
$
|
(25,260
|
)
|
16. QUARTERLY FINANCIAL DATA
Certain items in the table below have been presented in accordance with ASC 205, which requires that operating results of any disposed assets or assets held for sale to be removed from income from continuing operations and reported as discontinued operations as described in Note 15. Net sales and gross margin data reflect continuing operations only. All amounts in the table below are expressed in thousands, except per share amounts:
PACIFIC SUNWEAR OF CALIFORNIA, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
FISCAL YEAR ENDED FEBRUARY 1, 2014:
|
|
|
|
|
|
|
|
Net sales
|
$
|
166,352
|
|
|
$
|
210,054
|
|
|
$
|
202,795
|
|
|
$
|
218,591
|
|
Gross margin
|
41,781
|
|
|
62,586
|
|
|
51,173
|
|
|
43,704
|
|
(Loss) income from continuing operations
|
(24,054
|
)
|
|
(18,604
|
)
|
|
17,715
|
|
|
(22,033
|
)
|
Loss from discontinued operations, net of tax effects
|
(127
|
)
|
|
(641
|
)
|
|
(473
|
)
|
|
(504
|
)
|
Net (loss) income
|
(24,181
|
)
|
|
(19,245
|
)
|
|
17,242
|
|
|
(22,537
|
)
|
(Loss) income per share from continuing operations:
|
|
|
|
|
|
|
|
Basic
|
(0.35
|
)
|
|
(0.27
|
)
|
|
0.26
|
|
|
(0.32
|
)
|
Diluted
|
(0.35
|
)
|
|
(0.27
|
)
|
|
0.24
|
|
|
(0.32
|
)
|
Loss per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Diluted
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
(0.35
|
)
|
|
(0.28
|
)
|
|
0.25
|
|
|
(0.33
|
)
|
Diluted
|
(0.35
|
)
|
|
(0.28
|
)
|
|
0.23
|
|
|
(0.33
|
)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
68,242
|
|
|
68,464
|
|
|
68,568
|
|
|
68,586
|
|
Diluted
|
68,242
|
|
|
68,464
|
|
|
75,515
|
|
|
68,586
|
|
|
|
|
|
|
|
|
|
FISCAL YEAR ENDED FEBRUARY 2, 2013:
|
|
|
|
|
|
|
|
Net sales
|
$
|
158,377
|
|
|
$
|
192,838
|
|
|
$
|
210,701
|
|
|
$
|
222,829
|
|
Gross margin
|
37,134
|
|
|
52,848
|
|
|
59,218
|
|
|
47,146
|
|
(Loss) income from continuing operations
|
(15,217
|
)
|
|
(18,278
|
)
|
|
3,133
|
|
|
(22,220
|
)
|
(Loss) income from discontinued operations, net of tax effects
|
(406
|
)
|
|
740
|
|
|
(2,185
|
)
|
|
2,359
|
|
Net (loss) income
|
(15,623
|
)
|
|
(17,538
|
)
|
|
948
|
|
|
(19,861
|
)
|
(Loss) income per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
(0.22
|
)
|
|
(0.27
|
)
|
|
0.04
|
|
|
(0.32
|
)
|
Diluted
|
(0.22
|
)
|
|
(0.27
|
)
|
|
0.04
|
|
|
(0.32
|
)
|
(Loss) income per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
(0.01
|
)
|
|
0.01
|
|
|
(0.03
|
)
|
|
0.03
|
|
Diluted
|
(0.01
|
)
|
|
0.01
|
|
|
(0.03
|
)
|
|
0.03
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
(0.23
|
)
|
|
(0.26
|
)
|
|
0.01
|
|
|
(0.29
|
)
|
Diluted
|
(0.23
|
)
|
|
(0.26
|
)
|
|
0.01
|
|
|
(0.29
|
)
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
67,583
|
|
|
67,738
|
|
|
67,914
|
|
|
68,005
|
|
Diluted
|
67,583
|
|
|
67,738
|
|
|
71,360
|
|
|
68,005
|
|
Income (loss) per share amounts are computed for each of the quarters presented based on basic and diluted shares outstanding and, therefore, may not sum to the totals for the year.