<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 3
(Mark One)
[xx] Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the fiscal year ended May 31, 1995, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from to
--------------- ---------------
Commission File Number 0-19402
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VANS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 33-0272893
- -------------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2095 Batavia Street, Orange, California 92665-3101
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(714) 974-7414
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.001 par value per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [x].
The approximate aggregate market value of the Common Stock held by
non-affiliates of registrant (computed based on the average bid and asked
prices of the Common Stock, as reported on the NASDAQ National Market System on
August 16, 1995), is $42,206,086.
The number of shares of registrant's Common Stock outstanding at August 28, 1995
is 9,646,917.
Documents Incorporated By Reference:
Portions of registrant's 1995 Annual Report to Stockholders for the Fiscal Year
Ended May 31, 1995 are incorporated by reference into Part II of this report;
portions of registrant's definitive Proxy Statement for its 1995 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report; and
certain exhibits are incorporated by reference into Part IV of this report.
<PAGE> 2
PART II
ITEM 7. 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 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.
<PAGE> 3
FISCAL YEAR 1995 AS COMPARED TO FISCAL YEAR 1994
NET SALES
Net sales increased 9.4% to $88.1 million in fiscal 1995 from $80.5 million
in fiscal 1994. In the first quarter of fiscal 1995, the Company began importing
the International Collection. The sales increase experienced in fiscal 1995 is
primarily attributed to sales of this new line of footwear. See "--Overview."
Sales to national accounts increased 15.4% from $43.7 million in fiscal
1994 to $50.5 million in fiscal 1995. Sales to large national chains, such as
Kinney, Foot Locker, and Mervyn's, continued to increase during the year. At the
same time, new national and regional customers were developed, further expanding
the VANS brand name and generating increased sales.
International sales decreased 6.9% in fiscal 1995 to $12.9 million from
$13.9 million in fiscal 1994. Increases in sales to Japan, Germany and England
were not sufficient to offset the continuing decline in sales to Mexico and
Canada, which fell from an aggregate of $6.1 million in fiscal 1994 to an
aggregate of $1.5 million in fiscal 1995.
Sales through the Company's 79 retail stores (as of May 31, 1995) increased
8.0% to $24.6 million in fiscal 1995 from $22.8 million in fiscal 1994.
Comparable store sales (stores open one year or more) increased approximately
1.0% for fiscal 1995, the first positive year-to-year comparison since fiscal
1992. Comparable store sales per square foot in fiscal 1995 increased to $224
from $221 in fiscal 1994. The Company opened four new mall and five new factory
outlet stores in fiscal 1995, while closing eight locations as part of its
ongoing program to eliminate underperforming stores. The increase in retail
sales in fiscal 1995 is primarily attributed to the Company's strategy of
focusing on mall and factory outlet stores, which had comparable store increases
of 10.1% and 8.5%, respectively, for the year.
GROSS PROFIT
Gross profit was $27.7 million in fiscal 1995 as compared to $31.7 million
in fiscal 1994. As a percentage of net sales, gross profit decreased to 31.5% in
fiscal 1995 from 39.4% in fiscal 1994. As previously discussed, the rapid growth
in demand for foreign-sourced products experienced in fiscal 1995 caused an
imbalance in inventories and domestic production overcapacity. Gross profit was
primarily impacted by: (i) an approximately $6.3 million write-down of domestic
inventory in the fourth quarter to realign inventories; and (ii)
under-absorption in the Company's domestic manufacturing plants in the fourth
quarter due to production
<PAGE> 4
overcapacity. These factors were partially offset by increased margins on
foreign-sourced products. Due to the impact of the fourth quarter charges, a
year-to-year comparison of gross profit contribution by sales channel is not
meaningful.
EARNINGS (LOSS) FROM OPERATIONS
Losses from operations were $38.4 million in fiscal 1995 compared to
earnings of $4.0 million in fiscal 1994. Operating expenses increased 139.0% to
$66.1 million in fiscal 1995 from $27.7 million in fiscal 1994. Operating
expenses were primarily impacted by the restructuring costs of $30.0 million
recognized in the fourth quarter of fiscal 1995. See "-- Overview."
Selling and distribution. Selling and distribution expenses increased
20.2% from $16.1 million in fiscal 1994 to $19.4 million in fiscal 1995
primarily due to: (i) the cost of opening the Company's new City of Industry
distribution center; and (ii) increased personnel, travel expenditures and
sales commissions associated with the sales increase described above and the
introduction of new product lines.
Marketing advertising and promotion. Marketing, advertising and promotion
expenses increased 39.5% to $5.4 million in fiscal 1995 from $3.9 million in
fiscal 1994 due to increases in such expenses to support the sales growth
described above and the introduction of new product lines.
General and administrative. General and administrative expenses increased
50.5% to $8.3 million in fiscal 1995 from $5.5 million in fiscal 1994 primarily
due to: (i) $850,000 in separation payments in connection with the departure of
two senior executives; and (ii) increases in consulting, legal and executive
search fees.
Provision for doubtful accounts. Provision for doubtful accounts increased
from $519,000 in fiscal 1994 to $1.4 million in fiscal 1995. Of this increase,
$441,000 was attributable to the portion of accounts receivable deemed to be
uncollectible and $400,000 was to settle the Company's account with Marathon
Sports (U.S.A.), Inc. ("Marathon"), its distributor in Mexico. In the third
quarter of fiscal 1995 it became apparent to the Company that the full
amount of the Marathon receivable was not collectible. Economic conditions in
Mexico were in decline and the Mexican peso was losing value, making it more
difficult for Marathon to collect payment for shoes they were selling. As a
result, the Company entered into an agreement with Marathon whereby Marathon,
in full satisfaction of its obligations to the Company; (i) paid the Company
$600,000 upon execution of a new distribution agreement; (ii) executed a
promissory note for $275,000, guaranteed by the owners of Marathon and secured
by a deed of trust on their personal residence; and (iii) returned 50,000 pairs
of shoes to the Company.
OTHER INCOME
Other income (comprised primarily of litigation recovery, royalty income
and sublease income) increased $910,000 to $1.6 million in fiscal 1995 from
$712,000 in fiscal 1994, primarily due to a one-time benefit of $572,000 of
litigation recovery received in the second quarter of fiscal 1995. Such
litigation related to the Company's claims against the bankruptcy estate of
Drexel Burnham Lambert Inc. ("Drexel"). The claims alleged that, in connection
with the Acquisition, Drexel had defrauded the Company into issuing shares of
its Common Stock to a Drexel affiliate.
INCOME TAX EXPENSE (BENEFIT)
Income taxes decreased from an expense of $700,000 in fiscal 1994 to a
benefit of $2.5 million in fiscal 1995 primarily as a result of the fiscal 1995
loss. See "--Overview" and Note 9 of Notes to Consolidated Financial Statements.
FISCAL YEAR 1994 AS COMPARED TO FISCAL YEAR 1993
NET SALES
Net sales decreased 7.0% to $80.5 million in fiscal 1994 from $86.6 million
in fiscal 1993. During fiscal 1994 new fashion-forward products, introduced
early in the year, began to gain consumer acceptance in the marketplace,
particularly in the Company's women's business, which increased approximately
29.0% on a year-to-year basis.
Sales to national accounts increased 7.1% to $43.7 million in fiscal 1994
from $40.8 million in fiscal 1993. The increase was primarily attributed to
sales to the Company's top ten accounts, which improved by 38.1% during the
fiscal year, reflecting the increasing acceptance of the Company's product line
by major retailers.
International sales in fiscal 1994, including direct sales to Mexico,
decreased 36.3% to $13.9 million in fiscal 1994 from $21.8 million in fiscal
1993. Continued softness in the Company's Mexico and Canadian business was
attributed to the rationalization of excess inventory by its competitors. Other
export sales for the year were comparable to sales for fiscal 1993, and sales to
Japan remained strong, increasing 24.7% from $3.5 million in fiscal 1993 to $4.4
million in fiscal 1994.
Sales through the Company's 77-store retail chain (as of May 31, 1994)
decreased 4.5% to $22.8 million in fiscal 1994 from $23.9 million in fiscal
1993. Comparable store sales (stores open one year or more) were down 2.3% for
the year, but reflected an improving trend each quarter. Comparable store sales
per square foot decreased to $221 in fiscal 1994 from $226 in fiscal 1993.
Comparable mall store sales during the year, however, moved from a decrease of
20.9% for the first quarter of the year to an increase of 2.2% for the fourth
<PAGE> 5
quarter, and the Company's new factory store outlets generally performed above
expectations. The Company opened nine new stores during fiscal 1994, all of
which were mall stores or factory outlets, and closed 10 stores during fiscal
1994 as part of its ongoing program to eliminate underperforming stores.
GROSS PROFIT
Gross profit was $31.7 million in fiscal 1994 compared to $37.8 million in
fiscal 1993. As a percentage of net sales, gross profit decreased to 39.4% in
fiscal 1994 from 43.7% in fiscal 1993. Gross profit continued to be impacted by:
(i) the higher cost of new, more complex fashion-forward products, which tend to
result in a higher variable cost per pair; (ii) the shift in the Company's
customer base to larger wholesale accounts that receive larger discounts; (iii)
a shift in product mix to lower margin shoe styles; (iv) a more aggressive
promotion strategy adopted by the Company to stimulate sales; (v) unabsorbed
overhead due to lower run-rates at both of the Company's domestic manufacturing
facilities; and (vi) shifts in the sales mix of the Company's distribution
channels. The gross profit on shoes sold in Company-owned retail stores
decreased in fiscal 1994 to 56.1% from 61.5% in fiscal 1993. The gross margin on
shoes sold through the Company's other distribution channels decreased to 32.8%
in fiscal 1994 from 38.8% in fiscal 1993. The Company estimates that, after
deducting the selling and distribution expenses applicable to each distribution
channel from the corresponding gross margin, the gross profit contribution from
Company-owned retail stores decreased to 3.2% in fiscal 1994 from 15.7% in
fiscal 1993. At the same time, the contribution to gross profit from the
Company's other distribution channels decreased to 23.6% in fiscal 1994 from
28.1% in fiscal 1993.
EARNINGS FROM OPERATIONS
Earnings from operations were $4.0 million in fiscal 1994 compared to $5.8
million in fiscal 1993. As a percentage of net sales, earnings from operations
decreased from 6.7% in fiscal 1993 to 5.0% in fiscal 1994. Operating expenses
decreased 13.5% to $27.7 million in fiscal 1994 from $32.0 million in fiscal
1993.
Selling and distribution. Selling and distribution expenses were
relatively flat on a year-to-year basis.
Marketing, advertising and promotion. Marketing, advertising and promotion
expenses decreased 27.9% from $5.4 million in fiscal 1993 to $3.9 million in
fiscal 1994, reflecting the Company's overall expense reduction program.
General and administrative. General and administrative expenses decreased
33.0% from $8.2 million in fiscal 1993 to $5.5 million in fiscal 1994,
reflecting: (i) the Company's program to reduce overall expenses; (ii) a
provision that was established in the third quarter of fiscal 1993 in
connection with an investigation of the Company's employment practices by the
Immigration and Naturalization Service; and (iii) costs associated with the
opening of the Vista Facility in fiscal 1994.
Provision for doubtful accounts. Provision for doubtful accounts decreased
from $964,000 in fiscal 1993 to $519,000 in fiscal 1994 due to expenses of
approximately $525,000 in the third quarter of fiscal 1993 for the bankruptcy
action of a major account.
OTHER INCOME
Other income in fiscal 1994 was comprised primarily of royalty income.
Other income decreased $199,000 to $712,000 in fiscal 1994, from $911,000
in fiscal 1993, primarily due to the absence of a one-time benefit of $265,000
of litigation recovery received in the second quarter of fiscal 1993. Such
litigation recovery was related to a judgment from a trademark infringement
lawsuit.
INCOME TAX EXPENSE
Income tax expense decreased to $700,000, or 34.0% of earnings before
income taxes, in fiscal 1994, compared to $1.3 million, or 32.7% of earnings
before income taxes, in fiscal 1993. Income tax expense decreased due to: (i) a
decrease in earnings from operations; (ii) non-cash compensation deductions of
$538,000 on incentive stock options recognized for tax purposes in fiscal 1991
and for which no income tax benefit was originally recorded; and (iii) a
research and development tax credit for the design of the Vista Facility.
<PAGE> 6
LIQUIDITY AND CAPITAL RESOURCES.
The Company has a $10.0 million revolving line of credit with a bank,
which is secured by the eligible accounts receivable of the Company (the
"Secured Bank Line"). The Company is permitted to borrow up to 75% of the
dollar amount of such accounts. The Secured Bank Line was established in July
1995. The Company pays interest on the debt incurred under this Line at the
prime rate established by the bank from time to time. The Company has the
option to pay interest at the LIBOR rate. Under the agreement establishing the
Line, the Company must maintain certain financial covenants and is prohibited
from paying dividends without the bank's consent. Debt incurred under the
Secured Bank Line is due and payable on July 1, 1997.
At May 31, 1995, the Company maintained a $3,000,000 unsecured line of
credit with another bank which was utilized to place letters of credit for the
purchase of product. Borrowings under this line were $2,608,000 at May 31,
1995. Fees under the line were equal to 1/8% of the face amount of the
underlying letter of credit. Interest was payable at prime plus 3% for letters
of credit with extended terms. The Company failed to comply with certain
financial covenants required under the credit agreement at May 31, 1995, but the
bank waived such non-compliance. The line expired on July 15, 1995.
The Company has a $4,000,000 unsecured revolving credit facility with
Ssanyong Corporation, a South Korean corporation, which is utilized to support
the purchase of product. Assuming full utilization of the line, the Company will
pay an effective interest rate of 15.6% per annum on the debt incurred under the
facility, comprised of (i) an annual fee of 10% payable at the time of the
first draw thereunder, and (ii) annual interest of 5.6% on the outstanding debt.
The facility expires on April 26, 1997. There were no outstanding borrowings
under the facility at May 31, 1995.
At May 31, 1995, the Company had outstanding $29.0 million of the 9.6%
Senior Notes. Interest on such 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 Notes ($5.8 million), along with $1.4 million of interest also
due on that date. 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 Company paid aggregate interest of $2,784,000 on the 9.6%
Senior Notes during fiscal 1995.
The agreements governing the 9.6% Senior Notes restrict the Company's
ability to declare dividends and require the Company to maintain certain
financial covenants. The Company was not in compliance with such covenants as of
May 31, 1995. However, in July 1995, the Company and the holders of the 9.6%
Senior Notes entered into an agreement whereby the Noteholders permitted the
Company to obtain the Secured Bank Line, waived the Company's non-compliance,
and reset the financial covenants in exchange for the Company's agreement to (i)
make its scheduled August 1 principal and interest payments; (ii) pay the
proceeds of the sale of the Orange facility to the 9.6% Senior Noteholders; and
(iii) pay the Noteholders one-half of the proceeds of the tax refund the Company
received as a result of the write-downs it took at the end of fiscal 1995 on or
before September 15, 1995.
<PAGE> 7
The Company's cash position was $3,960,000 at May 31, 1995, including
approximately $680,000 of restricted cash included in other assets in the
consolidated financial statements which related to the Company's self-insured
workers' compensation plan. In connection with the self-insurance, the Company
maintains a $2,304,000 surety bond which is secured by $680,000 in long-term
marketable securities. The Company believes that cash from operations, coupled
with its current level of financing, is sufficient to satisfy its anticipated
cash needs for the remainder of fiscal 1996, including the payment of interest
on the 9.6% Senior Notes. However, if the Company experiences significant
growth in fiscal 1996, additional financing may be required by operating
activities.
The Company experienced an outflow of cash from operating activities of
$4,225,000 in fiscal 1995, compared to an inflow of cash from operations of
$3,989,000 and $11,210,000 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.
Accounts receivable, net of allowance for doubtful accounts, decreased
slightly to $12,584,000 at May 31, 1995 from $12,827,000 at May 31, 1994. This
decrease was primarily due to the Company's agreement to settle its account
with Marathon Sports U.S.A., Inc. ("Marathon"), its distributor for Mexico.
Under the terms of the settlement, Marathon (i) paid the Company $600,000 upon
the execution of a new distributor agreement (the "New Distributor Agreement");
(ii) executed a six-month Promissory Note for $275,000, guaranteed by the
owners of Marathon and secured by a Deed of Trust on their personal residence;
and (iii) returned 50,000 pairs of shoes to the Company. Additionally, if
Marathon fails to purchase at least 200,000 pairs of footwear during the term
of the New Distributor Agreement, it will owe the Company an additional
$100,000, to be paid over six months. In connection with this agreement, the
Company recorded a $400,000 provision for doubtful accounts in the third
quarter of fiscal 1995.
Inventories, which include raw materials, work-in-process, accessories
and finished goods, increased 27.6% to $16,998,000 at May 31, 1995 from
$13,321,000 at May 31, 1994. The rapid growth of the International Collection in
fiscal 1995 caused an imbalance in inventory and overcapacity of domestic
production. See "Fiscal 1995 Restructuring." In the fourth quarter of fiscal
1995, the Company recorded a domestic inventory adjustment of approximately
$6,300,000 to realign inventories to correspond to future customer orders. The
inventory balance at May 31, 1995 reflects this adjustment. The 27.6% increase
year-to-year is the result of (i) increased inventory to support sales of the
International Collection; (ii) increased inventory to support increased sales;
and (iii) excess domestic inventory written-down to net realizable value at May
31, 1995. The Company plans to dispose of the excess domestic inventory through
Company-owned outlet and clearance stores and traditional secondary market
channels. Management believes this can be achieved without a material adverse
effect on the Company's normal distribution.
<PAGE> 8
In the fourth quarter of fiscal 1995, the Company relocated its
distribution operations to a 127,000 square foot facility located in the City
of Industry. The cost of the relocation, which included the re-implementation
of systems, temporary personnel, and product movement costs, was approximately
$1,500,000.
As discussed above, the Company is in escrow to sell the Orange
facility. This transaction is subject to closing contingencies, but the Company
anticipates that such sale should be completed by November 1995. The proceeds of
the sale will be paid to the holders of the 9.6% Senior Notes.
If the sale is completed, the Company will transfer its corporate
offices, and substantially all of its corporate personnel, to the Company's
City of Industry distribution center. The transition of the corporate offices
will involve substantial time and effort by management. The Company estimates
the cost of such project to be $400,000 - $500,000, all of which should be
recognized in fiscal 1996.
In fiscal 1996, the Company plans to open 10 to 12 new retail stores at
an estimated aggregate cost of $800,000 - $900,000. The stores will open
throughout the year and consist primarily of outlet stores located in
California and other states. At the same time, the Company will continue to
identify and close underperforming stores.
The Company plans to upgrade the hardware and software for its primary
computer system in fiscal 1996. This upgrade is intended to support the growth
the Company is currently experiencing, as well as position the Company for
future growth. The cost of this system improvement is estimated at $500,000 and
is expected to be completed in the second quarter of fiscal 1996.
The Company is currently exploring a number of other systems-related
projects, including a materials requirement planning system and shipping and
warehouse systems, to further enhance its scheduling, manufacturing and
distribution capabilities. While it is too early to estimate the depth, and
therefore the cost of these projects, the Company estimates that these projects
will be financed with internally generated funds.
INFLATION
Historically, the Company has generally been able to offset increases
in the costs of labor and raw materials by controlling other costs and
increasing prices; however, during fiscal 1995, modest costs associated with
inflation were not offset by price increases due to competition in the
marketplace. Despite this, the Company believes that inflation has not had a
material adverse effect on its operations to date.
SEASONALITY
Management believes that the Company's business is somewhat seasonal,
with the greatest percentage of sales realized in the fourth and first fiscal
quarters (March through August), the so-called "Spring and Summer" and "Back to
School" months.
<PAGE> 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VANS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1994 1995
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................ $ 7,129,172 $ 3,279,843
Accounts receivable, net of allowance for doubtful accounts and
sales returns and allowances of $671,102 and $812,631 at May
31, 1994 and 1995, respectively (notes 7 and 13)............. 12,826,773 12,584,244
Inventories (note 4)............................................ 13,320,765 16,997,738
Income taxes receivable (notes 8 and 9)......................... 605,859 3,530,128
Deferred income taxes (note 9).................................. 1,087,000 1,615,000
Prepaid expenses................................................ 376,503 498,555
----------- -----------
Total current assets.................................... 35,346,072 38,505,508
Property, plant and equipment, net (notes 3, 5 and 10)............ 19,750,286 10,747,450
Excess of cost over the fair value of net assets acquired, net of
accumulated amortization of $10,325,544 and $31,966,872 at May
31, 1994 and 1995, respectively (notes 2 and 3)................. 38,913,855 17,272,527
Deferred financing costs, net of accumulated amortization of
$198,330 and $270,454 at May 31, 1994 and 1995, respectively.... 378,613 306,489
Property held for sale (notes 3 and 5)............................ -- 5,299,771
Other assets (note 6)............................................. 2,815,311 934,290
----------- -----------
$97,204,137 $73,066,035
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (note 7).................................. $ -- $ 2,608,173
Current portion of senior notes (note 8)........................ -- 7,025,069
Accounts payable (note 10)...................................... 4,599,122 8,579,473
Accrued payroll and related expenses............................ 2,431,531 2,026,229
Restructuring costs (note 3).................................... -- 6,083,934
Accrued workers' compensation (note 10)......................... 1,511,159 1,540,046
Accrued interest................................................ 931,728 907,660
----------- -----------
Total current liabilities............................... 9,473,540 28,770,584
Deferred income taxes (note 9).................................... 1,576,000 1,615,000
Capital lease obligations (notes 8 and 10)........................ -- 441,384
Senior notes (note 8)............................................. 29,000,000 21,974,931
----------- -----------
40,049,540 52,801,899
----------- -----------
Stockholders' equity (notes 2, 11 and 12):
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,
9,572,097 and 9,639,877 shares issued and outstanding at May
31, 1994 and 1995, respectively.............................. 9,573 9,640
Additional paid-in capital...................................... 46,559,306 46,803,649
Retained earnings (accumulated deficit)......................... 10,585,718 (26,549,153)
----------- -----------
57,154,597 20,264,136
Commitments and contingencies (note 10)
Subsequent event (note 10)
----------- -----------
$97,204,137 $73,066,035
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-1
<PAGE> 10
VANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Net sales (note 13).................................. $86,563,343 $80,475,645 $ 88,055,695
Cost of sales........................................ 48,776,856 48,777,229 60,339,890
----------- ---------- ----------
Gross profit....................................... 37,786,487 31,698,416 27,715,805
Operating expenses:
Selling and distribution........................... 15,773,476 16,099,503 19,354,878
Marketing, advertising and promotion............... 5,406,175 3,898,583 5,439,077
General and administrative......................... 8,217,135 5,509,105 8,291,129
Restructuring costs (note 3)....................... -- -- 30,047,500
Provision for doubtful accounts.................... 963,814 518,593 1,359,846
Amortization of intangibles........................ 1,641,172 1,641,328 1,641,328
----------- ---------- ----------
Total operating expenses........................ 32,001,772 27,667,112 66,133,758
----------- ---------- ----------
Earnings (loss) from operations................. 5,784,715 4,031,304 (38,417,953)
Interest income...................................... 183,877 173,892 81,634
Interest and debt expense............................ (2,856,116) (2,856,199) (2,880,615)
Other income......................................... 911,336 712,259 1,621,986
----------- ---------- ----------
Earnings (loss) before income taxes................ 4,023,812 2,061,256 (39,594,948)
Income tax expense (benefit) (note 9)................ 1,314,438 700,226 (2,460,077)
----------- ---------- ----------
Net earnings (loss)................................ $ 2,709,374 $ 1,361,030 $(37,134,871)
=========== ========== ==========
Per share information (note 2):
Primary:
Earnings (loss) per share....................... $ 0.28 $ 0.14 $ (3.86)
=========== ========== ==========
Weighted average common and common equivalent
shares........................................ 9,644,762 9,730,752 9,611,204
Fully diluted:
Earnings (loss) per share....................... $ 0.28 $ 0.14 $ (3.86)
=========== ========== ==========
Weighted average common and common equivalent
shares........................................ 9,648,277 9,730,752 9,611,204
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 11
VANS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, 1993, 1994 AND 1995
-------------------------------------------------------------
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
----------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1992............... 9,117,004 $9,117 $45,342,850 $ 6,515,314 $ 51,867,281
Issuance of common stock for
cash............................ 255,533 256 480,321 -- 480,577
Income tax benefit attributable to
stock option activity........... -- -- 460,494 -- 460,494
Net earnings...................... -- -- -- 2,709,374 2,709,374
--------- ----- ----------- ------------ ------------
BALANCE AT MAY 31, 1993............... 9,372,537 9,373 46,283,665 9,224,688 55,517,726
Issuance of common stock for
cash............................ 199,560 200 164,582 -- 164,782
Income tax benefit attributable to
stock option activity........... -- -- 111,059 -- 111,059
Net earnings...................... -- -- -- 1,361,030 1,361,030
--------- ----- ----------- ------------ ------------
BALANCE AT MAY 31, 1994............... 9,572,097 9,573 46,559,306 10,585,718 57,154,597
Issuance of common stock for
cash............................ 67,780 67 244,343 -- 244,410
Net loss.......................... -- -- -- (37,134,871) (37,134,871)
--------- ----- ----------- ------------ ------------
WBALANCE AT MAY 31, 1995............... 9,639,877 $9,640 $46,803,649 $(26,549,153) $ 20,264,136
========= ====== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 12
VANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------
1993 1994 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................................. $ 2,709,374 $ 1,361,030 $(37,134,871)
Adjustments to reconcile net earnings (loss) to net
cash
provided by (used in) operating activities:
Depreciation and amortization..................... 3,072,098 3,917,647 28,390,226
Amortization of deferred financing costs.......... 128,580 72,124 72,124
Provision for losses on accounts receivable and
sales returns................................... 963,814 518,593 1,359,846
Loss (gain) on the sale of property, plant and
equipment....................................... (1,137) 42,620 (36,411)
Changes in assets and liabilities:
Marketable securities........................... 4,182,123 -- --
Accounts receivable............................. (1,184,259) (1,007,126) (1,117,317)
Income taxes receivable......................... (1,400,000) 905,200 (2,924,269)
Inventories..................................... 1,154,617 (1,565,755) (3,676,973)
Deferred income taxes........................... (335,000) 524,000 (489,000)
Prepaid expenses................................ 85,534 169,454 (122,052)
Other assets.................................... 20,971 (262,194) 1,881,021
Accounts payable................................ 2,386,777 (1,229,098) 3,888,888
Accrued payroll and related expenses............ (607,323) 632,205 (405,302)
Accrued workers' compensation................... 1,597,252 (86,093) 28,887
Accrued bonuses................................. (811,442) -- --
Restructuring costs............................. -- -- 6,083,934
Accrued interest................................ -- (4,004) (24,068)
Income taxes.................................... (752,330) -- --
----------- ---------- ----------
Net cash provided by (used in) operating
activities................................. 11,209,649 3,988,603 (4,225,337)
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........... (7,382,613) (3,478,237) (2,641,480)
Proceeds from sale of property, plant and
equipment......................................... 25,994 58,971 186,437
----------- ---------- ----------
Net cash used in investing activities........ (7,356,619) (3,419,266) (2,455,043)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings.................. -- -- 2,608,173
Payments on capital lease obligations................ -- -- (21,532)
Proceeds from issuance of common stock, net.......... 480,577 164,782 244,410
----------- ---------- ----------
Net cash provided by financing activities.... 480,577 164,782 2,831,051
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................ 4,333,607 734,119 (3,849,329)
Cash and cash equivalents, beginning of year......... 2,061,446 6,395,053 7,129,172
----------- ---------- ----------
Cash and cash equivalents, end of year............... $ 6,395,053 $ 7,129,172 $ 3,279,843
=========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION--AMOUNTS PAID FOR:
Interest............................................. $ 2,784,000 $ 2,788,000 $ 2,808,490
Income taxes......................................... $ 3,472,447 $ 856,857 $ 1,007,533
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Income tax benefit attributable to stock option
activity.......................................... $ 460,494 $ 111,059 $ --
Capital lease obligations incurred................... $ -- $ -- $ 554,379
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 13
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
May 31, 1993, 1994 and 1995
1. BUSINESS AND ORGANIZATION
Vans, Inc. (the "Company") 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
outdoor sports such as skateboarding, snowboarding and BMX bicycling.
On August 29, 1991, the Company concurrently completed its initial public
stock offering (the "IPO") and issued $29,000,000 of Senior Notes due 1999 in a
private offering (the "Debt Offering")(see note 8).
The Company is the successor to Van Doren Rubber Company, Inc. ("VDRC"), a
California corporation that was founded in 1966. VDRC was acquired by the
Company in February 1988 in a series of related transactions (the
"Acquisition") and was accounted for using the purchase method of accounting.
VDRC was merged with and into the Company in connection with the IPO.
The Company's customers are located primarily in the United States.
However, there are customers located in a number of foreign countries (see note
13).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries, Van Doren International, Inc.,
a foreign sales corporation ("FSC") and Vans Footwear International, Inc., and
Vans Shoes Outlets, Ltd., a Texas Limited Partnership of which the Company is a
general partner. All significant intercompany balances and transactions have
been eliminated in consolidation.
Basis of Financial Statement Presentation. The financial statements have
been prepared in conformity with generally accepted accounting principles. In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates of the balance sheets and revenues and expenses for the periods. Actual
results could differ from those estimates.
Cash Equivalents. For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt investments purchased with
original maturities of three months or less to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market (net
realizable value). Cost is determined using the first-in, first-out (FIFO)
method.
Goodwill. Goodwill is the cost in excess of fair value of the net assets
acquired in the 1988 purchase of VDRC (see note 1). Goodwill represented
trademarks, manufacturing know-how and dealer relationships and was being
amortized on a straight-line basis over 30 years.
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Under the provisions of SFAS No. 121, if the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized. The amount of
impairment, if any, is measured based on projected discounted cash flows. The
Company adopted SFAS No. 121 in the fourth quarter of fiscal 1995. Prior to the
adoption of SFAS No. 121, the Company had used a similar approach for assessing
the recoverability of goodwill based on operating income.
F-5
<PAGE> 14
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
At May 31, 1995, the Company wrote off $20,000,000, representing the
unamortized portion of goodwill relating to manufacturing know-how resulting
from the decision to close its Orange, California manufacturing facility (see
note 3). The Company has evaluated the recoverability of the remaining goodwill
by analyzing forecasted undiscounted cash flows and found no further impairment
exists at May 31, 1995. Accordingly, as of May 31, 1995, goodwill represents
trademarks and dealer relationships and is being amortized on a straight-line
basis over 30 years.
Financing Costs. Costs incurred to obtain financing have been capitalized
and are amortized using the straight-line method over the estimated life of the
related debt.
Revenue Recognition. Revenue is recognized at the point of sale.
Property, Plant and Equipment. Property, plant and equipment are stated at
cost, less depreciation and amortization and estimated loss on disposal. The
cost of additions and improvements are capitalized, while maintenance and
repairs are expensed as incurred. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
YEARS
<S> <C>
Buildings and improvements................................................... 31.5
Machinery and equipment...................................................... 5-10
Store fixtures and equipment................................................. 7
Automobiles and trucks....................................................... 5
Computer, office furniture and equipment..................................... 3-5
</TABLE>
Leasehold improvements are amortized over the lesser of the estimated useful
lives of the assets or the related lease terms.
Income Taxes. Income taxes are provided based upon the provisions of SFAS
No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Other Income. Other income is comprised of the following:
<TABLE>
<CAPTION>
Years Ended May 31,
--------------------------------
1993 1994 1995
<S> <C> <C> <C>
Royalty income............... $472,590 $547,068 $ 907,549
Rental income................ 113,088 119,705 117,437
Litigation recovery.......... 265,447 - 572,468
Other........................ 60,211 45,486 24,532
-------- -------- ----------
$911,336 $712,259 $1,621,986
======== ======== ==========
</TABLE>
The litigation recovery amount for the year ended May 31, 1993
related to amounts collected on a judgment related to a trademark infringement
lawsuit.
For the year ended May 31, 1995, the litigation recovery amount
related to the Company's claims against the bankruptcy estate of Drexel
Burnham Lambert Inc. The claims alleged that, in connection with the
Acquisition, Drexel had defrauded the Company into issuing shares of its
common stock to a Drexel affiliate.
Fair Value of Financial Instruments. In December 1991, the FASB issued
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No.
107 requires all entities to disclose the fair value of financial instruments,
both assets and liabilities recognized and not recognized on the balance sheet,
for which it is practicable to estimate fair value. SFAS No. 107 defines fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of May 31, 1995,
the fair value of all financial instruments approximated carrying value.
Earnings (Loss) per Common Share. Primary earnings (loss) per share are
based on the weighted average number of shares outstanding during each year 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 year. Fully diluted earnings (loss) per
share are based on the weighted average number of shares outstanding during each
year 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
year. The Company has granted certain options which have been treated as common
share equivalents, when appropriate (see note 11).
Reclassifications. Certain amounts in the 1993 and 1994 consolidated
financial statements have been reclassified to conform to the 1995 presentation.
3. RESTRUCTURING COSTS
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
F-6
<PAGE> 15
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
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 and in July 1995, the Company closed its
Orange, California manufacturing facility and recognized restructuring costs of
$30.0 million in the fourth quarter of fiscal 1995.
At May 31, 1995, the restructuring cost liability of $6,084,000 includes an
estimated provision of $3,405,000 for involuntary termination benefit for
approximately 1,000 employees and $2,679,000 for costs to close the plant and
prepare the site for sale. As of May 31, 1995, the Company had paid
approximately $79,500 in costs related to the plant closure.
In the fourth quarter of fiscal 1995, the Company provided $30,047,500
($28,685,700 after tax, or $2.98 per share) for restructuring related to the
closure of its Orange, California manufacturing facility. The estimated
provision includes the above mentioned costs, $3,884,000 for estimated loss on
sale of the plant site and equipment offset against property held for sale (see
note 5) and $20,000,000 of goodwill related to manufacturing know-how eliminated
with the plant closure included in the accumulated amortization of the excess of
cost over the fair value of net assets acquired (see note 2).
4. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1994 1995
<S> <C> <C>
Raw materials............................................. $ 3,467,256 $ 1,978,760
Work-in-process........................................... 760,679 695,995
Finished goods............................................ 9,092,830 14,322,983
----------- -----------
$13,320,765 $16,997,738
========== ==========
</TABLE>
Inventories at May 31, 1994 and 1995 are reduced by $324,772 and $600,000,
respectively, to reflect lower of cost or market valuation allowances.
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, California manufacturing facility; and (iv) the discontinuance of
certain domestically-produced product.
F-7
<PAGE> 16
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1994 1995
<S> <C> <C>
Land..................................................... $ 3,926,535 $ 0
Buildings and improvements............................... 4,831,986 131,511
Machinery and equipment.................................. 9,442,739 6,866,966
Store fixtures and equipment............................. 1,265,024 1,392,944
Automobiles and trucks................................... 446,366 507,836
Computers, office furniture and equipment................ 3,899,957 5,076,750
Leasehold improvements................................... 3,471,391 3,924,933
------------ ------------
27,283,998 17,900,940
Less accumulated depreciation and amortization (7,533,712) (7,153,490)
------------ ------------
$19,750,286 $ 10,747,450
============ ============
</TABLE>
Land, building and equipment with a net book value of $9,183,771 related to
the Orange, California manufacturing facility has been reclassified to property
held for sale net of a $3,884,000 lower of cost or market adjustment (see note
3).
Included in machinery and equipment and automobiles and trucks at May 31,
1995 are $554,379 of assets held under capital leases. Accumulated amortization
of assets held under capital leases at May 31, 1995 totaled $21,435 (see note
10).
Depreciation expense totaled $1,430,926, $2,453,813 and $2,977,573 for the
years ended May 31, 1993, 1994 and 1995, respectively.
6. WORKERS' COMPENSATION
Effective July 1, 1992, the Company self-insured for workers' compensation
claims. In February 1995, the Company posted a $2,304,000 surety bond, as
required by California law, to act as security in the event of a default by the
Company in the payment of substantiated claims. The surety bond is
collateralized by $680,000 of long-term marketable securities which are included
in other assets in the accompanying balance sheet as of May 31, 1995. The
investments are held in custody by the issuing insurance company, are restricted
as to withdrawal or use, and are currently invested in long-term marketable
securities bearing interest payable to the Company at 11.68% at May 31, 1995.
Prior to the surety bond posted in February 1995, claims were secured by a
$2,304,000 irrevocable letter of credit, collateralized by investments in
short-term marketable securities included in other assets in the accompanying
balance sheet at May 31, 1994. At May 31, 1994 and 1995, there were no
outstanding claims and/or demands against the surety bond or letter of credit,
respectively (see note 10).
7. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
At May 31, 1995, the Company had a $3,000,000 unsecured bank line of
credit, of which $2,608,173 was outstanding. The line is utilized to issue
letters of credit for product purchases. Fees paid equaled 1/8% of the face
amount of the underlying letters of credit (see note 10). Interest is payable at
prime plus 3% on letters of credit with extended terms. Certain financial ratios
are required under the credit agreement. At May 31, 1995, the Company was in
compliance with or had obtained waivers for all such covenants. The line expires
on July 15, 1995.
F-8
<PAGE> 17
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
The Company has a $4,000,000 unsecured line of credit with a South Korean
corporation, which is utilized to support product purchases. Assuming full
utilization of the line, the Company will pay an effective interest rate of
15.6% per annum on the debt, comprised of (i) an annual fee of 10% payable at
the time of the first draw thereunder, and (ii) annual interest of 5.6% on the
outstanding debt. The line expires on April 26, 1997. There were no outstanding
borrowings under the facility at May 31, 1995.
In July 1995, the Company entered into a two-year credit agreement with a
financial institution for a $10,000,000 secured working capital line.
Availability under the line is limited to 75% of eligible accounts receivable
(as defined in the agreement). Interest is payable at the bank's prime rate. The
credit agreement expires on July 1, 1997.
8. DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1994 1995
<S> <C> <C>
Senior notes.............................................. $29,000,000 $29,000,000
Capitalized lease obligations (see note 10)............... -- 532,847
----------- -----------
29,000,000 29,532,847
Less current portion...................................... -- 7,116,532
----------- -----------
$29,000,000 $22,416,315
=========== ===========
</TABLE>
The Senior notes are 9.6% interest only notes due August 1, 1999. Interest
is payable semiannually. The Company is required to make annual principal
payments of $5,800,000 commencing August 1, 1995 and ending August 1, 1999. The
Company may prepay a portion or all of the notes at its option, subject to
prepayment premiums. The notes are senior to all unsecured debt of the Company.
The note agreements prohibit or restrict the payment of cash dividends and
contain certain financial covenants.
The Company failed to comply with certain financial ratios required under
the note agreements as of May 31, 1995. The Company's noteholders waived such
non-compliance, and have reset the ratios for subsequent periods in connection
with the establishment of the secured working capital line of credit in July
1995 (see note 7). In exchange for the waiver the Company has agreed to (1) make
the August 1, 1995 payment of principal and interest; (2) pay the proceeds of
the sale of the Orange facility to the noteholders; and (3) pay one-half of the
proceeds of the tax refund resulting from the write-downs the Company has
recorded at May 31, 1995 to the noteholders on or before September 15, 1995 (see
note 3). One-half of the tax refund has been included in current portion of
senior notes in the accompanying balance sheet at May 31, 1995.
On August 1, 1995, the Company made principal and interest payments of
$5,800,000 and $1,392,000, respectively, to the noteholders.
F-9
<PAGE> 18
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
9. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Current:
U. S. Federal................................ $1,184,042 $ 89,267 $(1,972,677)
State........................................ 465,396 75,959 1,600
----------- -------- ----------
1,649,438 165,226 (1,971,077)
----------- -------- ----------
Deferred:
U.S. Federal................................. (199,000) 433,000 (369,000)
State........................................ (136,000) 102,000 (120,000)
----------- -------- ----------
(335,000) 535,000 (489,000)
----------- -------- ----------
$1,314,438 $700,226 $(2,460,077)
=========== ======== ==========
</TABLE>
Total income tax expense (benefit) differed from amounts computed by
applying the U.S. Federal statutory tax rate of 34% to earnings (loss) before
income taxes, as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Computed "expected" tax expense (benefit).... $1,368,096 $ 700,827 $(13,462,282)
Write-off of goodwill........................ -- -- 6,800,000
Compensation under stock option plans........ (607,043) (182,792) (30,049)
Amortization of intangible assets............ 557,998 558,052 558,052
State franchise taxes, net of Federal
benefit.................................... 218,923 117,407 (78,144)
Benefit from nontaxable FSC income........... (325,248) (227,389) (88,400)
Research and development tax credit.......... -- (301,616) --
Increase in valuation allowance.............. -- -- 3,499,000
Other........................................ 101,712 35,737 341,746
------------ --------- ----------
$1,314,438 $ 700,226 $ (2,460,077)
============ ========= ==========
</TABLE>
F-10
<PAGE> 19
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
The components of net deferred taxes as of May 31, 1994 and 1995, follow:
<TABLE>
<CAPTION>
MAY 31,
--------------------------
1994 1995
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................... $ 290,587 $ 351,869
Inventories........................................... 441,746 720,707
State franchise taxes................................. 70,174 --
Accrued workers' compensation......................... 654,332 666,840
Restructuring costs................................... -- 3,824,256
Intangibles........................................... -- 95,500
Accrued expenses...................................... 135,079 357,864
Compensation under stock option plans................. 298,840 176,309
----------- ----------
1,890,758 6,193,345
Valuation allowance................................... -- (3,499,000)
----------- ----------
Total deferred tax assets............................. 1,890,758 2,694,345
----------- ----------
Deferred tax liabilities:
Property, plant and equipment......................... 2,112,727 2,144,147
State franchise taxes................................. -- 294,012
Intangibles........................................... 267,031 256,186
----------- ----------
Total deferred tax liabilities........................ 2,379,758 2,694,345
----------- ----------
Net deferred tax liabilities.......................... $ 489,000 $ --
=========== ==========
</TABLE>
During the year ended May 31, 1995, the Company increased its valuation
allowance related to deferred tax assets by $3,499,000.
Based on the Company's current and historical pre-tax results of
operations, net of the effects of restructuring costs, management believes it is
more likely than not that the Company will realize the benefit of the existing
deferred tax assets, not offset by a valuation reserve, as of May 31, 1995.
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates net taxable income;
however, there can be no assurance that the Company will generate any earnings
or any specific level of continuing earnings in future years. Certain tax
planning or other strategies could be implemented, if necessary, to supplement
earnings from operations to fully realize recorded tax benefits.
F-11
<PAGE> 20
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
10. COMMITMENTS AND CONTINGENCIES
Litigation. On June 6, 1995, a class action lawsuit was filed in the
Federal District Court for the Central District of California alleging
violations of the Federal Securities laws by the Company and certain of its
present and former officers and directors. On February 6, 1996, the Company
reached an agreement-in-principle to settle the class action lawsuit. The
proposed settlement provides for the Company's insurance carrier to pay
$1,000,000, which comprises the entire settlement amount. The agreement is
subject to the execution of definitive settlement documentation and the
approval of the Court.
The Company is involved as both plaintiff and defendant in various other
claims and legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters should not have
a material adverse effect on the Company's consolidated financial position or
results of operations.
Capital Leases. The Company has capital leases for certain equipment at its
distribution center. These leases were discounted using interest rates
appropriate at the inception of each lease. Future minimum lease payments for
capitalized lease obligations at May 31, 1995 are as follows:
<TABLE>
<S> <C>
1996..................................................................... $ 138,662
1997..................................................................... 138,662
1998..................................................................... 138,662
1999..................................................................... 138,662
2000..................................................................... 112,801
---------
Total minimum obligations................................................ $ 667,449
Less interest............................................................ (134,602)
---------
Present value of net minimum obligations................................. 532,847
Less current portion..................................................... (91,463)
---------
Long-term obligations at May 31, 1995 (see note 8)....................... $ 441,384
=========
</TABLE>
The current portion of capital lease obligations is included in accounts
payable in the accompanying balance sheet at May 31, 1995.
Operating Leases. Substantially all of the Company's retail stores and the
Vista manufacturing facility are leased under noncancelable operating leases
having original terms in excess of one year. Certain leases are renewable and
contain clauses for rent escalation. The future minimum rental payments under
noncancelable operating leases are as follows at May 31, 1995:
<TABLE>
<S> <C>
1996.................................................................... $ 2,736,000
1997.................................................................... 2,430,000
1998.................................................................... 2,283,000
1999.................................................................... 2,001,000
2000.................................................................... 1,422,000
Thereafter.............................................................. 2,955,000
-----------
$13,827,000
===========
</TABLE>
The Company also leases certain other equipment on a month-to-month basis.
Total rent expense incurred for the years ended May 31, 1993, 1994 and 1995
under all operating leases was approximately $3,365,000, $3,888,000 and
$4,279,000, respectively.
Included in rent expense for each of the years ended May 31, 1993, 1994 and
1995 is $36,000 for the rent of a retail store from The Group, a California
general partnership whose partners are former shareholders of
F-12
<PAGE> 21
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
VDRC. The Company also incurred rent expense of $39,700, $33,000 and $18,700 for
the years ended May 31, 1993, 1994 and 1995, respectively, for the lease of two
retail stores owned by members of the immediate family of one of the founders of
the Company.
Employment, Management and Consulting Agreements. At May 31, 1995, the
Company had employment agreements with thirteen officers that range from 1-3
years in duration and provide for minimum compensation levels. The minimum
salaries payable subsequent to May 31, 1995, through the duration of these
agreements, is $3,689,000.
For the years ended May 31, 1993, 1994 and 1995, the Company incurred
approximately $428,000, $754,000 and $1,516,000, respectively, in employment and
management expense under the above agreements which is included in cost of goods
sold, selling and distribution, and general and administrative expenses in the
accompanying consolidated statements of operations. Included in the May 31, 1995
amount is an $850,000 accrual for separation payments in connection with the
departure of two senior executives.
The Company has entered into a management agreement, as amended, with a
company owned by a significant stockholder of the Company. The agreement
provides for a management fee aggregating $350,000 annually through May 31,
1998. Payments under this agreement are made monthly. Amounts paid under this
agreement totaled approximately $350,000 for each of the years in the three-year
period ended May 31, 1995.
License Agreements. The Company has commitments for minimum guaranteed
payments under licensing agreements aggregating approximately $16,800, $22,800
and $62,400 at May 31, 1993, 1994 and 1995, respectively. These agreements range
from 1-3 years in duration and are payable through July 31, 1997. Approximately
$94,000, $110,000, and $214,000 were paid under license agreements during the
years ended May 31, 1993, 1994 and 1995, respectively.
Advertising Agreement. On July 1, 1993, the Company entered into an
agreement with an advertising agency to serve as the Company's advertising
agent. The agreement required that the Company guarantee the advertising agency
minimum annual billings of $180,000 within each 12-month cycle of the agreement.
This agreement was terminated June 1, 1995.
On June 1, 1995, the Company entered into an agreement with an advertising
agency to provide advertising planning and support. The agreement requires that
the Company pay the agency a minimum of $180,000 annually. The agreement may be
terminated by either party with 60 days written notice.
Workers' Compensation. The Company has self-insured for workers'
compensation claims since July 1, 1992. The Company is liable for claims up to
$250,000 per incident and maintains insurance for claims in excess of this
amount. Self-insurance costs are accrued based upon the aggregate of the
liability for reported claims and an actuarially determined estimated liability
for claims incurred but not reported. At May 31, 1994 and 1995, the Company had
accrued approximately $1,511,000 and $1,540,000, respectively, for these claims.
Letters of Credit. The Company utilizes letters of credit to back certain
purchases of product. These instruments are subject to fees competitively
determined in the marketplace.
Third Party Manufacturing. One manufacturer accounted for approximately
one-half of all third-party shoes manufactured during the one year period ended
May 31, 1995.
Bankruptcy of Major Account. In the third quarter of fiscal 1993, the
Company increased its provision for doubtful accounts by approximately $525,000
in connection with the bankruptcy action of a major account.
11. STOCK OPTIONS
In April 1988, the Company adopted an incentive stock option plan under
which the Company may grant to key employees incentive stock options to purchase
up to 666,000 shares of the Company's stock (the "1988
F-13
<PAGE> 22
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
Incentive Stock Option Plan"). The incentive stock options allow the employee to
purchase shares of common stock equal to fair market value at the date of grant.
All stock options granted under the plan were exercisable over a period of 3 to
5 years from the date of grant. These options expire 10 years from the date of
grant.
Transactions involving the 1988 Incentive Stock Option Plan are summarized
as follows:
<TABLE>
<CAPTION>
EXERCISE NUMBER
PRICE OF
PER SHARE SHARES
<S> <C> <C>
Outstanding at May 31, 1992.................................. $0.17-4.83 425,520
Options exercised............................................ 0.17-4.83 (110,000)
---------- ---------
Outstanding at May 31, 1993.................................. 0.17-4.83 315,520
Options exercised............................................ 0.17-4.83 (194,700)
---------- ---------
Outstanding at May 31, 1994.................................. 4.83 120,820
Options canceled............................................. 4.83 (10,000)
Options exercised............................................ 4.83 (49,830)
---------- ---------
Outstanding at May 31, 1995.................................. $ 4.83 60,990
========== =========
</TABLE>
In November 1991, the Board of Directors of the Company adopted a long-term
incentive plan under which the Company may grant to key employees incentive
stock options, and to directors and consultants nonqualified stock options to
purchase up to 1,400,000 shares of the Company's common stock (plus any and all
of the remaining shares available for grants of options under the 1988 Incentive
Stock Option Plan) until November 2001 (the "1991 Long-Term Incentive Plan").
Stock options granted under the plan are exercisable in varying amounts over the
term of the options, and the vesting periods accelerate for certain options upon
certain events, but all such options become fully vested no later than 5 years
after the date of grant. The exercise price for each option is equivalent to no
less than the fair market value of the Company's common stock on the date the
option was granted.
Transactions involving the 1991 Long-Term Incentive Plan are summarized as
follows:
<TABLE>
<CAPTION>
EXERCISE NUMBER
PRICE OF
PER SHARE SHARES
<S> <C> <C>
Outstanding at May 31, 1992................................ $11.25-20.50 126,030
Options canceled........................................... 14.75 (30,990)
Options granted............................................ 6.00-14.50 340,506
------------ --------
Outstanding at May 31, 1993................................ 6.00-20.50 435,546
Options canceled........................................... 6.00- 9.50 (30,255)
Options granted............................................ 5.63- 7.63 270,750
------------ --------
Outstanding at May 31, 1994................................ 5.63-20.50 676,041
Options canceled........................................... 6.00-14.75 (102,850)
Options granted............................................ 4.50- 6.38 771,000
------------ --------
Outstanding at May 31, 1995................................ $ 4.50-20.50 1,344,191
============ ========
</TABLE>
Under separate non-qualified stock option agreements, the Company has
granted options to purchase 256,140 shares of the Company's stock at an exercise
price ranging from $.17 to $17.75 per share. The excess, if any, of the fair
market value of the Company's stock at the date of grant over the exercise price
of the option was considered unearned compensation which was amortized and
charged to operations over the option's vesting period. As of May 31, 1993, 1994
and 1995, 143,500, 4,860 and 21,950 options, respectively, had been exercised at
$.17 per share.
F-14
<PAGE> 23
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
At May 31, 1995, 338,906 share options were exercisable under the Company's
stock option plans.
During the year ended May 31, 1993, the Board of Directors granted certain
officers of the Company restricted stock awards representing an aggregate of
21,773 shares of common stock. The shares underlying the stock grants are
outstanding at the date of grant. Generally, these shares become fully vested
five years from the grant date and remain restricted and non-transferable until
such date. During fiscal 1995, stock grants representing 4,000 shares were
canceled and 4,000 shares were vested as part of a separation agreement. At May
31, 1995, stock awards representing 13,773 shares remained outstanding.
12. STOCKHOLDER RIGHTS PLAN
On February 22, 1994, the Board of Directors of the Company unanimously
adopted a Stockholder Rights Plan, pursuant to which it declared a dividend
distribution of one preferred stock purchase right (a "Right") for each
outstanding share of the common stock.
The Rights dividend was payable on March 8, 1994 to the holders of record
of shares of common stock on that date. Each Right entitles the registered
holder to purchase from the Company 1/100th of a share on the Company's Series A
Junior Participating Preferred Stock, par value $.001 per share, 1,500,000
shares authorized and no shares issued or outstanding at May 31, 1995 (the
"Series A Preferred Stock"), at a price of $14.00 per 1/100th of a share,
subject to adjustment.
The Rights become exercisable (i) the 10th business day following the date
of a public announcement that a person or a group of affiliated or associated
persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more
of the outstanding shares of common stock, or (ii) the 10th business day
following the commencement of, or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the person or
group making the offer becoming an Acquiring Person (the earlier of the dates
described in clauses (i) and (ii) being called the "Distribution Date").
The Rights are not exercisable until the Distribution Date. The Rights will
expire on February 22, 1997 (the "Scheduled Expiration Date"), unless prior
thereto the Distribution Date occurs (in which event the Rights will expire on
February 22, 2004), or unless the Scheduled Expiration Date is extended.
Each share of Series A Preferred Stock purchasable upon exercise of the
Rights will be entitled to a minimum preferential quarterly dividend payment of
$1.00 per share, but will be entitled to an aggregate dividend of 100 times the
dividend declared per share of common stock. In the event the Company's assets
are liquidated, the holders of the shares of Series A Preferred Stock will be
entitled to an aggregate payment of 100 times the payment made per share of
common stock. Each share of Series A Preferred Stock will have 100 votes, voting
together with the shares of common stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of common stock are
exchanged, each share of Series A Preferred Stock will be entitled to receive
100 times the amount received per share of common stock. The Rights Plan was
ratified and approved by the Company's stockholders at the 1994 annual meeting
of stockholders.
F-15
<PAGE> 24
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
May 31, 1993, 1994 and 1995
13. EXPORT SALES
Sales to foreign unaffiliated customers, by major country, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------
1993 1994 1995
<S> <C> <C> <C>
Mexico...................................... $ 8,734,820 $ 4,754,000 $ 915,000
Germany..................................... 519,844 827,000 1,699,000
Italy....................................... 1,239,155 357,000 366,000
Japan....................................... 3,492,786 4,355,000 5,544,000
Canada...................................... 3,520,614 1,354,000 608,000
France...................................... 672,307 406,000 360,000
Panama...................................... 644,950 -- --
United Kingdom.............................. 461,000 354,000 1,143,000
Other....................................... 2,545,728.. 1,509,000 2,314,000
----------- ----------- -----------
$21,831,204 $13,916,000 $12,949,000
=========== =========== ===========
</TABLE>
During fiscal years 1993, 1994 and 1995 the Company had net sales of
approximately $8,037,000, $4,543,000, and $915,000 (9%, 6% and 1% of total
revenues, respectively) from the sale of shoes for distribution to Mexico
through Marathon Sports U.S.A., Inc. ("Marathon"). Marathon's accounts
receivable balance at May 31, 1994 and May 31, 1995 totaled $2,544,000, or 19%
of net accounts receivable and $236,000, or 2% of net accounts receivable,
respectively.
On March 20, 1995, the Company settled its account receivable with
Marathon. The agreement required Marathon to (i) pay the Company $600,000 in
cash, (ii) return 50,000 pairs of footwear with an estimated fair value of
approximately $750,000, and (iii) pay $275,000 pursuant to a six-month
promissory note, guaranteed by the owners of Marathon and secured by a Deed of
Trust on their personal residence. In connection with this agreement, the
Company recorded a $400,000 provision for doubtful accounts in the third quarter
of fiscal 1995. The Company continues to sell in Mexico through Marathon on a
cash basis pursuant to an agreement which expires on July 31, 1996.
F-16
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Vans, Inc.:
We have audited the accompanying consolidated balance sheets of Vans, Inc.
and subsidiaries as of May 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended May 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vans, Inc. and
subsidiaries as of May 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
July 24, 1995, except as to the first paragraph
of note 10, which is as of February 6, 1996
F-17
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this amendment to be
signed on its behalf by the undersigned thereunto duly authorized.
VANS, INC.
------------
(Registrant)
BY: /s/ Craig E. Gosselin
----------------------------------
Craig E. Gosselin
Vice President and General Counsel
Date: May 21, 1996
