<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 24, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
________________
COMMISSION FILE NUMBER 0-19402
VANS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0272893
(STATE OR OTHER JURISDICTION I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
2095 NORTH BATAVIA STREET
ORANGE, CALIFORNIA 92665-3101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 974-7414
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 9,739,084 shares of
Common Stock, $.001 par value, as of April 4, 1996.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 24, 1996 AND MAY 31, 1995
<TABLE>
<CAPTION>
FEBRUARY 24, MAY 31,
1996 1995
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<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 560,795 $ 3,279,843
Accounts receivable, net of allowance for doubtful accounts and
sales, returns and allowances of $1,061,179 and $812,631 at
February 24, 1996 and May 31, 1995, respectively............. 18,441,931 12,584,244
Inventories (note 2)............................................ 17,529,043 16,997,738
Income taxes receivable......................................... -- 3,530,128
Deferred income taxes........................................... 1,615,000 1,615,000
Prepaid expenses................................................ 969,591 498,555
----------- -----------
Total current assets.................................... 39,116,360 38,505,508
Property, plant and equipment, net................................ 10,753,385 10,747,450
Excess of cost over the fair value of net assets acquired, net of
accumulated amortization of $32,538,807 and $31,966,872 at
February 24, 1996 and May 31, 1995, respectively................ 16,700,593 17,272,527
Deferred financing costs, net of accumulated amortization of
$324,547 and $270,454 at February 24, 1996 and May 31, 1995,
respectively.................................................... 252,396 306,489
Property held for sale............................................ 4,687,106 5,299,771
Other assets...................................................... 1,199,216 934,290
----------- -----------
$ 72,709,056 $73,066,035
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings........................................... $ 5,953,408 $ 2,608,173
Current portion of senior notes................................. 5,800,000 7,025,069
Accounts payable................................................ 6,352,877 8,579,473
Accrued payroll and related expenses............................ 1,851,737 2,026,229
Restructuring costs............................................. 2,364,180 6,083,934
Accrued workers' compensation................................... 1,012,902 1,540,046
Accrued interest................................................ 168,829 907,660
Income taxes payable............................................ 1,756,109 --
----------- -----------
Total current liabilities............................... 25,260,042 28,770,584
Deferred income taxes............................................. 1,615,000 1,615,000
Capital lease obligation.......................................... 333,900 441,384
Long-term credit facility......................................... 4,647,745 --
Senior notes...................................................... 17,400,000 21,974,931
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49,256,687 52,801,899
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Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized
(1,500,000 shares designated as Series A Junior Participating
Preferred Stock), none issued and outstanding................ -- --
Common stock, $.001 par value, 20,000,000 shares authorized,
9,730,917 and 9,639,877 shares issued and outstanding at
February 24, 1996 and May 31, 1995, respectively............. 9,731 9,640
Additional paid-in capital...................................... 47,357,631 46,803,649
Accumulated deficit............................................. (23,914,993) (26,549,153)
----------- -----------
23,452,369 20,264,136
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$ 72,709,056 $73,066,035
=========== ===========
</TABLE>
2
<PAGE> 3
VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THIRTEEN WEEKS ENDED FEBRUARY 24, 1996 AND FEBRUARY 25, 1995
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
FEBRUARY 24, FEBRUARY 25,
1996 1995
------------ ------------
<S> <C> <C>
Net sales......................................................... $ 27,931,868 $ 21,732,576
Cost of sales..................................................... 16,752,503 12,634,862
----------- -----------
Gross profit............................................ 11,179,365 9,097,714
Operating expenses:
Selling and distribution........................................ 5,180,464 4,099,222
Marketing, advertising and promotion............................ 2,744,056 1,703,015
General and administrative...................................... 1,113,431 1,506,863
Provision for doubtful accounts................................. 65,830 448,482
Amortization of intangibles..................................... 190,645 410,332
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Total operating expenses................................ 9,294,426 8,167,914
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Earnings from operations................................ 1,884,939 929,800
Interest income................................................... 59,478 9,668
Interest and debt expense......................................... (939,567) (714,032)
Other income...................................................... 496,043 428,542
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Earnings before income taxes............................ 1,500,893 653,978
Income tax expense................................................ 600,357 261,591
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Net earnings............................................ 900,536 392,387
=========== ===========
Per share information (note 3):
Primary:
Earnings per share.............................................. $ 0.09 $ 0.04
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Weighted average common and common equivalent shares............ 10,454,371 9,863,304
=========== ===========
Fully diluted:
Earnings per share.............................................. $ 0.08 $ 0.04
=========== ===========
Weighted average common and common equivalent shares............ 10,613,426 9,894,394
=========== ===========
</TABLE>
3
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VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THIRTY-NINE WEEKS ENDED FEBRUARY 24, 1996 AND FEBRUARY 25, 1995
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
FEBRUARY 24, FEBRUARY 25,
1996 1995
------------ ------------
<S> <C> <C>
Net sales......................................................... $ 85,433,783 $ 63,469,566
Cost of sales..................................................... 52,289,897 37,215,422
----------- -----------
Gross profit............................................ 33,143,886 26,254,144
Operating expenses:
Selling and distribution........................................ 17,518,527 12,842,232
Marketing, advertising and promotion............................ 5,816,744 3,559,091
General and administrative...................................... 3,645,049 4,606,734
Provision for doubtful accounts................................. 245,086 518,320
Amortization of intangibles..................................... 571,935 1,230,996
----------- -----------
Total operating expenses................................ 27,797,341 22,757,373
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Earnings from operations................................ 5,346,545 3,496,771
Interest income................................................... 59,478 81,634
Interest and debt expense......................................... (2,452,216) (2,142,089)
Other income...................................................... 1,436,462 1,549,207
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Earnings before income taxes............................ 4,390,269 2,985,523
Income tax expense................................................ 1,756,109 1,194,210
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Net earnings............................................ 2,634,160 1,791,313
=========== ===========
Per share information (note 3):
Primary:
Earnings per share........................................... $ 0.26 $ 0.18
=========== ===========
Weighted average common and common equivalent shares......... 10,199,937 9,830,478
=========== ===========
Fully diluted:
Earnings per share........................................... $ 0.25 $ 0.18
=========== ===========
Weighted average common and common equivalent shares......... 10,613,426 9,894,394
=========== ===========
</TABLE>
4
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VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-NINE WEEKS ENDED FEBRUARY 24, 1996 AND FEBRUARY 25, 1995
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
---------------------------
FEBRUARY 24, FEBRUARY 25,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................................... $ 2,634,160 $ 1,791,313
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization................................. 2,378,234 3,287,362
Amortization of deferred financing costs...................... 54,093 54,093
Provision for losses on accounts receivable and sales
returns...................................................... 245,086 518,320
Provision for losses on inventories........................... 300,000
Changes in assets and liabilities:
Accounts receivable......................................... (6,106,235) (379,994)
Income taxes receivable..................................... 3,530,128 245,827
Inventories................................................. (531,305) (10,264,123)
Prepaid expenses............................................ (471,036) (1,230,091)
Other assets................................................ (264,926) 1,836,889
Accounts payable............................................ (2,226,596) 3,540,717
Accrued payroll and related expenses........................ (174,492) (1,634,547)
Accrued workers' compensation............................... (527,144) (12,974)
Restructuring costs......................................... (3,719,754) --
Accrued interest............................................ (738,831) (744,169)
Income taxes payable........................................ 1,756,109 --
------------ ------------
Net cash used in operating activities.................... (4,162,509) (2,691,377)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................... (1,913,251) (2,489,036)
Proceeds from sale of property held for sale..................... 717,143 --
------------ ------------
Net cash used in investing activities.................... (1,196,108) (2,489,036)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings.............................. 3,345,235 1,500,000
Payments on capital lease obligations............................ (107,484) --
Proceeds from long-term credit facility.......................... 4,647,745 --
Principal payments on senior notes............................... (5,800,000) --
Proceeds from issuance of common stock, net...................... 554,073 244,410
------------ ------------
Net cash provided by financing activities................ 2,639,569 1,744,410
------------ ------------
Net decrease in cash and cash equivalents................ (2,719,048) (3,436,003)
Cash and cash equivalents, beginning of period................... 3,279,843 7,129,172
------------ ------------
Cash and cash equivalents, end of period......................... $ 560,795 $ 3,693,169
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION -- AMOUNTS PAID FOR:
Interest......................................................... $ 2,912,619 $ 2,786,800
Income taxes..................................................... $ 41,265 $ 914,969
</TABLE>
5
<PAGE> 6
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Vans, Inc. (the "Company") manufactures and markets high-quality casual
shoes for men, women and children under the brand name "Vans."* The Company is
the successor to Van Doren Rubber Company, Inc., a California corporation that
was founded in 1966 ("VDRC"). VDRC was merged with and into the Company in
connection with the Company's initial public offering of Common Stock in August
1991.
The financial statements included herein are unaudited and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods presented. The results of
operations for the current interim periods are not necessarily indicative of
results to be expected for the current year.
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
2. Inventories are comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY
24, MAY 31,
1996 1995
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<S> <C> <C>
Raw materials............................................... $ 2,016,152 $ 1,978,760
Work-in-process............................................. 81,337 695,995
Finished goods.............................................. 16,031,554 14,922,983
----------- -----------
18,129,043 17,597,738
Inventory reserves.......................................... (600,000) (600,000)
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$17,529,043 $16,997,738
========== ==========
</TABLE>
3. Primary earnings per share are based on the weighted average number of
shares outstanding during each period and the assumed exercise of dilutive stock
options less the number of treasury shares assumed to be purchased from the
proceeds using the average market price of the Company's Common Stock during the
period. Fully diluted earnings per share are based on the weighted average
number of shares outstanding during each period and the assumed exercise of
dilutive stock options less the number of treasury shares assumed to be
purchased from the proceeds using the higher of the average or ending market
price of the Company's Common Stock during the period.
4. Subsequent to February 24, 1996 the Company obtained an additional
secured credit facility from Ssangyong U.S.A. whereby Ssangyong U.S.A. will
finance the Company's purchases of snowboard boots (the "Snowboard Boot
Facility"). Under the Snowboard Boot Facility, Ssangyong U.S.A. will purchase,
transport, warehouse, ship and collect payment for the snowboard boots, and will
be reimbursed for the sum of: (i) its out-of-pocket costs incurred in connection
with the foregoing (the "Ssangyong Costs"); (ii) interest on the Ssangyong Costs
at the prime rate established by Citibank N.A. from time to time; and (iii) a
handling fee equal to 3.5% of the F.O.B. price of the boots purchased. The
Snowboard Boot Facility is secured by a first priority security interest in the
boot inventory and the accounts receivable resulting from sales thereof, and a
second priority security interest in the Company's general intangibles. At no
time may the sum of (i) the outstanding balance of the Ssangyong Costs, plus
(ii) aggregate outstanding letters of credit under the Snowboard Boot Facility,
minus letters of credit opened by the Company's foreign distributors, exceed $7
million. The Snowboard Boot Facility expires on March 28, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Vans, Inc. is a leading designer, manufacturer and distributor of a
collection of high quality casual and active-casual footwear for men, women and
children, as well as performance footwear for enthusiasts of
- ---------------
*Vans is a registered trademark of Vans, Inc.
6
<PAGE> 7
outdoor sports such as skateboarding, snowboarding and BMX bicycling. The
Company is the successor to Van Doren Rubber Company, Inc., a California
corporation that was founded in 1966 ("VDRC"). VDRC was acquired by the Company
in February 1988 in a series of related transactions for a total cost (including
assumed liabilities) of $74.4 million (the "Acquisition"). The Acquisition
resulted in the recognition of approximately $48.0 million of goodwill by the
Company (the "Acquisition Goodwill"). VDRC was merged with and into the Company
in August 1991 at the time of the Company's initial public offering.
Prior to fiscal 1995, the Company manufactured all of its footwear at two
domestic manufacturing facilities located in Southern California. As part of the
Company's strategic redirection, in the first quarter of fiscal 1995 the Company
began to source from South Korea its line of casual and performance footwear
known as the International Collection. The success of the International
Collection created a domestic manufacturing overcapacity problem for the Company
which contributed to an overstock in domestic inventories. In the second quarter
of fiscal 1995, the Company increased the inventory valuation allowance from
$324,772 to approximately $600,000 in order to help mitigate the risks
associated with increased inventory balances. In the third quarter of fiscal
1995, the Company took steps to adjust its U.S. production; however, customer
demand for the International Collection continued to grow. In the fourth quarter
of fiscal 1995, it first became apparent that domestic manufacturing workforce
reductions would not be sufficient to address the increase in orders for the
International Collection and the decrease in demand for domestically-produced
footwear, and the Company determined that a plant closure would be required.
Therefore, on May 30, 1995 the Board of Directors voted to close its Orange,
California manufacturing facility (the "Orange Facility") and in July 1995, the
Company closed the Orange Facility. Accordingly, the Company recognized
restructuring costs of $30.0 million in the fourth quarter of fiscal 1995. Of
that amount: (i) $20.0 million represented a write-off of the goodwill allocated
to the manufacturing know-how associated with the Orange Facility (the "Orange
Facility Goodwill"); and (ii) $10.0 million represented restructuring costs to
close the Orange Facility. All remaining U.S. production of the Company was
shifted to the Company's smaller Vista, California manufacturing facility (the
"Vista Facility").
The Company is attempting to sell the Orange Facility and anticipates that,
if such sale is consummated, its administrative personnel will be primarily
relocated to space near the Company's City of Industry, California distribution
center. The Company is in preliminary negotiations with several potential buyers
of the Orange Facility. The Company cannot currently estimate when such
negotiations may result in a purchase agreement, if at all. The expected cost of
disposal of the Orange Facility is estimated at approximately $300,000 which
consists primarily of a 6% sales commission and legal fees. As of February 24,
1996, the property held for sale is recorded at its estimated net realizable
value of $4,687,000, inclusive of an estimated loss reserve of $3,271,000. The
Company believes that the property is fairly stated at its lower of cost or
market.
In the fourth quarter of fiscal 1995, the Company wrote-down $6.3 million
of inventory. The write-down of inventory consisted of $4.5 million of
domestically-produced finished goods and $1.8 million of raw material inventory.
Such inventory became impaired as a result of the following events which
occurred in the fourth quarter of fiscal 1995: (i) the expanding sales of the
International Collection; (ii) the slowing of sales of domestically-produced
footwear and related price erosion and discounting; (iii) the decrease in
domestic production as a result of the above and the subsequent closure of the
Orange Facility; and (iv) the discontinuance of certain domestically-produced
product.
Management of the Company, with the assistance of outside valuation
consultants, calculated the amount of the Orange Facility Goodwill based on an
analysis of the Company's business at the date of the Acquisition. At that time,
the Company's strategy was one of manufacturing efficiency, and the Company's
reputation was based on fast-turn, made-to-order manufacturing. The Company's
fixed assets as of the date of the Acquisition were primarily deployed to
manufacture footwear, and the Company's chain of retail stores served as outlets
for the footwear manufactured at the Orange Facility.
Based on this analysis, and a similar analysis of the other components of
the Acquisition Goodwill (trademarks and dealer relationships), management
determined that approximately 53% of such Acquisition Goodwill should have been
allocated to the manufacturing know-how associated with the Orange Facility at
the date of the Acquisition. The unamortized portion of the Orange Facility
Goodwill at May 31, 1995 was
7
<PAGE> 8
$20.0 million, and was written-off in connection with the closure of the Orange
Facility.
RESULTS OF OPERATIONS
THIRTEEN-WEEKS ENDED FEBRUARY 24, 1996 ("Q3 FISCAL 1996") COMPARED TO
THIRTEEN-WEEKS ENDED FEBRUARY 25, 1995 ("Q3 FISCAL 1995")
NET SALES
Net sales for Q3 fiscal 1996 increased 28.5% to $27.9 million, compared to
$21.7 million for the same period in fiscal 1995. The sales increase was
primarily driven by (i) domestic and international sales of the International
Collection, which increased from approximately $5.3 million, or 24.4% of net
sales, for Q3 fiscal 1995, to approximately $18.3 million, or 65.5% of net
sales, for Q3 fiscal 1996; and (ii) the continued strengthening of the VANS
brand name worldwide, which led to a 152.8% increase in International sales on a
period-to-period basis, as discussed below.
Sales to national accounts were relatively even at $11.8 million, compared
to $12.0 million for the comparable period of fiscal 1995. National sales were
adversely impacted by: (i) the Company's on-going liquidity constraints, which
forced the Company to delay purchases of International Collection footwear in Q3
fiscal 1996 (see "-- Liquidity and Capital Resources"); (ii) the generally poor
retail environment that existed during this period; and (iii) the existence of a
relatively large amount of close-out sales in Q3 fiscal 1995, which resulted
from the Company's inventory imbalance between domestic and foreign-produced
footwear. The Company did not experience a similar amount of close-out sales in
Q3 fiscal 1996.
Sales to international distributors increased 152.8% to $8.8 million for Q3
Fiscal 1996, compared to $3.5 million for the same period a year ago. Increased
sales to Germany, France, Canada and the United Kingdom were the principal
reasons for the increase.
Sales through the Company's 80-store retail chain (as of February 24, 1996)
increased 17.1% to $7.3 million, up from $6.2 million for Q3 fiscal 1995.
Comparable store sales (sales at stores open one year or more) were up 10.5% for
the quarter. Comparable store sales increased for each of the Company's
conventional mall and free standing stores, factory outlet and clearance stores.
8
<PAGE> 9
GROSS PROFIT
Gross profit increased 22.9% to $11.2 million in Q3 fiscal 1996 from $9.1
million in Q3 fiscal 1995. As a percentage of net sales, gross profit decreased
to 40.0% for Q3 fiscal 1996 from 41.9% for the comparable period a year ago.
Margins were adversely impacted by: (i) a significant shift in the sales mix of
the Company's distribution channels towards lower gross margin sales to
international distributors who absorb certain operating expenses which would
otherwise be absorbed by the Company; and (ii) increased discounts offered to
customers who book orders either 120 days or 150 days in advance under the
Company's new futures program. These decreases were partially offset by the
higher gross margins associated with sales of the International Collection
throughout all of the Company's distribution channels.
EARNINGS FROM OPERATIONS
Earnings from operations increased 102.7% to $1.9 million in Q3 fiscal 1996
from $930,000 in Q3 fiscal 1995. As a percentage of sales, earnings from
operations increased to 6.7% in Q3 fiscal 1996 from 4.3% in the comparable
period in fiscal 1995. Operating expenses increased 13.8% to $9.3 million in Q3
fiscal 1996 from $8.2 million in Q3 fiscal 1995. The increase was primarily the
result of the following factors: (i) increased distribution costs related to the
operation of the Company's City of Industry distribution facility, which was not
in operation in Q3 fiscal 1995; (ii) increased costs related to the operation of
five new out-of-state retail stores that did not exist in Q3 fiscal 1995; and
(iii) increased advertising expenditures to support the Company's snowboard boot
line. These increases were partially offset by a decrease in general and
administrative expenses related primarily to reduced personnel costs and a
decrease in amortization of intangibles from $410,000 to $191,000 on a
period-to-period basis as a result of the write-off of the Orange Facility
Goodwill at May 31, 1995. See "-- Overview."
INTEREST AND DEBT EXPENSE
Interest and debt expense increased to approximately $940,000 in Q3 fiscal
1996, as compared to $714,000 in Q3 fiscal 1995. The increase was attributable
to interest expense payments made to the Company's secured and unsecured lenders
on debt that did not exist in Q3 fiscal 1995. These increases were partially
offset by the lower interest expense resulting from the payment of $5.8 million
of principal of the Senior Notes made on August 1, 1995. See "-- Liquidity and
Capital Resources."
OTHER INCOME
Other income increased 15.8% to $496,000 in Q3 fiscal 1996 from $429,000 in
Q3 fiscal 1995, primarily due to increased royalty income.
INCOME TAX EXPENSE
Income tax expense increased to approximately $600,000 for Q3 fiscal 1996
from approximately $262,000 for Q3 fiscal 1995, as a result of increased
earnings.
THIRTY-NINE WEEKS ENDED FEBRUARY 24, 1996 COMPARED TO THIRTY-NINE WEEKS ENDED
FEBRUARY 25, 1995
NET SALES
Net sales increased 34.6% to $85.4 million in the first thirty-nine weeks
of fiscal 1996 from $63.5 million in the first thirty-nine weeks of fiscal 1995.
The sales increase was primarily driven by the Company's product line expansion
through the introduction of the International Collection and snowboard boots,
which represent new markets and product lines for the Company as well as
increased sales through each of the Company's three distribution channels.
Domestic and international sales of the International Collection increased
from approximately $9.4 million, or 14.8% of net sales, for the first
thirty-nine weeks of fiscal 1995 to approximately $47.4 million, or 55.5% of net
sales, for the first thirty-nine weeks of fiscal 1996, and sales of the
Company's recently introduced
9
<PAGE> 10
line of snowboard boots increased from approximately $276,000 for the first
thirty-nine weeks of fiscal 1995, or 0.4% of net sales, to approximately $7.1
million, or 8.3% of net sales, for the comparable current fiscal period.
Sales to national accounts for the first thirty-nine weeks of fiscal 1996
increased 31.2% to $46.0 million, compared to $35.0 million for the comparable
period in fiscal 1995. Increased volume of sales to existing accounts were
primarily responsible for the increase. Sales to national accounts were
relatively even in the third fiscal quarter of the period, compared to the same
period of the previous year due to: (i) the Company's working capital
constraints, which forced the Company to delay purchases of International
Collection goods in the period (see "--Liquidity and Capital Resources"); (ii)
the generally soft national retail environment that existed during the third
fiscal quarter; and (iii) the existence of a relatively large amount of
close-out sales in the third quarter of fiscal 1995, which resulted from the
Company's inventory imbalance between domestic and foreign-produced footwear.
See "--Overview." The Company did not experience a similar amount of close-out
sales in the third quarter of fiscal 1996.
Sales to international distributors increased 67.9% to $18.2 million for
the first thirty-nine weeks of fiscal 1996 from $10.8 million for the same
period of fiscal 1995. Increased sales to Germany, France, Canada and the United
Kingdom were the principal reasons for the increase.
Sales through the Company's 80-store retail chain (as of February 24, 1996)
increased 20.9% to $21.3 million during the first thirty-nine weeks of fiscal
1996, as compared to $17.6 million for the first thirty-nine weeks of fiscal
1995. Comparable store sales (sales at stores open one year or more) increased
11.4% from the prior period. Comparable store sales increased for each of the
Company's conventional mall and free standing stores, factory outlet and
clearance stores.
GROSS PROFIT
Gross profit increased 26.2% to $33.1 million in the first thirty-nine
weeks of fiscal 1996 from $26.3 million in the first thirty-nine weeks of fiscal
1995. As a percentage of net sales, gross profit decreased to 38.8% for the
first thirty-nine weeks of fiscal 1996 from 41.4% for the comparable period a
year ago. Margins were adversely impacted by: (i) the operation of the Orange
Facility for the first two months of fiscal 1996, as required by the Federal
Worker Adjustment and Retraining Notification Act, after announcing the closure
of such facility (see "--Overview"); (ii) the ramp-up of production at the Vista
Facility due to the transfer of production from the Orange Facility (see
"--Overview"); (iii) a significant shift in the sales mix of the Company's
distribution channels towards lower gross margin sales to international
distributors who absorb certain operating expenses which would otherwise be
absorbed by the Company; (iv) a shift in product mix to lower gross margin
snowboard boots; and (v) increased discounts offered to customers who book
orders either 120 days or 150 days in advance under the Company's new futures
program. These decreases were partially offset by the higher gross margins
associated with sales of International Collection footwear throughout all of the
Company's distribution channels.
EARNINGS FROM OPERATIONS
Earnings from operations increased 52.9% to $5.3 million in the first
thirty-nine weeks of fiscal 1996 from $3.5 million in the first thirty-nine
weeks of fiscal 1995. As a percentage of net sales, earnings from operations
were relatively even at 6.3% for the first thirty-nine weeks of fiscal 1996
versus 5.5% for the comparable period in fiscal 1995. Operating expenses
increased 22.1% to $27.8 million in the first thirty-nine weeks of fiscal 1996
from $22.8 million in the first thirty-nine weeks of fiscal 1995. The increase
was primarily the result of the following factors: (i) a $2.3 million increase
in marketing and advertising expense to support the Company's sales growth and
the introduction of the snowboard boot line; (ii) increased distribution costs
related to the operation of the Company's City of Industry distribution
facility, which did not exist in the first thirty-nine weeks of fiscal 1995;
(iii) increased commissions to independent sales representatives due to
increased sales to national accounts; and (iv) costs of increased personnel,
primarily in the design and marketing groups, to manage the Company's sales
growth. These increases were partially offset by a decrease in the amortization
of intangibles from $1.2 million to $572,000 on a period-to-period basis as a
result of the write-off of the Orange Facility Goodwill on May 31, 1995. See
"--Overview."
10
<PAGE> 11
OTHER INCOME
Other income decreased $113,000 to $1.4 million in the first thirty-nine
weeks of fiscal 1996 from the first thirty-nine weeks of fiscal 1995, due to the
absence of a one-time benefit of $572,000 of litigation recovery received in the
second quarter of fiscal 1995, partially offset by an increase in royalty
income.
INTEREST AND DEBT EXPENSE
Interest and debt expense increased by $310,000 to $2.5 million in the
first thirty-nine weeks of fiscal 1996 from the first thirty-nine weeks of
fiscal 1995, due to higher levels of secured and unsecured debt. These increases
were partially offset by the lower interest expense resulting from the repayment
of $5.8 million of principal of the Company's 9.6% senior notes due August 1,
1999 (the "Senior Notes") made on August 1, 1995.
INCOME TAX EXPENSE
Income tax expense increased to $1.8 million for the first thirty-nine
weeks of fiscal 1996 from $1.2 million for the comparable period of the prior
fiscal year, as a result of increased earnings.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company finances its operations with a combination of cash flow from
operations and borrowings. The Company experienced an outflow of cash from
operating activities of $4.2 million during the first thirty-nine weeks of
fiscal 1996, compared to an outflow of cash of $2.7 million for the same period
in fiscal 1995. The cash used in operations was primarily the result of: (i) an
increase in net accounts receivable to $18.4 million at February 24, 1996 from
$12.6 million at May 31, 1995, as described below; (ii) an increase in inventory
to $17.5 million at February 24, 1996 from $17.0 million at May 31, 1995, as
described below; (iii) an increase in prepaid expenses; and (iv) decreases in
the restructuring cost accrual, accounts payable, accrued interest and accrued
workers' compensation. Cash used in operations was partially offset by the
decrease in income taxes receivable and an increase in income taxes payable.
The increase in accounts receivable was primarily due to: (i) the increase
in net sales the Company experienced during the first thirty-nine weeks of
fiscal 1996 and the timing of such sales; (ii) sales of snowboard boots to
specialty retailers which have longer payment terms than the Company's
traditional distribution channels; and (iii) increased sales to accounts in the
Eastern United States which receive payment terms of an additional 15 days.
The increase in inventories was primarily due to: (i) an increased number
of finished goods held for sale at the Company's retail stores in order to
improve in-stock selection and availability; (ii) an increased average cost of
finished goods resulting from a product mix shift to include higher cost
snowboard boots; and (iii) an increased number of International Collection shoes
needed to support increased sales volume. These increases in inventory were
partially offset by a decrease in the Company's work-in-process inventory and a
decrease in domestically-produced footwear in connection with the closing of the
Orange Facility. See "--Overview."
The Company had a net outflow of cash from investing activities of $1.2
million during the first thirty-nine weeks of fiscal 1996, compared to an
outflow of cash of $2.5 million for the same period in fiscal 1995, due to an
increase in capital expenditures. Capital expenditures for the first thirty-nine
weeks of fiscal 1996 primarily consisted of: (i) the ramp-up of production at
the Vista Facility in connection with the Company's restructuring (see
"--Overview"); (ii) the opening of two new retail mall stores and five new
factory outlet stores; and (iii) the remodeling of three existing mall stores.
The Company had a net inflow of cash from financing activities of $2.6
million during the first thirty-nine weeks of fiscal 1996, compared to an inflow
of cash of $1.7 million for the same period in fiscal 1995. The cash provided by
financing activities was primarily the result of $4.6 million of proceeds from
the Secured Line of Credit and $3.3 million of proceeds from the Unsecured
Credit Facility. See "--Borrowings." Cash provided
11
<PAGE> 12
by financing activities was partially offset by the repayment of $5.8 million of
the principal amount of the Senior Notes on August 1, 1995.
The Company experienced an outflow of cash from operating activities of
$4.2 million in fiscal 1995, compared to an inflow of cash from operations of
$4.0 million and $11.2 million in fiscal 1994 and 1993, respectively. Cash used
in operations in fiscal 1995 was the result of the net loss incurred, net of
non-cash items, primarily the goodwill write-off, depreciation and amortization
and restructuring costs; and increases in inventories, income taxes receivable
and deferred income taxes. Cash used in operations in fiscal 1995 was partially
offset by a decrease in other assets and increases in accounts payable. Cash
provided by operations in fiscal 1994 was primarily the result of net earnings
and increases in accrued payroll and related expenses and decreases in income
taxes receivable and deferred taxes, offset by increases in accounts receivable
and inventories and a decrease in accounts payable. Cash provided from
operations in fiscal 1993 was primarily the result of net earnings and increases
in accounts payable and accrued workers' compensation benefits, and decreases in
marketable securities and inventories, offset by increases in income taxes
receivable and deferred income taxes and decreases in accrued payroll and
related expenses, accrued bonuses and income taxes payable.
The Company had a net outflow of cash from investing activities for each of
the three years ended May 31, 1995, principally due to capital expenditures.
The Company had a net inflow of cash from financing activities in each of
the three years ended May 31, 1995, primarily due to net proceeds from the
issuance of Common Stock in all three years and, in fiscal 1995, proceeds from
short-term borrowings.
BORROWINGS
The Secured Line of Credit was established in July 1995, and, as amended,
permits the Company to borrow amounts up to the lesser of 80% of eligible
accounts receivable or $10 million. The Company pays interest on the debt
incurred under the Secured Line of Credit at the prime rate established by the
Bank from time to time. The Company has the option to pay interest at a rate
tied to the LIBOR rate. Under the agreement establishing the Secured Line of
Credit, as amended, the Company must maintain certain financial covenants and is
prohibited from paying dividends or making any other distribution without the
Bank's consent. Debt incurred under the Secured Line of Credit is due and
payable on July 1, 1997. At February 24, 1996, the Company had drawn down $4.6
million under the Secured Line of Credit (on such date, the prime rate was 8.25%
per annum). The Company intends to repay the outstanding balance under the
Secured Line of Credit with the net proceeds from this Offering. See "Use of
Proceeds."
The Unsecured Credit Facility with Ssangyong is used to support the
purchase of footwear. The interest rate on debt incurred under the Unsecured
Credit Facility increases based on the amount of debt incurred. Assuming full
utilization of the Unsecured Credit Facility, the Company will pay an effective
interest rate of 14.8% per annum. Balances under the Unsecured Credit Facility
are due within 60 days from the date of incurrence. Interest on amounts
outstanding under the Unsecured Credit Facility is calculated on the full
maturity period regardless of when payment is received within the 60 day term of
each loan. The Unsecured Credit Facility expires on April 26, 1997. Pursuant to
an amendment to the agreement with Ssangyong, the Unsecured Credit Facility was
increased from $4.0 to $6.0 million. The Company intends to utilize the improved
liquidity that will result from payment of the outstanding balance due under the
Secured Line of Credit with the net proceeds from this Offering to repay
balances outstanding under the Unsecured Credit Facility as they become due. See
"Use of Proceeds."
The Company recently obtained an additional secured credit facility from
Ssangyong U.S.A. whereby Ssangyong U.S.A. will finance the Company's purchases
of snowboard boots (the "Snowboard Boot Facility"). Under the Snowboard Boot
Facility, Ssangyong U.S.A. will purchase, transport, warehouse, ship and collect
payment for the snowboard boots, and will be reimbursed for the sum of: (i) its
out-of-pocket costs incurred in connection with the foregoing (the "Ssangyong
Costs"); (ii) interest on the Ssangyong Costs at the prime rate established by
Citibank N.A. from time to time; and (iii) a handling fee equal to 3.5% of the
F.O.B. price of the boots purchased. The Snowboard Boot Facility is secured by a
first priority security interest in the boot inventory and the accounts
receivable resulting from sales thereof, and a second priority security
12
<PAGE> 13
interest in the Company's general intangibles. At no time may the sum of: (i)
the outstanding balance of the Ssangyong Costs, plus (ii) aggregate outstanding
letters of credit under the Snowboard Boot Facility, minus letters of credit
opened by the Company's foreign distributors, exceed $7 million. The Snowboard
Boot Facility expires on March 28, 1997.
At February 24, 1996, the Company had outstanding $23.2 million principal
amount of the Senior Notes. Interest on such Senior Notes is payable on February
1 and August 1 of each year. On August 1, 1995, the Company paid the first
installment of principal of the Senior Notes of $5.8 million, along with $1.4
million accrued interest. On February 1, 1996, the Company paid $1.1 million of
accrued interest. Equal additional installments of principal are due on August
1, 1996, 1997 and 1998, with remaining principal plus accrued interest due on
August 1, 1999. The agreements governing the Senior Notes restrict the Company's
ability to declare dividends and require the Company to maintain certain
financial covenants. The Senior Notes are secured by a first priority security
interest in the Company's general intangibles and equipment. Additionally, the
Note holders have the right to place a Deed of Trust on the Orange Facility to
further secure the Senior Notes. The Company intends to repay the Senior Notes
with the proceeds from this Offering. As a result of the repayment in full of
the Senior Notes, the Company will recognize, during the quarter in which the
repayment occurs, an extraordinary pre-tax loss on early extinguishment of debt
of approximately $1.9 million ($1.1 million after tax). See "Use of Proceeds."
As of May 31, 1995, as a result of the $20.0 million goodwill write-off and
$10.0 million of restructuring costs in the fourth quarter of fiscal 1995 in
connection with the closure of the Orange Facility, and the $6.3 million
inventory write-down in the fourth quarter of fiscal 1995, the Company was not
in compliance with certain financial covenants of the Senior Notes and a bank
agreement which expired in July 1995. The holders of the Senior Notes and the
bank waived the default so that the Company was in compliance with the Senior
Notes and the debt agreement as of May 31, 1995. Effective as of February 24,
1996, the Company, the Bank and the holders of the Senior Notes amended the
agreements governing the Secured Line of Credit and the Senior Notes to modify
the Fixed Charge Coverage Ratio covenant under both agreements.
CURRENT CASH POSITION
The Company's cash position was $561,000 as of February 24, 1996, exclusive
of approximately $680,000 of long-term marketable securities included in other
assets in the consolidated balance sheet which secures a bond maintained by the
Company in connection with its self-insured workers' compensation plan. The
Company's cash position has, in the past 18 months, been partially impacted by
the increased working capital requirements caused by the rapid sales growth of
the imported International Collection. These working capital constraints, in
turn, adversely impacted sales to the Company's national accounts in the third
quarter of fiscal 1996 because the Company had previously committed a
significant portion of its available funds to support increased international
sales which were placed earlier in the quarter than national sales. See "Risk
Factors--Working Capital Constraints" and "--Results of Operation--Thirty-Nine
Weeks Ended February 24, 1996 Compared to Thirty-Nine Weeks Ended February 25,
1995--Net Sales." Because the International Collection is imported, there are
greater timing differences between the payment for goods and the receipt of cash
from sales of such goods than if produced domestically. Additionally, because
payment terms in the ski and snow industry are longer than the Company's
traditional distribution channels, there are even greater timing differences
between payment for the Company's new line of snowboard boots and the receipt of
cash from sales of such boots.
The Company anticipates that the application of the net proceeds from this
Offering to repay debt should alleviate the Company's working capital
constraints to a large extent for the next 12 months. In addition, the Company
will attempt to increase the amount available under the Secured Line of Credit,
however, there can be no assurance that it will be successful in doing so. See
"Use of Proceeds." For the foreseeable future, the Company believes that cash
from operations together with borrowings from its Secured Line of Credit and
other credit facilities should be sufficient to meet its working capital needs.
If this Offering is not completed, the Company will require other financing to
support its growth and satisfy the Company's other cash requirements. There can
be no assurance that such financing will be available, or that if it is
available, it will be on terms acceptable to the Company.
13
<PAGE> 14
CAPITAL EXPENDITURES
For the thirty-nine week period ended February 24, 1996, the Company's
capital expenditures were $1.9 million. In the remainder of fiscal 1996, the
Company plans to open three new factory outlet stores at an estimated aggregate
cost of $250,000. The Company does not anticipate a significant increase in the
level of capital expenditures in fiscal 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<S> <C>
27 Financial Data Schedule
</TABLE>
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
By: VANS, INC.
----------------------------------
(Registrant)
NAME
----------------------------------
Date: May 15, 1996 By: /s/ CRAIG E. GOSSELIN
----------------------------------
Craig E. Gosselin
Vice President and General Counsel
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000877273
<NAME> VANS INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> NOV-26-1995
<PERIOD-END> FEB-24-1996
<CASH> 560,795
<SECURITIES> 0
<RECEIVABLES> 18,441,931
<ALLOWANCES> 1,061,179
<INVENTORY> 17,529,043
<CURRENT-ASSETS> 39,116,360
<PP&E> 10,753,385
<DEPRECIATION> 0
<TOTAL-ASSETS> 72,709,056
<CURRENT-LIABILITIES> 25,260,042
<BONDS> 22,381,645
0
0
<COMMON> 9,731
<OTHER-SE> 23,442,638
<TOTAL-LIABILITY-AND-EQUITY> 72,709,056
<SALES> 27,931,868
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<CGS> 16,752,503
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