<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1996
REGISTRATION NO. 333-3272
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
VANS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3021 33-0272893
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2095 NORTH BATAVIA STREET
ORANGE, CALIFORNIA 92665-3101
(714) 974-7414
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
CRAIG E. GOSSELIN
VICE PRESIDENT AND GENERAL COUNSEL
VANS, INC.
2095 NORTH BATAVIA STREET
ORANGE, CALIFORNIA 92665-3101
(714) 974-7414
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
CRAIG E. DAUCHY BRYANT B. EDWARDS
ERIC C. JENSEN LATHAM & WATKINS
COOLEY GODWARD CASTRO 633 WEST FIFTH STREET, SUITE 4000
HUDDLESON & TATUM LOS ANGELES, CALIFORNIA 90071
3000 SAND HILL ROAD (213) 485-1234
BUILDING 3, SUITE 230
MENLO PARK, CALIFORNIA 94025
(415) 843-5000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ---------------------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
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Common Stock, $.001 par value.................. 2,990,000 $13.875 $41,486,250 $14,306(2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee under Rule 457(c) of the Securities Act of 1933 based on
the average of the high and low sales prices of the Common Stock on the
Nasdaq National Market on March 29, 1996.
(2) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
VANS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-3
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-3 REGISTRATION STATEMENT HEADING IN PROSPECTUS
- ------------------------------------------------- -------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front Cover Page and Outside Back
Cover Page
3. Summary Information, Risk Factors, and
Ratio of Earnings to Fixed Charges....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Not applicable
6. Dilution................................... Not applicable
7. Selling Security Holders................... Certain Relationship; Principal and Selling
Stockholders
8. Plan of Distribution....................... Outside Front and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered............................... Not applicable
10. Interests of Named Experts and Counsel..... Legal Matters
11. Material Changes........................... Outside Front and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Dividend Policy; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Certain
Relationship; Principal and Selling
Stockholders; Consolidated Financial
Statements
12. Incorporation of Certain Information by
Reference................................ Incorporation of Certain Documents by
Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 15, 1996
PROSPECTUS
, 1996
2,600,000 SHARES
LOGO
COMMON STOCK
Of the 2,600,000 shares of Common Stock being offered hereby (the
"Offering"), 2,500,000 are being sold by Vans, Inc. (the "Company"), and 100,000
are being sold by a stockholder of the Company (the "Selling Stockholder"). The
Company will not receive any of the proceeds from the sale of shares of Common
Stock by the Selling Stockholder. The Common Stock is traded on the Nasdaq
National Market under the symbol "VANS." On April 15, 1996, the last reported
sales price of the Common Stock was $14.00 per share.
SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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Per Share............... $ $ $ $
Total(3)................ $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of this Offering estimated at $470,000,
payable by the Company.
(3) A principal stockholder of the Company and its affiliated investment
partnership have granted the Underwriters a 30-day option to purchase up to
an aggregate of 390,000 additional shares of Common Stock to cover
over-allotments, if any. If the option is exercised in full, the Price to
the Public, Underwriting Discounts and Commissions and Proceeds to the
Selling Stockholders will be $ , $ and $ ,
respectively. See "Principal and Selling Stockholders" and "Underwriting."
The shares of Common Stock offered hereby are being offered by the several
Underwriters when, as and if delivered to and accepted by them, subject to
certain conditions, including their right to withdraw, cancel or reject orders
in whole or in part. It is expected that delivery of certificates representing
the shares of Common Stock will be made against payment in New York, New York on
or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
<PAGE> 4
VANS and the VANS logo are registered trademarks of the Company. This
Prospectus includes other trademarks of the Company and the trademarks of other
companies.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus or incorporated by
reference herein. The discussion in this Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as those discussed elsewhere
in this Prospectus. Except as otherwise indicated, the information contained in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
Unless the context otherwise requires, all references to the "Company" refer to
Vans, Inc. and its subsidiaries.
THE COMPANY
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 was founded in
1966 in Southern California as a domestic manufacturer of vulcanized deck shoes
(such as the Authentic(TM)). Today the Company markets its broad footwear line
worldwide to a target customer base of 12 to 24 year old young men and women.
For the thirty-nine week period ended February 24, 1996, the Company generated
sales of $85.4 million. The Company's sales to national accounts increased
during this period by 31.2% to $46.0 million, international sales increased by
67.9% to $18.2 million, and sales through the Company's 80 retail stores grew by
20.9% to $21.3 million with a comparable store sales increase of 11.4%.
The Company has earned a reputation over its 30 year history for quality,
performance and value, particularly among participants in alternative sports
such as skateboarding and BMX bicycling. As a result of this reputation, the
Company has developed a strong brand image which the Company believes represents
the individualistic and outdoor lifestyle of its target customer base. The VANS
brand image coincides with what the Company believes is a fundamental shift in
the attitudes and lifestyles of young people worldwide, characterized by the
rapid growth and acceptance of alternative, outdoor sports and the desire to
lead an individualistic, contemporary lifestyle. The Company believes that
underlying factors influencing young people include: (i) programs broadcast
worldwide on networks such as MTV, ESPN and ESPN2; (ii) the growing
international distribution and popularity of magazines such as Rolling Stone,
TransWorld SKATEboarding, Spin and Details; and (iii) the increased independence
and purchasing power of young people worldwide, as evidenced by the estimated 25
million teenagers in the United States who in 1994 spent approximately $89
billion.
To capitalize on the strength of the VANS brand with young men and women
worldwide, the Company has recently repositioned itself from a domestic
manufacturer to a marketing-driven company. With a focus on understanding the
attitudes, lifestyle and product desires of its target customer base, and by
marketing and designing its product line accordingly, the Company believes it is
well-positioned to further the growth of the VANS brand in this attractive
market.
Led by a new management team including Walter Schoenfeld, the Company's
Chief Executive Officer and the founder of Britannia Sportswear Company, and
Gary Schoenfeld, the Company's Chief Operating Officer, the Company has
implemented a number of strategic and operational initiatives. In particular,
the Company: (i) began sourcing new products from overseas; (ii) leveraged its
brand equity with young people into products centered around increasingly
popular alternative sports, such as the Company's snowboard boot line, and into
products that have a lifestyle orientation, such as the Company's successful
International Collection of casual and active-casual shoes; (iii) designed a
marketing strategy to promote the VANS brand and stay close to the product
desires of its target customers; (iv) restructured its operations which
culminated with the July 1995 closing of its underutilized manufacturing
facility in Orange, California and the consolidation of the production of its
traditional vulcanized shoes at its smaller facility in Vista, California; and
(v) enhanced its management information and inventory control systems to better
control costs and increase
3
<PAGE> 6
operational efficiencies. Each of these initiatives has been an important
ingredient of the Company's heightened commitment to its customers.
BUSINESS STRATEGY
The Company's long-term objective is to become a leading lifestyle company
offering lines of complementary footwear, apparel and accessory products
worldwide that capitalize on the strength of the VANS brand. The Company's
operating and growth strategies are aimed at achieving this long-term objective
while maintaining the authenticity and credibility of the VANS brand image.
OPERATING STRATEGY
The Company seeks to be the brand of choice for lifestyle and alternative
sport footwear and related products by continually listening and responding to
the product desires of its target customers. The Company's core customers are 12
to 24 year old young men and women who are active enthusiasts of alternative
sports and/or on the forefront of fashion and contemporary lifestyle trends. The
breadth of the Company's product line is intended to appeal both to these core
trendsetters as well as to mainstream customers who similarly identify with the
lifestyle image of the VANS brand. The Company's operations are directly tied to
this strategy and are intended to provide the necessary framework for staying
close to these customers. Key elements of the Company's operating strategy
include:
o Promoting the VANS brand image through grassroots marketing efforts;
o Providing authentic and design-distinctive products;
o Focusing domestic distribution through selected national retailers and
independent accounts;
o Selecting international distributors that are skilled at promoting the
VANS brand in their local markets;
o Executing a retail strategy that complements the Company's overall brand
strategy;
o Maintaining flexibility in manufacturing to better respond to customer
needs;
o Executing a well-conceived product testing process to help gauge market
acceptance; and
o Utilizing selective licensing to further promote the VANS brand.
GROWTH STRATEGY
The Company's growth strategy is to maximize its long-term opportunities
while simultaneously enhancing and protecting its valuable brand image. The
Company's growth strategy is focused on:
o Expanding its product line beyond the Company's core men's footwear
styles to include more women's styles as well as related products such as
apparel and other accessories;
o Capitalizing on the growing snowboarding market;
o Increasing the penetration of its existing domestic account base; and
o Pursuing a global marketing initiative to increase sales in existing and
new international markets.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........................ 2,500,000 shares
Common Stock offered by a Selling Stockholder.............. 100,000 shares
Common Stock to be outstanding after this Offering(1)...... 12,332,418 shares
Use of Proceeds............................................ For repayment of debt and
general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market Symbol.............................. VANS
</TABLE>
- ------------------------
(1) Excludes options to purchase 1,393,209 shares of Common Stock outstanding
under the Company's 1991 Long-Term Incentive Plan (the "Incentive Plan"), of
which options to purchase an aggregate of 424,987 shares are currently
exercisable. Also excludes options to purchase 110,280 shares of Common
Stock granted outside of the Incentive Plan, all of which are currently
exercisable.
------------------------
The executive offices of the Company are located at 2095 North Batavia
Street, Orange, California 92665-3101. The Company's telephone number is (714)
974-7414.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
FISCAL YEARS ENDED MAY 31, ----------------------------
----------------------------- FEBRUARY 25, FEBRUARY 24,
1993 1994 1995 1995 1996
------- ------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $86,563 $80,476 $88,056 $ 63,470 $ 85,434
Gross profit(1)......................... 37,786 31,698 27,716 26,255 33,144
Restructuring costs(2).................. -- -- 30,048 -- --
Earnings (loss) from operations......... 5,785 4,031 (38,418) 3,498 5,347
Interest and debt expense............... (2,856) (2,856) (2,881) (2,142) (2,452)
Net earnings (loss)..................... 4,023 2,061 (39,595) 2,986 4,390
Per share information(3):
Primary earnings (loss) per share..... $ 0.28 $ 0.14 $ (3.86) $ 0.18 $ 0.26
Fully diluted earnings (loss) per
share.............................. 0.28 0.14 (3.86) 0.18 0.25
Pro forma earnings (loss) per
share(4)........................... (3.03) 0.32
</TABLE>
<TABLE>
<CAPTION>
AS OF FEBRUARY 24, 1996
-------------------------
ACTUAL AS ADJUSTED(6)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital(5)................................................... $13,856 $ 22,260
Total assets......................................................... 72,709 75,144
Long-term debt, including current portion............................ 28,298 450
Total stockholders' equity........................................... 23,452 56,145
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
FISCAL YEARS ENDED MAY 31, ----------------------------
----------------------------- FEBRUARY 25, FEBRUARY 24,
1993 1994 1995 1995 1996
------- ------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net sales by channel:
National............................ $40,837 $43,744 $50,464 $ 35,039 $ 45,962
Retail.............................. 23,895 22,816 24,643 17,598 21,278
International....................... 21,831 13,916 12,949 10,833 18,194
------- ------- ------- ------------ ------------
Total net sales................ $86,563 $80,476 $88,056 $ 63,470 $ 85,434
</TABLE>
- -----------------------------
(1) Fiscal 1995 amount includes a write down of $6.3 million of domestic
inventory in the fourth quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."
(2) In the fourth quarter of fiscal 1995, the Company recognized a charge of
$30.0 million related to the closure of its Orange, California manufacturing
facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(3) See Note 2 of Notes to Consolidated Financial Statements for a description
of the calculation of net earnings (loss) per common share.
(4) Pro forma earnings (loss) per share for the fiscal year ended May 31, 1995
and the thirty-nine week period ended February 24, 1996 assumes the
retirement of debt from the estimated proceeds of the Offering had taken
place at the beginning of the period. The computation assumes approximately
2,100,000 shares and 2,200,000 shares, respectively, of Common Stock would
be issued to retire the debt and the after tax (at the statutory rate of
40%) interest and debt expense savings would be approximately $1.7 million
and $1.3 million, respectively.
(5) Working capital consists of current assets minus current liabilities.
(6) Adjusted to reflect the sale of 2,500,000 shares of Common Stock offered by
the Company hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Stock offered by this Prospectus.
CHANGES IN FASHION TRENDS
The Company's success is largely dependent on its ability to anticipate the
rapidly changing fashion tastes of its customers and to provide merchandise that
appeals to their preferences in a timely manner. There can be no assurance that
the Company will respond in a timely manner to changes in consumer preferences
or that the Company will successfully introduce new models and styles of
footwear. Achieving market acceptance for new products may also require
substantial marketing and product development efforts and the expenditure of
significant funds to create consumer demand. Decisions with respect to product
designs often need to be made several months in advance of the time when
consumer acceptance can be determined. As a result, the Company's failure to
anticipate, identify or react appropriately to changes in styles and features
could lead to, among other things, excess inventories and higher markdowns,
lower gross margins due to the necessity of providing discounts to retailers, as
well as the inability to sell such products through Company-owned retail and
factory outlet stores. Conversely, failure by the Company to anticipate consumer
demand could result in inventory shortages, which can adversely affect the
timing of shipments to customers, negatively impacting retailer and distributor
relationships and diminishing brand loyalty. The failure to introduce new
products that gain market acceptance would have a material adverse effect on the
Company's business, financial condition and results of operations, and could
adversely affect the image of the VANS brand name. See "Business-- Product
Design and Development," "--Marketing and Promotion" and "--Backlog."
WORKING CAPITAL CONSTRAINTS
During the last 18 months, the Company has experienced an increase in the
level of accounts receivable and been subjected to other significant working
capital constraints due to numerous factors, including acceptance and sales of
its products, the timing and manufacturing of orders, the seasonality of its
business and payment terms extended to its retailers and by its suppliers.
During the thirty-nine week period ended February 24, 1996, working capital
constraints were one of several factors which adversely impacted sales to the
Company's national accounts. The Company believes that the application of the
net proceeds of this Offering to repay debt should alleviate these constraints
to a significant extent. However, there can be no assurance that, particularly
in the event of continued growth in sales, the factors discussed above or other
factors would not cause the Company to experience cash flow constraints, which
could have a significant adverse effect on the Company's results of operations.
In particular, to the extent the Company increases its sales to international
distributors or to certain national accounts, the longer payment terms provided
to such customers are expected to increase the levels of the Company's accounts
receivable and could therefore affect the Company's ability to finance its
operations. The level of accounts receivable of the Company increased
significantly in absolute dollars and as a percentage of sales during the
thirty-nine week period ended February 24, 1996 as compared to the comparable
prior fiscal period. The Company may need to seek additional financing to
support its growth in the future; however, there can be no assurance that such
financing will be available on terms acceptable to the Company, or at all. In
addition, the Company has recently entered into a financing and handling
arrangement with Ssangyong (U.S.A.), Inc. ("Ssangyong U.S.A.") to provide for
financing and distribution of snowboard boots. Such agreement expires on March
28, 1997 and there can be no assurance that the relationship with Ssangyong
U.S.A. will be successful or that the agreement will be renewed. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
COMPETITION
Footwear Industry
The athletic and casual footwear industry is highly competitive. The
Company competes with a number of domestic and foreign manufacturers of
footwear. Many of the Company's competitors, such as Nike, Inc., Reebok
International Ltd., adidas AG and Fila Holding SpA, have significantly greater
financial resources
6
<PAGE> 9
than the company, have more comprehensive lines of product offerings, compete
with the Company in the Far East for manufacturing sources and spend
substantially more on product advertising than the Company. In addition, the
general availability of offshore shoe manufacturing capacity allows for rapid
expansion by competitors and new entrants in the footwear market. In addition,
in the casual footwear market, the Company competes with a number of companies,
such as Airwalk, Converse Inc. and Stride Rite Corporation (Keds), many of which
may have significantly greater financial and other resources than the Company.
Snowboard Boot Industry
The Company is a relatively new entrant in the snowboard boot business.
Although the Company has experienced growth in sales of its line of snowboard
boots, it faces significant competition, most notably from Airwalk and Burton
Snowboards, Inc., the industry leaders. Snowboarding is a relatively new sport
and there can be no assurance that it will continue to grow at the rate
experienced in recent years, or that its popularity will not decline. Moreover,
the market for snowboards is characterized by image-conscious consumers. The
failure by the Company to accurately predict and target future trends or to
maintain its progressive image could have a material adverse effect on its
snowboard boot sales. The Company believes that its future success in the
snowboard boot market will depend, in part, on its ability to introduce
innovative, well-received products, and there can be no assurance that it will
do so. See "Business--Competition."
DEPENDENCE ON FOREIGN MANUFACTURERS
Approximately 64% of the Company's shoes and 100% of the Company's
snowboard boots sold during the thirty-nine week period ended February 24, 1996
were manufactured by independent suppliers located in South Korea. The Company
anticipates that its reliance on offshore manufacturers will increase, primarily
due to increasing sales of its International Collection and the Company's
snowboard boot line. The Company does not have contracts with its foreign
footwear manufacturing sources. The Company currently uses six manufacturers for
the production of its shoes, three manufacturers for the production of snowboard
boots and one manufacturer for the production of both shoes and snowboard boots.
One manufacturer accounted for approximately 52% of all third party shoes
manufactured during the thirty-nine week period ended February 24, 1996, and the
Company believes this manufacturer accounts for approximately 40% of all third
party shoes which are currently being manufactured for the Company. In addition,
the Company may in the future use manufacturers outside of South Korea. There
can be no assurance that the Company will not experience difficulties with such
manufacturers, including reduction in the availability of production capacity,
errors in complying with product specifications, inability to obtain sufficient
raw materials, insufficient quality control, failure to meet production
deadlines or increases in manufacturing costs. In addition, if the Company's
relationship with any of its manufacturers were to be interrupted or terminated,
the Company would be required to locate alternative manufacturing sources. The
establishment of new manufacturing relationships involves numerous
uncertainties, and there can be no assurance that the Company would be able to
obtain alternative manufacturing sources on terms satisfactory to the Company.
Should a change in its suppliers become necessary, the Company would likely
experience increased costs, as well as substantial disruption and resulting loss
of sales. In addition, the Company utilizes two international sourcing agents
who assist the Company in selecting and overseeing third party manufacturers,
ensuring quality, sourcing fabrics and monitoring quotas and other trade
regulations. The loss or reduction in the level of services from either of such
agents could significantly affect the ability of the Company to efficiently
source products from South Korea, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Sourcing and Manufacturing."
Foreign manufacturing is subject to a number of risks, including work
stoppages, transportation delays and interruptions, political instability,
foreign currency fluctuations, changing economic conditions, expropriation,
nationalization, the imposition of tariffs, import and export controls and other
non-tariff barriers (including quotas) and restrictions on the transfer of
funds, environmental regulation and other changes in governmental policies.
There can be no assurance that such factors will not materially adversely affect
the Company's business, financial condition and results of operations. See
"Business--Sourcing and Manufacturing." While the Company's transactions with
international suppliers and distributors are accounted for in
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<PAGE> 10
United States dollars, and the Company does not engage in currency hedging,
currency fluctuations could adversely affect the Company in the future.
All Company products manufactured overseas and imported into the United
States are subject to duties collected by the United States Customs Service.
Customs information submitted by the Company is subject to review by the Customs
Service. The Company is unable to predict whether additional United States
Customs duties, quotas or other restrictions may be imposed on the importation
of its products in the future. The enactment of any such duties, quotas or
restrictions could result in increases in the cost of such products generally
and might adversely affect the sales or profitability of the Company.
MANAGEMENT OF GROWTH
The Company intends to pursue an aggressive growth strategy through
expanded marketing and promotion efforts, more frequent introductions of
products, broader lines of casual and performance footwear and snowboard boots
as well as apparel and other accessories and increased international market
penetration. To the extent the Company is successful in increasing sales of its
products, a significant strain may be placed on its financial, management and
other resources. The Company's future performance will depend in part on its
ability to manage change in both its domestic and international operations and
will require the Company to attract, train, manage and retain management, sales,
marketing and other key personnel. In addition, the Company's ability to manage
its growth effectively will require it to continue to improve its operational
and financial control systems and infrastructure and management information
systems. There can be no assurance that the Company will be successful in such
efforts, and the inability of the Company's management to manage growth
effectively could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Sales and
Distribution" and "Management."
RELIANCE ON CERTAIN CUSTOMERS
During the thirty-nine week period ended February 24, 1996, the Company's
net sales to its five largest national retail customers accounted for
approximately 38% of total net national account sales and 21% of total net
sales. During the thirty-nine week period ended February 24, 1996, the Company's
net sales to its five largest international distributors accounted for
approximately 78% of total international distributor sales and 17% of total net
sales. Although the Company has long-term relationships with many of its
customers, the Company's national and other retail customers do not have
contractual obligations to purchase the Company's products. While the Company's
international distributors are generally contractually obligated to make minimum
purchases, there can be no assurance that such distributors will meet such
minimum purchase requirements. The loss of or significant decrease in business
from any of the Company's major national retail or international distribution
customers could have a material adverse effect on its business, financial
condition and results of operations. See "Business--Sales and Distribution."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The footwear industry is characterized by significant seasonality of net
sales and results of operations. Historically, the Company's business has been
moderately seasonal, with the largest percentage of sales realized in the first
and fourth fiscal quarters (March through August), the "Spring and Summer" and
"Back to School" months. In addition, because snowboarding is a winter sport,
sales of the Company's snowboard
8
<PAGE> 11
boots have historically been strongest in the first and second fiscal quarters.
As the Company increases its international sales and experiences changes in its
product mix, it expects that its quarterly results will vary from historical
trends. As a result of these and other factors, the Company anticipates that a
higher portion of its overall fiscal year revenues will be recognized in the
first fiscal quarter. Therefore, the results of operations of any quarter may
not necessarily be indicative of the results that may be achieved for a full
fiscal year or any future quarter. In addition to seasonal fluctuations, the
Company's operating results fluctuate on a quarter-to-quarter basis as a result
of holidays, weather and the timing of large shipments of footwear. The
Company's operating margins also fluctuate according to product mix, cost of
materials and the mix between wholesale and retail channels. Given these
factors, there can be no assurance that the Company's future results will be
consistent with past results or the projections of securities analysts.
Historically, the Company has shipped a large portion of its products late in
the quarter. Consequently, the Company may not learn of sales shortfalls until
late in any particular fiscal quarter, which could result in an immediate and
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Seasonality."
TRADE CREDIT RISK
The Company's results of operations are affected by the timely payment for
products by national accounts, independent retailers, international distributors
and other customers. Particularly as the Company increases sales to independent
retailers, including snowboard boot retailers, the Company's bad debt risk may
increase. Although the Company's bad debt expense has not been material to date,
no assurance can be given that it will not increase relative to net sales in the
future or that the Company's current reserves for bad debt will be adequate. Any
significant increase in the Company's bad debt expense relative to net sales
could adversely impact the Company's net income and cash flow, and could
adversely affect the Company's ability to pay its obligations as they become
due.
DEPENDENCE ON KEY INDIVIDUALS
The Company's future success is highly dependent on the services of its
management team. The Company's Chief Executive Officer, Chief Operating Officer
and Chief Financial Officer have all been hired in the last 12 months. The loss
of the services of these individuals or any of the Company's other officers
could have a material adverse effect on the Company's business. Each executive
officer of the Company is currently subject to an employment agreement. However,
the Company believes that the market for key personnel in the industries in
which it competes is highly competitive. There can be no assurance that the
Company will be able to attract and retain key personnel with the skills and
expertise necessary to manage the Company's business, both in the United States
and abroad. See "Management."
ECONOMIC CYCLICALITY
Certain economic conditions affect the level of consumer spending on the
products offered by the Company, including, among other things, general business
conditions, interest rates, taxation and consumer confidence in future economic
conditions. The Company and the footwear and apparel industry in general are
highly dependent on the economic environment and discretionary levels of
consumer spending that affect not only the consumer, but also distributors and
retailers of the Company's products. As a result, the Company's results of
operations may be materially adversely affected by downward trends in the
economy or the occurrence of events that adversely affect the economy in
general. In addition, a significant portion of the Company's revenues come from
sales in California, including sales through the Company's retail stores. A
decline in the economic conditions in California could materially adversely
affect the Company's business, financial condition and results of operations.
RELIANCE ON THIRD PARTY TECHNOLOGY
The Company currently licenses certain proprietary technology and the
right to produce snowboard boots for a step-in boot binding system from Switch
Manufacturing ("Switch"). Such license expires December 31, 1997 and is
non-exclusive, except that Switch may not enter into license agreements with
the two snowboard boot market leaders measured by sales in 1994. The loss
of the Switch license, failure by Switch to renew such license or the
termination of the Company's limited exclusivity could adversely impact the
Company's competitive position in the snowboard boot market. In addition,
failure by Switch to receive a patent on its binding system, or patent
litigation regarding such system, could significantly reduce the value to the
9
<PAGE> 12
Company of its relationship with Switch. In that regard, the Company has been
advised that Switch has been sued for patent infringement by Mark Raines,
Gregory Deeney and Preston Binding Company ("Preston"), a division of Ride, Inc.
("Ride"). The suit alleges that the Switch binding system infringes the patent
of a binding system developed by Messrs. Raines and Deeney which was
subsequently assigned to Preston. Switch has responded to the suit by filing an
answer denying such allegations and a complaint against Preston and Ride seeking
a declaratory judgment of patent non-infringement and damages for alleged bad
faith allegations of patent infringement.
Additionally, the Company has been advised by Switch that K2 Corporation
("K2") has notified Switch that, in its opinion, Switch's binding system
infringes certain allowed claims in a U.S. patent application filed by K2. To
the Company's knowledge, no litigation has commenced in this matter.
The Company has not been named as a defendant in the Preston suit or
threatened with litigation in either of the foregoing matters; however, there
can be no assurance that the Company will not be named in the Preston suit or
any potential litigation which might arise between Switch and K2, and there can
be no assurance as to the outcome of the litigation between Switch and Preston
and Ride or any potential litigation between Switch and K2. In the event Switch
is found liable in the Preston suit or in any suit that may be filed by K2, the
Company may be unable to use the Switch step-in boot binding system, which could
adversely impact the Company's competitive position in the snowboard boot
market.
RISKS ASSOCIATED WITH SPECIALIZED MATERIALS
The Company's success is largely dependent on its ability to anticipate the
rapidly changing fashion tastes of its customers and to provide merchandise that
appeals to their preferences in a timely manner. In response to recent consumer
demand, the Company has begun selling footwear that uses certain specialized
fabrics, instead of the traditional materials used by the Company such as
leather and canvas. There can be no assurance that the Company will be able to
obtain on a timely basis an adequate supply of such fabrics, which could result
in the Company's inability to meet consumer demand. Further, there can be no
assurance that footwear produced with such material will have performance and
durability comparable to the Company's traditional footwear. The failure of
footwear using such fabrics to perform to customer satisfaction could result in
a higher rate of customer returns and could adversely affect the image of the
VANS brand name, which could have a material adverse effect on the Company's
business and results of operations. See "Business -- Product Design and
Development."
PRODUCT LIABILITY
The Company's snowboard boots are often used in relatively high-risk
recreational settings. Consequently, the Company is exposed to the risk of
product liability claims in the event that a user of such boots is injured in
connection with such use. In many cases, users of the Company's boots may engage
in imprudent or even reckless behavior while using such products, thereby
increasing the risk of injury. The Company maintains general liability insurance
(which includes product liability coverage) and excess liability insurance
coverage in an amount the Company believes to be sufficient. However, there can
be no assurance that such coverage will be sufficient, will continue to be
available on acceptable terms, will be available in sufficient amounts to cover
one or more large claims, or that the insurer will not disclaim coverage as to
any future claim. The successful assertion of one or more large claims against
the Company that exceed available insurance coverage, or changes in the
Company's insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could have a material adverse
effect on the Company's financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has fluctuated substantially since the
Company's initial public offering in August 1991. There can be no assurance that
the market price of the Common Stock will not continue to fluctuate
significantly. Future announcements concerning the Company or its competitors,
quarterly variations in operating results, the introduction of new products or
changes in product pricing policies by the Company or its competitors, weather
patterns that may be perceived to affect the demand for the Company's products,
changes in earnings estimates by analysts or changes in accounting policies,
among other factors, could cause the market price of the Common Stock to
fluctuate substantially. In addition, stock markets have experienced extreme
price and volume volatility in recent years. This volatility has had a
10
<PAGE> 13
substantial effect on the market prices of securities of many smaller public
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations could adversely affect the
market price of the Common Stock. See "Price Range of Common Stock."
RISK OF WORKERS' COMPENSATION CLAIMS
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. The Company has not been required to pay any
material amounts for workers' compensation claims since it began self-insuring.
There can be no assurance, however, that workers' compensation claims will not
increase in the future. An increase in the number of claims or the dollar amount
of individual claims could have a material adverse effect on the Company's
business, financial condition or results of operations. In addition, there can
be no assurance that excess-coverage insurance will remain available on terms
satisfactory to the Company, or at all. The loss of excess coverage insurance as
a result of a large number of claims or for other reasons could materially
adversely affect the Company.
ACQUISITION-RELATED RISKS
From time to time, the Company evaluates and considers the acquisition of
businesses involved in activities or with product lines that are compatible to
those of the Company. Acquisitions involve numerous risks, including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks associated with entering markets or conducting
operations with which the Company has no or limited direct prior experience, and
the potential loss of key employees of the acquired company. Moreover, there can
be no assurance that the anticipated benefits of an acquisition will be
realized. Future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, all of which could materially adversely affect the Company's business,
financial condition, results of operations or stock price.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 12,332,418 shares
of Common Stock outstanding, all of which will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), by persons other than "affiliates" of the Company, as
that term is defined under Rule 144 under the Securities Act. McCown De Leeuw &
Co. ("MDC"), MDC/JAFCO Ventures, an investment partnership affiliated with MDC
("MDC/JAFCO"), and all of the officers and directors of the Company holding an
aggregate of 1,991,325 shares (assuming no exercise of the Underwriters'
over-allotment option) have agreed with the Underwriters that they will not,
directly or indirectly, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, offer, sell, pledge, contract to sell or
otherwise dispose of any Common Stock (or any security convertible into or
exchangeable or exercisable for Common Stock) or other securities of the Company
that are substantially similar to the Common Stock or grant any options or
warrants to purchase Common Stock or similar securities, for a period of 120
days after the date of this Prospectus, subject to certain limited exceptions
(the "Lock-Up Period"). See "Underwriting." Following the expiration of the
Lock-Up Period, all of such shares will be freely tradeable, subject to the
provisions of Rule 144. Such sales could adversely affect the prevailing market
prices for the Company's Common Stock. MDC and MDC/JAFCO are also entitled to
demand and piggyback registration rights with respect to the 1,870,414 shares of
Common Stock they currently own. The exercise of such registration rights could
have a material adverse effect on the market price of the Company's Common
Stock.
ANTI-TAKEOVER EFFECTS
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock (of which 1,500,000 shares have been designated Series
A Junior Preferred Stock) and to fix the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the Company's
stockholders. The potential issuance of Preferred Stock may have the effect of
delaying, deferring or
11
<PAGE> 14
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. The Company has no current plans to issue shares of
Preferred Stock. Additionally, the Board of Directors has adopted a Stockholder
Rights Plan pursuant to which the holders of the Common Stock on March 8, 1994
received a dividend distribution of one Series A Junior Preferred Stock purchase
right for every share of Common Stock owned by them (a "Right"). The Rights are
exercisable upon the occurrence of certain transactions (such as a proposed
acquisition of the Company) and entitle the holder to acquire additional shares
of Common Stock of the Company or the acquiror at a price equal to 50% of the
then current market price of such stock. The Rights could have the effect of
deterring tender offers or takeover attempts. Other provisions of the Company's
charter and bylaws may also have the effect of delaying or deterring a change in
control of the Company. See Note 12 of Notes to Consolidated Financial
Statements.
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares being
offered by the Company hereby, based on the assumed public offering price of
$14.00 per share, and after deducting underwriting discounts and commissions and
estimated offering expenses, are estimated to be approximately $32.7 million.
The Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders."
The Company plans to use: (i) $25.6 million of the net proceeds to repay
the outstanding principal amount of the Company's 9.6% senior notes due August
1, 1999 (the "Senior Notes"), including accrued interest and a make whole amount
resulting from the prepayment of the Senior Notes; (ii) $4.6 million of the net
proceeds to repay amounts outstanding under a secured line of credit (the
"Secured Line of Credit") with Bank of the West (the "Bank") which currently
bears interest at 8.25% per annum; and (iii) the remaining net proceeds for
general corporate purposes, including increased working capital for the
financing of inventory and accounts receivable. Pending such uses, the Company
intends to invest the net proceeds from this Offering in short-term,
investment-grade, interest-bearing instruments.
The Company intends to utilize the improved liquidity which will result
from the reduction of debt under the Secured Line of Credit to reduce amounts
outstanding under an unsecured revolving credit facility (the "Unsecured Credit
Facility") with Ssangyong Corporation, a South Korean corporation ("Ssangyong"),
as such amounts become due over the ensuing 60 days. Assuming full utilization
of the Unsecured Credit Facility, amounts outstanding thereunder bear interest
at an effective rate of 14.8% per annum. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Annual principal payments of $5.8 million are due on the Senior Notes on
August 1, 1996, 1997 and 1998, with the remaining balance plus accrued interest
due on August 1, 1999. As a result of the repayment in full of the Senior Notes
with a portion of the net proceeds of this Offering, 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). The Secured Line of Credit accrues interest at the Bank's prime rate
and is due on July 1, 1997. As of February 24, 1996, the amounts outstanding
under the Senior Notes and the Secured Line of Credit were $23.2 million and
$4.6 million, respectively. The Company used the amounts borrowed under the
Secured Line of Credit to make a $5.8 million principal payment on the Senior
Notes on August 1, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
13
<PAGE> 16
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "VANS." The following table sets forth, for the periods indicated,
the high and low sales prices of the Common Stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
HIGH LOW
---- ---
<S> <C> <C> <C>
FISCAL YEAR ENDED MAY 31, 1994:
1st Quarter............................................................... $ 8 1/2 $ 5 3/4
2nd Quarter............................................................... 7 3 /16
3rd Quarter............................................................... 6 3/4 4 1/2
4th Quarter............................................................... 7 1/8 4 1/2
FISCAL YEAR ENDED MAY 31, 1995:
1st Quarter............................................................... $ 6 7/8 $ 4 3/8
2nd Quarter............................................................... 8 1/4 5 7/8
3rd Quarter............................................................... 8 1/4 5 7/8
4th Quarter............................................................... 7 3 1/8
FISCAL YEAR ENDED MAY 31, 1996:
1st Quarter............................................................... $ 7 3/8 $ 4 1/4
2nd Quarter............................................................... 8 3/8 5 5/8
3rd Quarter............................................................... 13 3/4 6 7/8
4th Quarter (through April 15, 1996)...................................... 15 11 7/8
</TABLE>
On April 15, 1996, the last reported sales price on the Nasdaq National
Market for the Company's Common Stock was $14.00 per share. As of April 1, 1996,
there were 179 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its Common Stock.
The Company presently intends to retain its earnings to fund the development and
growth of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. In addition, the terms of the Secured Line
of Credit and the agreements governing the Senior Notes prohibit the payment of
such dividends without the consent of the Bank and the holders of the Senior
Notes.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth the short-term borrowings and the total
capitalization of the Company at February 24, 1996, and as adjusted to give
effect to the sale of 2,500,000 shares of Common Stock offered by the Company
hereby and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
<TABLE>
<CAPTION>
AS OF FEBRUARY 24, 1996
-------------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings................................................ $ 5,953 $ 5,953
======== ====
Long-term debt, including current portion:
Long-term credit facility.......................................... $ 4,648 $ --
Senior notes....................................................... 23,200 --
Capital lease obligations.......................................... 450 450
-------- ----
Total long-term debt....................................... 28,298 450
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 12,332,418 shares issued and outstanding actual
and adjusted, respectively(1)................................... 10 12
Additional paid-in capital......................................... 47,357 80,048
Accumulated deficit................................................ (23,915) (23,915)
-------- ----
Total stockholders' equity................................. 23,452 56,145
-------- ----
Total capitalization.................................. $51,750 $56,595
======== ====
</TABLE>
- ------------------------
(1) Excludes options to purchase 1,393,209 shares of Common Stock outstanding
under the Incentive Plan, of which options to purchase an aggregate of
424,987 shares are currently exercisable. Also excludes options to purchase
110,280 shares of Common Stock granted outside of the Incentive Plan, all of
which are currently exercisable.
15
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statements of operations for each of the years in the
three-year period ended May 31, 1995, and with respect to the Company's
consolidated balance sheets as of May 31, 1994 and 1995, are derived from
financial statements of the Company which are included in this Prospectus and
which have been audited by KPMG Peat Marwick LLP, independent auditors, as
indicated in their report included herein. The data set forth with respect to
the Company's consolidated balance sheet as of May 31, 1993 has been derived
from audited financial statements which are not included or incorporated by
reference herein. The consolidated statements of operations data for the
thirty-nine week periods ended February 25, 1995 and February 24, 1996, and the
consolidated balance sheet data as of February 24, 1996, have been derived from
unaudited condensed consolidated financial statements included herein and
reflect, in management's opinion, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for such periods. Results of operations for
any interim period are not necessarily indicative of results to be expected for
the full fiscal year. The data set forth below should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included herein.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
FISCAL YEARS ENDED MAY 31, -----------------------------
-------------------------------- FEBRUARY 25, FEBRUARY 24,
1993 1994 1995 1995 1996
------- ------- -------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $86,563 $80,476 $ 88,056 $ 63,470 $ 85,434
Cost of sales............................... 48,777 48,778 60,340 37,215 52,290
------- ------- -------- ------- -------
Gross profit(1)........................... 37,786 31,698 27,716 26,255 33,144
Operating expenses:
Selling and distribution.................. 15,773 16,099 19,355 12,842 17,518
Marketing, advertising and promotion...... 5,406 3,899 5,439 3,559 5,817
General and administrative................ 8,217 5,509 8,291 4,607 3,645
Restructuring costs(2).................... -- -- 30,048 -- --
Provision for doubtful accounts........... 964 519 1,360 518 245
Amortization of intangibles............... 1,641 1,641 1,641 1,231 572
------- ------- -------- ------- -------
Total operating expenses................ 32,001 27,667 66,134 22,757 27,797
------- ------- -------- ------- -------
Earnings (loss) from operations......... 5,785 4,031 (38,418) 3,498 5,347
Interest income............................. 183 174 82 81 59
Interest and debt expense................... (2,856) (2,856) (2,881) (2,142) (2,452)
Other income................................ 911 712 1,622 1,549 1,436
------- ------- -------- ------- -------
Earnings (loss) before income taxes..... 4,023 2,061 (39,595) 2,986 4,390
Income tax expense (benefit)................ 1,314 700 (2,460) 1,195 1,756
------- ------- -------- ------- -------
Net earnings (loss)..................... $ 2,709 $ 1,361 $(37,135) $ 1,791 $ 2,634
======= ======= ======== ======= =======
Per share information(3):
Primary earnings (loss) per share......... $ 0.28 $ 0.14 $ (3.86) $ 0.18 $ 0.26
Fully diluted earnings (loss) per share... 0.28 0.14 (3.86) 0.18 0.25
</TABLE>
- -----------------------------
(1) Fiscal 1995 amount includes a write down of $6.3 million of domestic
inventory in the fourth quarter. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."
(2) In the fourth quarter of fiscal 1995, the Company recognized a charge of
$30.0 million related to the closure of its Orange, California manufacturing
facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
(3) See Note 2 of Notes to Consolidated Financial Statements for a description
of the calculation of net earnings (loss) per common share.
16
<PAGE> 19
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF
--------------------------- FEBRUARY 24,
1993 1994 1995 1996
------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(1).................................... $23,882 $25,873 $ 9,735 $ 13,856
Total assets.......................................... 96,252 97,204 73,066 72,709
Long-term debt, including current portion............. 29,000 29,000 29,533 28,298
Total stockholders' equity............................ 55,518 57,155 20,264 23,452
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
FISCAL YEARS ENDED MAY 31, -----------------------------
-------------------------------- FEBRUARY 25, FEBRUARY 24,
1993 1994 1995 1995 1996
------- ------- -------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Net sales by channel:
National................................ $40,837 $43,744 $ 50,464 $ 35,039 $ 45,962
Retail.................................. 23,895 22,816 24,643 17,598 21,278
International........................... 21,831 13,916 12,949 10,833 18,194
------- ------- -------- ------- -------
Total net sales....................... $86,563 $80,476 $ 88,056 $ 63,470 $ 85,434
</TABLE>
- -----------------------------
(1) Working capital consists of current assets minus current liabilities.
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risk and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed hereunder, in "Risk
Factors" and "Business," as well as those discussed elsewhere in this
Prospectus.
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.
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<PAGE> 21
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 $20.0 million, and was written-off in connection
with the closure of the Orange Facility. See Notes 2 and 3 of Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated statements of operations data expressed as a percentage of net
sales. The table and the discussion below should be read in conjunction with the
financial statements and the notes thereto that appear elsewhere in this
Prospectus.
STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MAY THIRTY-NINE WEEKS ENDED
31, -----------------------------
------------------------- FEBRUARY 25, FEBRUARY 24,
1993 1994 1995 1995 1996
----- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 56.3 60.6 68.5 58.6 61.2
----- ----- ----- ----- -----
Gross profit............................. 43.7 39.4 31.5 41.4 38.8
Operating expenses:
Selling and distribution................. 18.2 20.1 22.0 20.3 20.5
Marketing, advertising and promotion..... 6.3 4.8 6.2 5.6 6.8
General and administrative............... 9.5 6.9 9.4 7.3 4.3
Restructuring costs...................... -- -- 34.1 -- --
Provision for doubtful accounts.......... 1.1 0.6 1.5 0.8 0.3
Amortization of intangibles.............. 1.9 2.0 1.9 1.9 0.7
----- ----- ----- ----- -----
Total operating expenses.............. 37.0 34.4 75.1 35.9 32.6
----- ----- ----- ----- -----
Earnings (loss) from operations....... 6.7 5.0 (43.6) 5.5 6.2
Interest income............................ 0.2 0.2 0.1 0.1 0.1
Interest and debt expense.................. (3.3) (3.5) (3.3) (3.4) (2.9)
Other income............................... 1.1 0.9 1.8 2.5 1.7
----- ----- ----- ----- -----
Earnings (loss) before income taxes... 4.7 2.6 (45.0) 4.7 5.1
Income tax expense (benefit)............... 1.5 0.9 (2.8) 1.9 2.1
----- ----- ----- ----- -----
Net earnings (loss)................... 3.2% 1.7% (42.2)% 2.8% 3.0%
===== ===== ===== ===== =====
</TABLE>
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 represented 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
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<PAGE> 22
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 for 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 three store types (conventional mall and freestanding stores, factory
outlet stores 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 absorbed 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 booked
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 22.2% 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, advertising and promotion expenses to support the Company's sales
growth and 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."
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<PAGE> 23
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 Senior Notes made on August 1, 1995. The
Company believes that interest and debt expense will substantially decrease in
the short-term since the proceeds of this Offering will be used to repay the
Senior Notes and the Secured Line of Credit. See "Use of Proceeds." However,
future long-term interest and debt expense levels will be dependent on the
Company's future liquidity needs. See "--Liquidity and Capital Resources."
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.
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
21
<PAGE> 24
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." Operating
expenses were also impacted by: (i) the cost of opening the new City of Industry
distribution center; (ii) increased personnel, travel expenditures, and sales
commissions associated with new product lines and the sales increase described
above; (iii) $1.5 million in increased marketing, advertising and promotion
expenditures; (iv) $850,000 in separation payments included in general and
administrative expenses in connection with the departure of two senior
executives; and (v) a $841,000 increase in the provision for doubtful accounts,
$441,000 of which was attributable to the portion of accounts receivable deemed
to be uncollectible and $400,000 of which 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 sold by it. 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 guaranty
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 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.
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
22
<PAGE> 25
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. The decrease was primarily due to: (i) general overall cost reductions,
and reduced legal, consulting and advertising expenses; (ii) expenses of
approximately $525,000 in the third quarter of fiscal 1993 for the bankruptcy
action of a major account; (iii) 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 (iv) the
opening of the Vista Facility in fiscal 1994. The decrease was partially offset
by increased expenses associated with the implementation of the initial program
to upgrade the Company's management information systems and increased retail
store expenditures related to the re-styling of existing stores, opening of new
stores and a reserve established for the closing of existing stores.
OTHER 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.
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.
23
<PAGE> 26
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 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.
24
<PAGE> 27
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 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
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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. See "Risk
Factors--Working Capital Constraints."
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.
RECENT ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. The Company plans to
continue to measure compensation cost of employee stock option plans using the
intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and starting in fiscal 1997, to make pro forma
disclosures of net earnings and earnings per share as if the fair value method
prescribed by SFAS No. 123 had been applied.
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SEASONALITY
The footwear industry is characterized by significant seasonality of net
sales and results of operations. Historically, the Company's business has been
moderately seasonal, with the largest percentage of sales realized in the first
and fourth fiscal quarters (March through August), the so-called "Spring and
Summer" and "Back to School" months. In addition, because snowboarding is a
winter sport, sales of the Company's snowboard boots have historically been
strongest in the first and second fiscal quarters. As a result of the Company's
strategic redirection and the expansion of the Company's product line and
international distribution channels, the Company believes that quarterly results
in the future may vary from historical trends. Because of these and other
factors, the Company anticipates that a higher portion of its overall fiscal
year revenues will be recognized in the first fiscal quarter. In addition to
seasonal fluctuations, the Company's operating results fluctuate
quarter-to-quarter as a result of the timing of holidays, weather, timing of
shipments, product mix, cost of materials and the mix between wholesale and
retail channels. Because of such fluctuations, the results of operations of any
quarter are not necessarily indicative of the results that may be achieved for a
full fiscal year or any future quarter. In addition, there can be no assurance
that the Company's future results will be consistent with past results or the
projections of securities analysts. See "Risk Factors -- Seasonality and
Quarterly Fluctuations."
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BUSINESS
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 was founded in
1966 in Southern California as a domestic manufacturer of vulcanized deck shoes
(such as the Authentic(TM)). Today the Company markets its broad footwear line
worldwide to a target customer base of 12 to 24 year old young men and women.
For the thirty-nine week period ended February 24, 1996, the Company generated
sales of $85.4 million. The Company's sales to national accounts increased
during this period by 31.2% to $46.0 million, international sales increased by
67.9% to $18.2 million, and sales through the Company's 80 retail stores grew by
20.9% to $21.3 million with a comparable store sales increase of 11.4%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has earned a reputation over its 30 year history for quality,
performance and value, particularly among participants in alternative sports
such as skateboarding and BMX bicycling. As a result of this reputation, the
Company has developed a strong brand image which the Company believes represents
the individualistic and outdoor lifestyle of its target customer base. The VANS
brand image coincides with what the Company believes is a fundamental shift in
the attitudes and lifestyles of young people worldwide, characterized by the
rapid growth and acceptance of alternative, outdoor sports and the desire to
lead an individualistic, contemporary lifestyle. The Company believes that
underlying factors influencing young people include: (i) programs broadcast
worldwide on networks such as MTV, ESPN and ESPN2; (ii) the growing
international distribution and popularity of magazines such as Rolling Stone,
TransWorld SKATEboarding, Spin and Details; and (iii) the increased independence
and purchasing power of young people worldwide, as evidenced by the estimated 25
million teenagers in the United States who in 1994 spent approximately $89
billion.
To capitalize on the strength of the VANS brand with young men and women
worldwide, the Company has recently repositioned itself from a domestic
manufacturer to a marketing-driven company. With a focus on understanding the
attitudes, lifestyle and product desires of its target customer base, and by
marketing and designing its product line accordingly, the Company believes it is
well-positioned to further the growth of the VANS brand in this attractive
market.
Led by a new management team including Walter Schoenfeld, the Company's
Chief Executive Officer and the founder of Britannia Sportswear Company, and
Gary Schoenfeld, the Company's Chief Operating Officer, the Company has
implemented a number of strategic and operational initiatives. In particular,
the Company: (i) began sourcing new products from overseas; (ii) leveraged its
brand equity with young people into products centered around increasingly
popular alternative sports, such as the Company's snowboard boot line, and into
products that have a lifestyle orientation, such as the Company's successful
International Collection of casual and active-casual shoes; (iii) designed a
marketing strategy to promote the VANS brand and stay close to the product
desires of its target customers; (iv) restructured its operations which
culminated with the July 1995 closing of its underutilized Orange Facility and
the consolidation of the production of its traditional vulcanized shoes at its
smaller Vista Facility; and (v) enhanced its management information and
inventory control systems to better control costs and increase operational
efficiencies. Each of these initiatives has been an important ingredient of the
Company's heightened commitment to its customers.
BUSINESS STRATEGY
The Company's long-term objective is to become a leading lifestyle company
offering a complementary array of footwear, apparel and accessory products
worldwide by capitalizing on the strength of the VANS brand name. The Company's
operating and growth strategies are aimed at achieving this long-term objective
while maintaining the authenticity and credibility of the VANS brand image.
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OPERATING STRATEGY
The Company seeks to be the brand of choice for lifestyle and alternative
sport footwear by continually listening and responding to the product desires of
its target customers. The Company's core customers are 12 to 24 year old young
men and women who are active enthusiasts of alternative sports and/or on the
forefront of fashion and contemporary lifestyle trends. The breadth of the
Company's product line is intended to appeal both to these core trend setters as
well as to mainstream customers who similarly identify with the lifestyle image
of the VANS brand. The Company's operations are directly tied to this strategy
and are intended to provide the necessary framework for staying close to these
customers. Key elements of the Company's operating strategy include:
- Promote the VANS Brand Image through Grassroots Marketing Efforts. The
Company promotes its brand image through a grassroots marketing effort
that includes the sponsorship of alternative sporting and entertainment
events, sports teams and individual athletes. An example of one of the
Company's event sponsorships is the "VANS Warped Tour '96," a festival
planned for this summer that will combine concerts with a skateboarding
contest in approximately 40 cities throughout the United States, Canada,
Europe and Japan. In addition, the Company sponsors over 100 of the
world's top athletes in skateboarding, snowboarding and BMX bicycling.
The Company believes its event sponsorships and athletic endorsements
reinforce the Company's authenticity and credibility with its core
customer base and can generate valuable media exposure on networks such
as MTV and ESPN2, as well as in alternative sport and lifestyle
magazines. The Company believes this media coverage increases the overall
awareness of the VANS brand image among its broader target market
worldwide. The VANS image is further enhanced through print and
advertising campaigns which depict youthful, active lifestyles and
attitudes and have been carried on networks such as MTV and Prime Sports,
on outdoor billboards and in magazines such as Rolling Stone, TransWorld
SKATEboarding, TransWorld SNOWboarding, Spin and Details. The Company's
grassroots marketing approach enables it to stay close to its core target
customers, while promoting the VANS brand globally as the choice for
alternative sport and active lifestyle footwear.
- Provide Authentic and Design-Distinctive Products. The Company designs
and develops high quality products that embody the VANS image. The
Company's performance and casual footwear products incorporate
distinctive fabrics, cutting-edge styles and colors and dependable
construction designed to appeal to outdoor sports enthusiasts seeking
performance footwear and to other more mainstream consumers seeking
footwear that represents youth, individuality and independence. The
Company believes the technical features of its skate performance shoes
and snowboard boots as well as the Company's Signature Skate Shoe Series,
a line endorsed by top alternative sport athletes worldwide, reinforce
the authenticity and credibility of the VANS brand name.
- Distribute through Selected National Retailers and Independent
Accounts. The Company sells its products through carefully selected
national retailers, including Foot Locker, Kinney Shoe Corporation,
Nordstrom, Inc., J.C. Penney Company, Inc., Gadzooks, Inc., and Mervyn's.
Recently, the Company has significantly expanded its business with new
and existing accounts, including R.H. Macy & Co., The Bon Marche,
Journey's and Foot Action, Inc. The Company also sells its products
through independent retailers such as skateboard and surf shops to
maintain its authenticity and stay close to its core customer base. The
Company believes that it is strengthening its relationships with these
national and independent retailers through: (i) the introduction and
expansion of the International Collection; (ii) more frequent
availability of new stock keeping units to keep inventory fresh; (iii)
maintenance of the quality image of its retail account base; and (iv) and
the quality of its products and timeliness of deliveries. The Company
generated $46.0 million in national sales for the thirty-nine week period
ended February 24, 1996, representing an increase of 31.2% over the
comparable period in fiscal 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
- Select International Distributors that Build the VANS Brand
Name. Recognizing significant opportunities internationally, the Company
has recently upgraded and expanded its international distributor base.
New distributors have been added in four of the Company's five largest
export markets in
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addition to six new distributors covering 30 countries in Central and South
America, Southeast Asia, Eastern Europe and the Middle East. The Company has
focused on selecting and maintaining relationships with distributors who
understand both how to build the VANS brand as well as the tastes and
preferences of their local markets. The Company generated $18.2 million of
international sales for the thirty-nine week period ended February 24,
1996, representing a 67.9% increase over the comparable period in fiscal
1995. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
- Execute a Retail Strategy that Complements the Company's Overall Brand
Strategy. The Company's 81 retail stores (comprised of 55 conventional
mall and free standing stores, 21 factory outlet stores and 5 clearance
stores), which are concentrated in Southern California, provide it with
an important outlet for slower moving inventory and a forum to test new
products and obtain feedback from customers. Comparable store sales
increases have exceeded 10% in each of the last four quarters ended
February 24, 1996, and for the thirty-nine week period ended February 24,
1996, sales through the Company's retail stores increased to $21.3
million, representing a 20.9% increase over the comparable period in
fiscal 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
- Maintain Flexibility in Manufacturing to Enhance Market
Responsiveness. Central to the success of the Company's operating
strategy is the ability to respond quickly to changing trends within its
target market. The Company believes it minimizes lead times and capital
expenditures and maximizes quality and product variety by utilizing a
combination of third-party foreign manufacturers and its own domestically
located facility. With relatively short lead times (8-12 weeks) and the
ability to manufacture in small lots in South Korea, the Company believes
that it can generally keep its inventory fresh by adding the latest
designs to its offering mix while eliminating slower moving styles.
- Execute Well-Conceived Product Testing Process. The Company has recently
developed a product testing process to stay close to its customers and
gauge product acceptance in the marketplace. In addition to placing new
products and samples in its own retail stores, the product testing
process includes: (i) previewing product at trade shows with independent
and specialty retailers who then provide the Company with initial
consumer reactions to new products placed in their stores; (ii) testing
products and new concepts with selected national accounts; and (iii)
conducting its "first edition" test program in which the Company chooses
and introduces one new style roughly every six to eight weeks for
distribution on a preview basis to a group of key independent retailers
and several of the Company's retail stores.
- Utilize Selective Licensing. The Company believes that selective
licensing of the VANS name and trademarks for use on non-footwear product
lines, such as apparel and accessories, has provided an opportunity to
promote the VANS brand while significantly reducing capital outlays and
operating expenses. The Company has the right to approve the design,
manufacturing specifications, advertising and distribution of its
licensed products and maintains a practice of evaluating its licensing
arrangements to ensure consistent presentation of the VANS brand.
GROWTH STRATEGY
The Company has developed a growth strategy that it believes will maximize
its long-term opportunities while simultaneously enhancing and protecting its
valuable brand image. The Company's growth strategy is focused on: (i) expanding
its product-line beyond the Company's core men's footwear styles to include more
women's styles, as well as related products, such as apparel and other
accessories; (ii) capitalizing on the growing snowboarding market; (iii)
increasing the penetration of its existing domestic account base; and (iv)
pursuing a global marketing initiative to increase sales in existing and new
international markets.
- Expand the VANS Product Line
- Women's and Youth's Footwear. The Company's traditional footwear
products have expanded from a line of basic, vulcanized style shoes
to a collection of lifestyle fashions, including a line of
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women's contemporary lifestyle footwear. In the second quarter of fiscal 1996,
the Company expanded its International Collection to include a line of women's
fashion styles through the introduction of casual-athletic shoes in innovative
materials such as vinyl, satin and patent leather. The Company intends
to continue to broaden its customer base and believes that one of its
next logical extensions is to provide more products in youth's sizes
targeted at 8 to 12 year olds whose families are already purchasing
VANS products.
- Apparel and Accessories. Leveraging off the Company's growing
reputation for fashion-forward designs and high-quality products,
the Company intends to increase its production and distribution of
brand-name apparel and accessories. These products may include
T-shirts, sweatshirts, shorts, caps, backpacks and other accessories
to be distributed in geographic locations where the Company does not
have existing licensing agreements. In addition, the Company may
produce and distribute alternative sports apparel, such as
snowboarding outerwear. The Company currently has all of the
international rights outside of Japan and Italy to produce and
distribute its own apparel, and all of the domestic and
international rights to develop and distribute alternative sports
apparel, such as snowboarding outerwear.
- Capitalize on the Growing Snowboarding Market. The Company entered the
snowboard boot market approximately 18 months ago and believes that today
it is among the top four market share leaders worldwide based on the
number of snowboard boots sold. The Company believes that a substantial
growth opportunity exists in the snowboarding market and believes it is
well-positioned to increase its market share of the snowboard boot
market. According to the National Sporting Goods Association ("NSGA"),
the number of snowboarding participants increased from 1.2 million in
1992 to 2.1 million in 1994. American Demographers estimates that the
number of snowboarding participants in the United States will total 4.8
million by the year 2000. Recently, the Company entered into a licensing
agreement with Switch Manufacturing to utilize Switch's innovative and
convenient step-in boot binding system. Switch is a leading manufacturer
of snowboard boot bindings and the Company believes its affiliation with
Switch reinforces the Company's credibility among snowboard boot
customers, further establishing the Company's position in the snowboard
boot market. See "Risk Factors--Reliance on Third Party Technology." The
Company has increased the number of snowboard boots offered from five
styles in the 1995/1996 season to 11 styles in the 1996/1997 season. The
Company believes further opportunities exist to leverage its brand into
snowboarding apparel and accessories.
- Increase Penetration of Existing National Retail and Independent
Accounts. Building upon the Company's operating strategy described
above, the Company believes significant growth opportunities exist within
its current national account base. The Company intends to grow its
account base through its broadened product line which it believes will
enable it to increase: (i) the number of stores for which its existing
national and regional chains purchase products; and (ii) the number of
stock-keeping units sold through each store.
- Expand Internationally by Increasing Penetration of Existing Markets and
Entering New Markets. International markets represent a substantial area
of growth for the Company since the Company believes that many of its
target customers of 12 to 24 year olds around the world similarly
identify with the lifestyles of their counterparts in the United States.
The Company intends to continue its international expansion through a
global marketing initiative designed to increase VANS brand awareness
worldwide. This marketing strategy includes: (i) increasing the number of
international alternative sport and entertainment event sponsorships;
(ii) more extensive touring abroad by the Company's internationally
recognized athletes and alternative sports teams; (iii) generating media
coverage in international markets through increased participation in
promotional activities; (iv) previewing products at international trade
shows; and (v) working with international distributors who understand
their local markets and providing them with sales tools and promotional
materials to enable them to effectively market the VANS brand.
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INDUSTRY OVERVIEW
The Company's target customer segment is believed to have very favorable
demographics. American Demographics magazine estimates that in 1995 there were
approximately 29 million teenagers in the United States alone. This number is
expected to increase to approximately 35 million by 2010, representing one of
the fastest growing population segments. In addition, these target customers
have substantial and increasing purchasing power. In 1994, teenagers spent an
estimated $89 billion, of which $57 billion was money they earned themselves.
Underscoring the importance of brand image, teenage boys participating in an
American Demographics study responded that brand name mattered more in
purchasing sneakers than when buying jeans, soft drinks or fast food.
According to industry sources, the domestic athletic footwear market is
estimated to be $8.1 billion (wholesale) in 1996. The Company's shoes compete in
the casual-athletic and alternative sport segments of the athletic footwear
market, which are estimated to grow more quickly than traditional athletic
footwear in 1996. See "Competition."
Because of its historical involvement with sports, such as skateboarding
and BMX bicycling, the Company believes it is well-positioned to capitalize on
the growth in the alternative sport category, particularly with its line of
snowboarding boots. In 1994 and 1995, surveys conducted by the Sporting Goods
Manufacturing Association indicated snowboarding was ranked in the top eight
"hottest" new sports. Between 1992 and 1994, the estimated number of
snowboarding participants increased from 1.2 million to 2.1 million,
representing a compound annual growth rate of 32.3%, and an industry report
estimates that the number of snowboarding participants in the United States will
be approximately 4.8 million by the year 2000. The Company believes that similar
growth rates are being experienced in the other major international markets as
well, making snowboarding one of the fastest growing sports in the world. In
addition to its growth potential, another factor which makes this sport an
attractive market segment is the amount of money spent on snowboarding-related
equipment. As alternative sports such as snowboarding, skateboarding, hiking and
mountain biking continue to become more mainstream, the Company believes that
demand for outdoor performance shoes and boots is likely to increase as well.
MARKETING AND PROMOTION
The Company's global marketing strategy is to further enhance the image and
awareness of the VANS brand by associating its products with the sports, music,
fashion and contemporary lifestyle trends established by young people in the
U.S. and abroad. The Company's core customers are 12 to 24 year olds in the
forefront of trends in alternative sports and contemporary lifestyles, while
much of the Company's sales volume is driven by its broader target market of
mainstream customers who desire to live a lifestyle consistent with the VANS
brand.
The Company markets its brand through the sponsorship of alternative sport
and entertainment events, print and television advertising and alternative sport
athletic endorsements. In addition, point-of-purchase merchandising used by the
Company's national accounts and international distributors, as well as the
design of the Company's retail stores and factory outlets, further promote the
VANS brand.
As part of the Company's growth strategy and global marketing initiatives,
the Company has increased its marketing, advertising and promotion expenditures
to $5.8 million in the first thirty-nine weeks of fiscal 1996 from $3.6 million
in the first thirty-nine weeks of fiscal 1995.
ALTERNATIVE SPORTS AND ENTERTAINMENT EVENT SPONSORSHIPS
The Company's marketing and promotion strategy includes the sponsorship of
alternative sporting and entertainment events. The Company believes these events
and sponsorships reinforce the Company's authenticity and credibility with its
core customer base and create significant brand loyalty among participants in
these sports. Through these sponsorships, the Company has received media
coverage on networks such as MTV, ESPN2 and Fox, and in alternative sport and
contemporary lifestyle magazines. The Company believes
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this media coverage is seen or read by its broader target market throughout the
world and increases overall awareness of the VANS brand name.
Among the events and activities the Company has sponsored are the 1995
World Championships of Skateboarding (with The Hard Rock Cafe), skateboard
contests such as the Venice Street Grind, Battle of the Bay and Slam City Pro,
the Brooklyn Bridge Skate Ramp, the Wild Women's Snowboarding Camp, the National
Bike League and the American Bike League. The Company also sponsors snow, skate
and surf videos and "demo days" at ski and snowboard resorts around the country
and in Japan, and participates in college campus tours organized by magazines
such as Spin and Details.
This summer, the Company will be the exclusive title sponsor of the "VANS
Warped Tour '96." This event is scheduled to visit approximately 40 top young
adult markets throughout the U.S., Canada, Europe and Japan. The tour is
intended to be an affordable daytime lifestyle, music and sports festival for
teenagers and young adults, with skateboarding, biking and climbing events,
retailer booths, video games, prize giveaways and performances by emerging
alternative bands. It will also feature an amateur skateboarding competition in
selected locations, with the winners being invited to participate in the 1996
World Championships of Skateboarding, which will again be sponsored by the
Company and The Hard Rock Cafe. The tour will be promoted through local radio,
print, poster and flyer distribution, supplemented by national promotion via
television, print and the Internet. The Company plans to compile a "VANS Warped
Tour '96" CD, featuring the bands performing on the tour, to be used as a gift
with a VANS product purchase. The tour and the CD promotion are designed to
coincide with the "Back to School" season.
ATHLETIC ENDORSEMENTS
As with event sponsorship, the Company believes the endorsement of
alternative sports teams and individual athletes reinforces the Company's
authenticity and credibility with its core customers and creates significant
brand loyalty among participants. The Company's sponsored athletes aid in the
design of the Company's shoes, make promotional appearances, wear the Company's
products exclusively and increase overall consumer awareness of the VANS brand.
The Company supports its sports marketing with print and television advertising
featuring its sponsored athletes.
The Company sponsors over 100 of the world's top male and female athletes
through the VANS Skateboarding Team, the VANS Snowboarding Team and the VANS BMX
Team. Selected members of the VANS teams include:
Skateboarding
Steve Caballero -- Big Air World Title Holder, Signature Pro Model
Mike Carroll -- Skater of the Year, Thrasher, 1994, Signature Pro Model
Salman Agah -- Skater of the Year, Thrasher, 1993, Signature Pro Model
Simon Woodstock -- 2nd Place Street Champion Holder, Munster
Competition/1995
Snowboarding
Jamie Lynn -- World Champion, 2nd Place Big Air, Innsbruck, Austria/1996,
Signature Pro Model
Shaun Palmer -- World Champion 1988-89, 15 year competitor, Signature Pro
Model
Circe Wallace -- Recognized Top Five Female Snowboarder: TransWorld
SNOWboarding
Rachel Furiel -- #1 Place Senior Women's Pipe USASA Nationals, 1996
BMX Bicycling
Pete Loncarevich -- Top BMX rider
Cheri Elliott -- 1995 Extreme Game Champion, World Downhill, 1994
John Purse -- National Bike League, #1 Pro BMX, #2 American Bike League,
1996
Kiyomi Waller -- #1 ABA Pro 24 Cruiser, 1996
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PRINT AND TELEVISION ADVERTISEMENTS
The VANS alternative sports image is enhanced by print and advertising
campaigns which depict youthful, contemporary lifestyles and attitudes and are
carried on networks such as MTV, Prime Sports and ESPN2, on billboards and in
magazines such as TransWorld SKATEboarding, Thrasher and TransWorld
SNOWboarding. The Company promotes its lifestyle image through advertisements in
a number of magazines that appeal to its target customer group, including
Rolling Stone, BMX Plus, BAM, Spin, Vibe, Option, Bikini, and Details. In
addition, the Company selectively advertises in widely circulated fashion and
lifestyle magazines, such as Seventeen, Elle, and YM. The Company develops much
of its advertising in-house, which the Company believes allows it to respond
more quickly and with a greater degree of creative and cost control.
WORLD WIDE WEB SITE
Since September 1995, the Company has marketed its products and image
through its interactive home page on the World Wide Web to customers who
directly access the Internet. The Web site includes a product catalog, photos,
interviews, sound and video clips of bands who wear VANS products, profiles and
interviews with members of the Company's sports teams, information on
Company-sponsored events, celebrities who wear VANS products and the Company's
history.
PRODUCT DESIGN AND DEVELOPMENT
The Company's product design and development efforts are centered around
leading edge trends in the youth culture, including such areas as alternative
music and outdoor sports, television, movies and clothing. The Company's
products are then designed and refined based on consumer and retailer feedback
through multiple product reviews. The Company's designers work to monitor subtle
changes in the music, sports, media and fashions which appeal to the Company's
core customers.
The Company traditionally designs and merchandises three lines of footwear
products per year for the annual Spring, "Back to School" and Holiday seasons.
The standard product development cycle takes approximately one year from design
concept through production and rollout. However, in response to changes in
trends or consumer demand, the Company will develop new products for immediate
introduction (in as little as 1-2 months) or accelerate the planned release of
new designs. The product design cycle begins by understanding the consumer,
which is accomplished through a study of current trends in clothes, magazines
and markets both by the design staff and through the use of market forecasting
services. The design team then typically develops three or four themes based on
this marketing analysis and produces product concept boards for the review of
management and the sales and marketing staff. The design team then refines the
designs, prepares specification sheets and orders samples. The Company's design
staff works with sales and marketing personnel as well as with the Company's
alternative sports teams and athletes in all aspects of this design process. One
or more cycles of prototype products are reviewed by the design team and focus
groups composed of the target consumers, and the design team may eliminate some
designs based on the feedback received. Key retailers, sales representatives and
distributors typically will also review the line prior to the final preparation
of specifications and samples. The product is then typically reviewed again by
key retailers and additional changes may be made prior to the presentation of
the products at trade shows to a broader range of retailers. Product previews
have proven critical to the manufacturing process by providing indications as to
whether a new design will be successful and therefore produced. Product lines
are released in multiple deliveries over the course of a season and product life
cycles vary from as short as one season (3-6 months) to 2-3 years or more.
PRODUCTS
The Company produces a wide variety of casual, active-casual and
performance footwear products and snowboard boots, all of which are designed to
appeal to alternative sport enthusiasts seeking performance footwear and
mainstream consumers seeking footwear that represents youth, individuality and
independence. The average retail prices for the Company's footwear products
range from $20 to $65 for casual and performance footwear, and from $140 to $250
for snowboard boots. The Company also offers a variety of apparel and
accessories bearing the VANS brand name through its own retail stores as well as
through licensing arrangements with third parties.
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The Company's shoes and snowboard boots can generally be categorized by the
manufacturing process used. The Company's International Collection line
primarily consists of its foreign-sourced shoes manufactured through a
cold-cured process in which the upper and sole are sewn and cemented together.
This manufacturing process allows for the combination of a number of different
outsoles, fabrics and styles. The Company's domestically produced shoes,
including the traditional VANS deck shoes, are vulcanized, a manufacturing
process utilizing heat and pressure that binds the sole and upper together.
MEN'S FOOTWEAR
Casual and Casual Skate. The Company's casual and casual skate line
includes many styles within the International Collection, a wide variety of
cold-cured suede, leather and canvas shoes, as well as traditional slip-on and
laced canvas vulcanized footwear. The styles are offered in a wide variety of
colors, fabrics, designs and outsoles. Some of the Company's casual and
skate-influenced styles are the Razor(TM), Fracture(TM), Wally(TM), Rail(TM),
Old Skool(TM), Era(TM), Mel(TM) and the Authentic(TM).
Performance Skate. Throughout its 30-year history, the VANS brand name has
long been associated with skateboarding. The Company's performance skate line of
footwear is designed to provide skaters with the style and technical features
they demand. The Company offers performance skate shoes in a variety of colors
and styles with many of the same features described above as well as double and
triple stitching for durability, padded tongues and collars and grippy gum
rubber bottoms. The Company offers a Signature Skate Shoe Series and works with
top skaters, such as Steve Caballero and Salman Agah, to develop high
performance skate footwear. The Company believes the identification of its shoes
with top skaters helps to increase sales of its performance footwear. Some of
the Company's performance skate shoes are the Fairlane(TM), Ratz(TM) and
Pudge(TM), as well as the Lo Cab(TM), Half Cab(R), Mike Carroll(TM) and Salman
Agah(TM) signature shoes.
WOMEN'S FOOTWEAR
The Company's footwear products for women include casual, fashion-oriented
products within the International Collection (introduced in the second quarter
of fiscal 1996), and traditional deck shoes. Many of the products in the women's
line incorporate fundamental features of the Company's skate shoes with fashion-
conscious styles, colors and fabrics. The core line of women's footwear includes
active-casual suede, leather, nylon, canvas, vinyl and patent leather sport and
casual shoes in a wide variety of colors. The line includes vulcanized, flat or
heeled shoes, as well as cemented, skate-oriented, cup-soled shoes. Some of the
Company's women's shoes include the Lucy(TM), Ethel(TM), Jinx(TM), Nice(TM) and
Croodle(TM).
SNOWBOARD BOOTS
For the 1996/1997 season, the Company has expanded its snowboard boot line
to include 11 styles offering unique combinations of a number of technical
innovations at various price points. Featured in this season's line are: (i)
five styles of lighter weight linerless boots; (ii) four styles which are
compatible with the Switch Autolock(TM) system, an innovative and convenient
step-in boot binding system; and (iii) three styles designed specifically for
women.
In the 1995/1996 season, the Company offered five styles of snowboard
boots, including the Lemming(TM), a lightweight linerless boot, and the
Voltaire(TM), its first Switch-compatible boot. In the 1995/1996 season, the
Company sold approximately 95,000 pairs of boots. In the 1994/1995 season, the
first season in which the Company sold snowboard boots, the Company offered two
boot styles and sold approximately 4,000 pairs of boots.
The Company believes that the Switch step-in binding system is currently
the most proven and accepted version of the new step-in binding systems, and
believes that its licensing arrangement with Switch further enhances the
Company's credibility and reputation in the snowboard boot market. Step-in
bindings provide added convenience by reducing the amount of time required to
mount and dismount the board before and after each run. See "Risk
Factors--Reliance on Third Party Technology."
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SANDALS
In the last quarter of fiscal 1995, the Company began offering a limited
number of stylish leather and nubuck sandals. The Company believes sandals
represent a logical product line extension and are consistent with the VANS
image. The Company has recently changed manufacturers for its sandals and may
engage third party designers to further develop the line. Current sandals
offered by the Company include the Monk(TM), Caesar Sport(TM) and Mahatma(TM).
APPAREL AND ACCESSORIES
The Company offers certain apparel and accessories at its Company-owned
retail stores, including T-shirts, hats, backpacks, shorts, sweatshirts, socks
and wallets. Most products carry the VANS brand logo and are designed to appeal
to the styles and trends of the Company's target consumer group. Products sold
in the Company's stores are designed by the Company and manufactured by third
parties. In addition, the Company has selectively licensed its trademarks to
certain distributors. See "-- Licensing."
SALES AND DISTRIBUTION
The Company has three primary distribution channels for its products: (i)
national sales through national and regional retailers, as well as independent
specialty stores, including skate and surf shops; (ii) international sales
through selected distributors for 53 countries; and (iii) sales through
Company-operated retail and factory outlet stores.
NATIONAL SALES
The Company sells its products through approximately 3,500 active accounts,
including Foot Locker, Kinney Shoe Corporation, Nordstrom, Inc., J.C. Penney
Company, Inc., Gadzooks, Inc. and Mervyn's. Recently, the Company has
significantly expanded its business with certain new and existing accounts,
including R.H. Macy & Co., Inc., The Bon Marche, Journey's and Foot Action, Inc.
The Company also sells its products through independent retailers such as
skateboard and surf shops to maintain its authenticity and to stay close to its
core customers. The Company intends to execute its growth strategy through
marketing and product development in order to further increase sales through its
existing accounts.
The Company strives to maintain the integrity of the VANS image by
controlling the distribution channels for its products based on criteria which
include the retailer's image and ability to effectively promote the Company's
products. The Company works with its retailers to display, stock and sell a
greater volume of the Company's products.
The Company's distribution strategy is to differentiate the product
offerings of independent speciality stores and larger national accounts through
the breadth of its product lines and the staggered release of certain products.
The expansion of the Company's product line has also enhanced the Company's
ability to distribute its products through a larger number of major accounts
while maintaining variety across these accounts. In addition, the Company
staggers the release of certain products to select independent retailers or
national accounts to test product acceptance, as well as to increase the variety
of products offered. As an example, the Company generally releases its new
performance skate shoes to independent accounts 60 days before making them more
broadly available.
The Company sells products to its national accounts primarily through
independent sales representatives. Several of the Company's larger accounts are
managed by Company officers and sales executives. The Company typically engages
its independent sales representatives pursuant to agreements with terms ranging
from one to three years in length. Compensation of independent sales
representatives is generally limited to commissions on sales.
INTERNATIONAL SALES
The Company believes that a significant opportunity exists for increased
sales of its products to existing international markets, and, to a more limited
extent, expansion into new international markets. The Company
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believes that because of the global reach of music, fashion, media and
alternative sports, the styles and trends among the Company's target customer
group internationally are similar in many ways to those in the United States.
The Company currently sells its products to distributors for resale in 53
foreign countries, with its five largest markets for the thirty-nine week period
ended February 24, 1996 being Germany, Japan, France, Canada and the United
Kingdom. As a result of the Company's improved product line, increased
acceptance domestically, a recently upgraded distributor base and a global
marketing strategy designed to reinforce the VANS brand image, the Company
experienced international sales growth of 67.9% overall and 47.7% in its top
five international markets in the first thirty-nine weeks of fiscal 1996 as
compared to the same period in fiscal 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company's international distributors receive a discount on the
wholesale price of the Company's footwear products and are granted the right to
resell such products in defined territories, usually a country or group of
countries. Distribution agreements generally are exclusive, restrict the
distributor's ability to sell competing products, have a term of one to three
years, provide a minimum sales threshold which increases annually, and generally
require the distributor to spend up to 5% of its revenues on marketing. The
Company receives payment from all its distributors in United States dollars.
RETAIL SALES
The Company currently operates 81 retail stores, 74 of which are located in
California. The Company's retail stores are divided into three store groups,
including conventional mall and freestanding stores, factory outlet stores and
clearance stores. Currently, the number of stores in each store group is 55, 21
and 5, respectively. The Company's retail stores carry a wide variety of the
Company's footwear products, along with apparel and accessory items, most of
which bear the VANS brand name and logo. Sales of all items other than footwear
accounted for approximately 7.0% of total retail store sales in the first
thirty-nine weeks of fiscal 1996 as compared to 3.9% in the comparable period of
fiscal 1995.
The average retail store is between approximately 1,000 to 2,000 square
feet, with average sales for stores open all of fiscal 1995 of approximately
$313,000. A typical Company store is open seven days a week, for an average of
ten hours per day, and has two or three employees in the store during business
hours. The Company sells factory seconds and discontinued shoes at discounted
prices through factory outlets and clearance stores. The Company opened seven
new factory outlets in fiscal 1995 and has opened an additional five factory
outlets during the first thirty-nine weeks of fiscal 1996. The Company
continually works to upgrade the design and layout of its retail stores as part
of its overall marketing plan and remodels older stores as its resources permit
to further promote the VANS brand image. The Company intends to open new factory
outlet stores only in the leading outlet centers throughout the country. The
Company does not intend to significantly increase the number of its other retail
stores. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DISTRIBUTION FACILITIES
Domestic distribution of products is centralized in the Company's
approximately 127,000 square foot distribution center in the City of Industry,
California. Upon receipt from overseas manufacturers, the Company's products are
inspected, sorted, packaged and shipped to retail accounts in the United States
and abroad. While foreign-sourced footwear for domestic accounts is generally
shipped to the City of Industry facility, such footwear for international sales
is typically shipped directly from the Company's overseas manufacturers to its
international distributors. In addition, the Company's recent snowboard boot
financing arrangement with Ssangyong U.S.A. provides for Ssangyong U.S.A. to
administer the warehousing and shipping of snowboard boots through March 1997.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Borrowings."
MANAGEMENT INFORMATION SYSTEMS
During the first thirty-nine weeks of fiscal 1996, the Company
significantly upgraded its management information capabilities. This included
the redesign of its order entry system and implementation of an
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enhanced order processing and a warehouse management system. The Company is
currently implementing a Distribution Requirements Planning program (DRP) and is
in the process of selecting an automated shipping program. Additionally, the
Company is in the process of upgrading its Company-wide payroll system as well
as investing in updated point-of-sale technology at its retail stores. All of
these improvements are designed to improve operational efficiencies and allow
the Company to better track its sourcing, distribution and customer service
processes.
SOURCING AND MANUFACTURING
Historically, the Company manufactured its products at two Company-operated
domestic manufacturing facilities. In fiscal 1995, in connection with the
Company's strategic redirection, the Company shifted a significant portion of
its manufacturing to independent manufacturers located in South Korea to produce
the International Collection, which can only be manufactured in significant
commercial quantities abroad.
The Company sources the International Collection and snowboard boots from
ten contractors in South Korea. During the first thirty-nine weeks of fiscal
1996, approximately 64% of the Company's shoes and 100% of the Company's
snowboard boots were manufactured offshore by third party manufacturers. The
Company utilizes two sourcing agents in South Korea who assist the Company in
selecting and overseeing third party contractors, ensuring quality, sourcing
fabrics and monitoring quotas and other trade regulations. The Company's
production staff and independent sourcing agents together oversee all aspects of
manufacturing and production. As is common in the industry, there are no
agreements between the Company and any of its contractors or suppliers, however,
the Company believes that its relationships with its contractors and suppliers
are good. The Company anticipates that its reliance on offshore manufacturers
and the importation of its products will increase primarily due to increasing
sales of the International Collection and the Company's snowboard boot line. In
addition, the Company may in the future source its products through
manufacturers outside of South Korea. See "Risk Factors--Dependence on Foreign
Manufacturers."
The Company manufactures vulcanized footwear at its 90,400 square foot
Vista Facility. The Vista Facility allows the Company to produce a broader line
of its vulcanized footwear products for its retail stores as well as its
domestic and international accounts. The Vista Facility was established in 1992
to apply integrated cellular manufacturing techniques to the traditional method
of shoemaking. These new techniques have led to the reduction of manufacturing
cycle times at the Vista Facility from nine days to three, with cycle times for
some of the Company's most popular styles reduced to one day. The Company
currently operates two shifts a day at the Vista Facility. Manufacturing
generally operates on a five-day week, although Saturday shifts are common
during periods of peak production, primarily in the Spring and "Back To School"
seasons. The Company has recently implemented an incentive bonus plan for
employees at its Vista Facility which provides for a monthly bonus payment based
on achieving certain production quality and quantity standards.
The Company's quality control program is designed to ensure that all goods
bearing its trademarks meet the Company's standards. With respect to products
manufactured by independent contractors, the Company develops and inspects
prototypes of each product prior to manufacture by such contractors, establishes
fittings based on the prototype, inspects samples and, through its employees or
sourcing agents, inspects materials prior to production. The Company or its
sourcing agents inspect the final product prior to shipment to the Company's
City of Industry distribution center. With respect to licensed products, the
Company oversees the quality control programs of its licensees and regularly
inspects samples of their products.
A wide range of materials are used in the domestic and offshore production
of the Company's footwear. The Company has not experienced a significant
manufacturing delay caused by the unavailability of raw materials, however,
there can be no assurance that difficulties in obtaining raw materials,
particularly specialized materials used in certain women's shoes, will not arise
in the future or that any such difficulties would not have a material adverse
effect on the Company's business. To date, the Company has not experienced any
significant safety or health problems from the use or handling of these raw
materials.
Dependence on international manufacturers subjects the Company to the
general conditions and risks of doing business internationally, including
reduction in the availability of production capacity, errors in complying with
product specifications, inability to obtain sufficient raw materials,
insufficient quality control,
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failure to meet production deadlines or increases in manufacturing costs. The
Company cannot predict whether the conditions under which it currently does
business abroad will remain favorable or whether any events will occur which
could adversely affect the availability of independent offshore manufacturing on
terms satisfactory to the Company. Although the Company believes that it could
develop alternative sources of supply for the products obtained from its present
suppliers outside the United States, there can be no assurance that such
alternative sources would be available on terms satisfactory to the Company, or
at all. See "Risk Factors--Dependence on Foreign Manufacturers."
LICENSING
The Company has licensed certain of its trademarks for apparel and
accessory products where the Company believed such arrangements would promote
the VANS brand name and image consistent with the Company's overall marketing
and promotion plan.
Currently, the Company has license agreements with six third party
licensees. The licensees have the exclusive right to manufacture and sell
certain products under the Company's trademarks in specified territories. The
licenses provide for a royalty payment to the Company and typically establish
minimum annual royalty amounts. In the United States, the Company's license
agreement covers caps, wovens (shorts), shirts and socks. In Japan, the
Company's license agreements cover footwear, caps, sports bags, snowboards,
apparel, watches and sunglasses. In Germany, the license agreement covers a
variety of bags and, in Italy, the Company's license agreement covers apparel.
The Company is generally permitted to sell its licensed products through its
retail stores and its distributors. The Company's licenses have varying
expiration dates, and are generally extendable at the option of the licensee,
provided certain conditions have been met.
The Company believes additional opportunities exist to increase sales of
apparel and accessories bearing the VANS brand name and intends to expand the
product line in the future. The Company believes its licensing arrangements to
date have allowed it to best use its current resources while promoting a
consistent image for the VANS name worldwide. By moving to bring the apparel and
accessory business in-house, as appropriate, the Company believes it will be
able to enhance the designs of its casual apparel and accessories, as well as to
develop a line of functional apparel appropriate for use in alternative sports,
such as snowboarding.
COMPETITION
The athletic and casual footwear industry is highly competitive. The
Company competes with a number of domestic and foreign manufacturers of
footwear. Many of the Company's competitors, such as Nike, Inc., Reebok
International Ltd., adidas AG and Fila Holding SpA, have significantly greater
financial resources than the Company, have full lines of product offerings,
compete with the Company in the Far East for manufacturing sources and spend
substantially more on product advertising than the Company. The general
availability of offshore shoe manufacturing capacity allows for rapid expansion
by competitors and new entrants in the footwear market. In the casual footwear
market, the Company competes with a number of companies, such as Airwalk,
Converse Inc. and Stride Rite Corporation (Keds), many of which may have
significantly greater financial and other resources than the Company.
The Company is a relatively new entrant in the snowboard boot business.
Although the Company has experienced strong initial sales of its line of
snowboard boots, it faces strong competition from well-established competitors,
most notably Airwalk and Burton Snowboards, Inc., the domestic industry leaders.
Snowboarding is a relatively new sport and there can be no assurance that it
will continue to grow at the rate experienced in recent years, or that its
popularity will not decline. Moreover, the market for snowboards is
characterized by image-conscious consumers. The failure by the Company to
accurately predict and target future trends or to maintain its progressive image
could have a material adverse effect on its snowboard boot sales. The Company
believes that its future success in the snowboard boot market will depend, in
part, on its ability to introduce innovative, well-received products, and there
can be no assurance of its ability to do so.
The Company competes primarily on the basis of brand image, design, price,
performance, quality, style and color selection and manufacturing and delivery
performance. While the Company believes that it
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<PAGE> 42
generally competes favorably with respect to such factors, any failure to do so
could have a material adverse impact on the Company's business, financial
condition and results of operations.
BACKLOG
As of April 1, 1996, the Company's backlog of orders for delivery in the
fourth quarter of fiscal 1996 and the first quarter of fiscal 1997 was
approximately $34.6 million, as compared to approximately $16.0 million as of
April 1, 1995. The Company's backlog amounts exclude orders from the Company's
retail stores. The Company has recently expanded its futures program which
offers the Company's national accounts a discount for placing orders early. In
addition, increased international sales have contributed to backlog as such
sales typically have longer lead times. The Company's backlog also depends upon
a number of other factors, including the timing of trade shows, during which a
significant percentage of the Company's orders are received, the timing of
shipments, product mix of customer orders and the amount of in-season orders. As
a result of these and other factors, period-to-period comparisons of backlog may
not necessarily be meaningful.
In addition, the Company has historically shipped less than all orders in
its backlog and a large portion of its products late in the quarter. As a
result, the Company may not learn of sales shortfalls until late in any
particular fiscal quarter, which could result in an immediate and adverse effect
on the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company holds trademarks, copyrights and patents on its products, brand
names and designs which the Company believes are material to its business. The
Company has made federal, state and international filings with respect to its
material intellectual property, and intends to keep these filings current. The
Company believes that its rubber "Off the Wall(R)" sole design, the VANS
trademark, and the logo incorporating the VANS trademark are significant to its
business as they have been in use for many years and have gained acceptance
among consumers and in the footwear industry. In the United States, the Company
has 20 trademark registrations and 17 pending applications. In addition, the
Company has approximately 91 trademark registrations and 124 applications in
over 50 other countries. The Company is aware of potentially conflicting
trademark claims in the United States, as well as certain countries in Europe,
South America and the Far East, and is currently engaged in, or contemplating
trademark opposition or other legal proceedings, with respect to these claims.
There can be no assurance that the Company will be able to use all of its
trademarks in any of the jurisdictions where conflicts exist. The Company
regards its trademarks and other proprietary rights as valuable assets and
believes that they have significant value in the marketing of its products. The
Company vigorously protects its trademarks against infringement both in the
United States and internationally, including through the use of cease and desist
letters, administrative proceedings and lawsuits.
ENVIRONMENTAL MATTERS
In the ordinary course of business, the Vista Facility generates a small
amount of hazardous waste which is stored on-site and transported off-site by
registered waste haulers for disposal at permitted disposal facilities. The
Company holds permits from local jurisdictions for discharging waste water,
storing hazardous materials, emitting air pollutants, and operating an air
pollution control system and certain other machinery. The Company believes that
it is in substantial compliance with all applicable rules and regulations of
federal, state and local environmental regulatory agencies.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is information regarding directors, executive officers and
key employees of the Company as of April 1, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- --------------------------------- --- ------------------------------------------------------
<S> <C> <C>
George E. McCown................. 60 Chairman of the Board
David E. De Leeuw................ 51 Vice Chairman of the Board
Walter E. Schoenfeld............. 65 Vice Chairman of the Board, President and Chief
Executive Officer
Gary H. Schoenfeld............... 33 Director, Executive Vice President and Chief Operating
Officer
Robert H. Camarena............... 30 Vice President--Distribution and Logistics
Gary L. Dunlap................... 51 Vice President--Management Information Systems
Marc A. Gold..................... 34 Vice President--Sales, Eastern Division
Craig E. Gosselin................ 36 Vice President--General Counsel and Secretary
Gordon C. (Butch) Lee, Jr. ...... 38 Vice President--Sales, Western Division
Neal R. Lyons.................... 39 Vice President--Retail Stores
William C. Mann.................. 52 Vice President--Foreign Sourcing
Sari K. Ratsula.................. 31 Vice President--Design and Product Development
Steven J. Van Doren.............. 40 Vice President--Private Label and Promotions
Kyle B. Wescoat.................. 44 Vice President--Chief Financial Officer
Charles C. Kupfer................ 34 Controller
Lisa M. Douglas.................. 36 Director
Wilbur J. Fix.................... 68 Director
Kathleen M. Gardarian............ 50 Director
Robert B. Hellman, Jr............ 36 Director
Peter M. Husting................. 61 Director
Philip H. Schaff, Jr. ........... 75 Director
James R. Sulat................... 45 Director
</TABLE>
George E. McCown has served as Chairman of the Board since February 1988.
From February until July 1988, he served as President/Chief Executive Officer.
Mr. McCown was co-founder and has been a managing general partner of MDC
Management Company, the general partner of McCown De Leeuw & Co. ("MDC"), since
1984. MDC is a significant stockholder of the Company. See "Principal and
Selling Stockholders." He also serves as Chairman of the Board and a director of
BMC West Corporation, a publicly traded corporation, and is a director of
Specialty Paperboard, Inc., a publicly traded corporation, Nimbus CD
International, a publicly traded corporation, and several other MDC portfolio
companies. Mr. McCown received a B.S. from Stanford University and an M.B.A.
from Harvard University.
David E. De Leeuw became Vice Chairman of the Board and Chief Financial
Officer in February 1988. He became Secretary in July 1988 and resigned as Chief
Financial Officer in June 1991. He resigned as Secretary in May 1993. Mr. De
Leeuw was co-founder and has been a managing general partner of MDC Management
Company, the general partner of MDC, since 1984. MDC is a significant
stockholder of the Company. See "Principal and Selling Stockholders." Mr. De
Leeuw also serves as a director of Specialty Paperboard, Inc., a publicly traded
corporation, Nimbus CD International, a publicly traded corporation, and several
other MDC portfolio companies. Mr. De Leeuw received a B.A. from Lafayette
College and an M.B.A. from Columbia University.
Walter E. Schoenfeld has been a director since August 1991 and has served
as President and Chief Executive Officer since May 1995. He previously held that
position from July 1993 to September 1994. From April 1993 to July 1993, he
served as Acting President and Chief Executive Officer. Mr. Schoenfeld has been
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a Vice Chairman of the Board since March 1993. Mr. Schoenfeld has served as
Chairman of the Board of Schoenfeld Group Ltd., a private consulting and
investment company, since 1987, and as Chairman of the Board of Access Long
Distance Telephone Company since 1991. From 1983 to 1987, he was Chairman of the
Board and Chief Executive Officer of Schoenfeld Neckwear Company, a leading
neckwear company. Mr. Schoenfeld founded Britannia Sportswear Company in 1971
and served as Chairman of the Board and Chief Executive Officer of Schoenfeld
Industries, Inc., its parent company, from 1971 until the sale of the company.
He is a limited partner of a partnership affiliated with MDC, which partnership
does not hold any stock of the Company. Mr. Schoenfeld is the father of Gary H.
Schoenfeld, a director and Executive Vice President and the Chief Operating
Officer of the Company. Mr. Schoenfeld received a B.B.A. from the University of
Washington.
Gary H. Schoenfeld has served as Executive Vice President and Chief
Operating Officer since September 1995 and as a director since November 1995.
Prior to joining the Company, Mr. Schoenfeld was a partner of MDC. During his
employment with MDC from July 1988 to August 1995, Mr. Schoenfeld was a director
of five MDC-affiliated companies, and has been involved with the Company since
1989. Prior to joining MDC, Mr. Schoenfeld was employed for two years by David
H. Murdock, a private financier, and was involved in a variety of projects with
Brittania Sportswear Company, including offshore sourcing operations in Hong
Kong. Mr. Schoenfeld is a director of Fitness Holdings, Inc., an MDC portfolio
company. Mr. Schoenfeld is the son of Walter E. Schoenfeld, the Company's
President and Chief Executive Officer. Mr. Schoenfeld received a B.A. from the
University of California at Los Angeles and an M.B.A. from Stanford University.
Robert H. Camarena has been Vice President--Distribution and Corporate
Logistics since February 1996. Prior to that time, from May 1995 to February
1996, Mr. Camarena was Director of Distribution and Corporate Logistics. Prior
to joining the Company, Mr. Camarena was General Manager of Silver America and
Vice President of Operations of OroAmerica, Inc. from May 1992 to May 1995. From
May 1991 to May 1992, Mr. Camarena was Director of Distribution of Cecil Saydah
Co.
Gary L. Dunlap has been Vice President--Management Information Systems
since May 1995. Prior to joining the Company he was Vice President--Information
Services for OroAmerica, Inc. from March 1992 to April 1995, and held the same
position at Berkshire Properties & Development from July 1985 to March 1992. Mr.
Dunlap received a B.S. from Lycoming College.
Marc A. Gold has been Vice President--Sales, Eastern Division since June
1994. Mr. Gold became Eastern Regional Sales Manager of the Company in July
1993, with responsibility for sales to both national chains and independent
retailers doing business in the Eastern United States. Prior to joining the
Company, Mr. Gold was employed by L.A. Gear Inc. from 1987 to 1993 in various
sales positions, eventually becoming a National Accounts Manager.
Craig E. Gosselin has been Vice President--General Counsel since July 1992.
He became Secretary in May 1993. He was an Assistant Secretary of the Company
from February 1988 to May 1993. From March 1990 to June 1992, Mr. Gosselin was a
Partner of the law firm of Cooper & Dempsey. Mr. Gosselin received a B.B.A. from
Loyola Marymount University and a J.D. from Southwestern University School of
Law.
Gordon C. (Butch) Lee, Jr. has been Vice President--Sales, Western Division
since June 1994. From June 1993 to June 1994, Mr. Lee was Western Regional Sales
Manager of the Company, with responsibility for sales to independent retailers
in the Western United States. Mr. Lee has been employed in numerous capacities
at the Company since 1980. Mr. Lee is the son of Gordon C. Lee, a founder of the
predecessor of the Company.
Neal R. Lyons has been Vice President--Retail Stores since February 1995.
Prior to joining the Company, Mr. Lyons was Director of Stores for Reebok from
June 1994 to February 1995. From September 1989 to June 1994, he was President
of Midlantic Footwear, a large-scale footwear and apparel organization and a
division of Intershoe Inc.
William C. Mann has been Vice President--Foreign Sourcing since June 1994.
Mr. Mann has over 30 years experience in the footwear industry, with a
particular emphasis on foreign sourcing. He founded
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Items International Inc., a manufacturer of private label footwear, in 1978, and
eventually formed Airwalk as a division of Items International. Mr. Mann served
as President of Airwalk from 1986 to 1992.
Sari K. Ratsula has been Vice President--Design and Product Development
since June 1994. She has been employed by the Company since 1989, and has been
involved in all facets of the design and development of the Company's product
line, ultimately becoming Director of Product Development, a position she held
from 1991 to June 1994. Ms. Ratsula received an M.S. from the Helsinki School of
Economics and Business Administration.
Steven J. Van Doren has been a Vice President since May 1990. He is
currently primarily responsible for the Company's private label and promotional
efforts. Mr. Van Doren has been employed by the Company in various capacities
since the formation of the predecessor of the Company in 1966. Mr. Van Doren is
the son of Paul Van Doren, a founder of the predecessor of the Company.
Kyle B. Wescoat has served as Vice President--Chief Financial Officer since
February 1996. From November 1995 to February 1996, Mr. Wescoat served as
Assistant to the President of Equity Management Inc., a marketing services
company that specializes in brand extension licensing. From January 1994 to
October 1995, Mr. Wescoat was Chief Financial Officer of Shirmar Corporation, an
industrial products company. From August 1990 to January 1994, Mr. Wescoat
served as Chief Financial Officer of PLC Leather, a manufacturer, wholesaler and
importer of women's fashion accessories. Mr. Wescoat received a B.S. from Drexel
University and an M.B.A. from the University of Michigan.
Charles C. Kupfer has served as Controller since September 1994. From July
1995 to December 1995 he was Acting Chief Financial Officer of the Company. He
served as Assistant Controller of the Company from August 1992 until September
1994. Prior to joining the Company, Mr. Kupfer was employed by KPMG Peat Marwick
LLP. Mr. Kupfer received a B.A. from the University of California at Irvine and
a second B.A. from the California State University at Fullerton.
Lisa M. Douglas has been a director since November 1995. Ms. Douglas is
President of Nufitness Corporation, a producer of fitness-related television,
audio, visual aids and wellness programs. Prior to founding Nufitness in 1991,
Ms. Douglas was Director of Corporate Sales for Koala Blue, a women's sportswear
manufacturer. Ms. Douglas currently serves on the Board of the Steering
Committee of the Associates of Cedars-Sinai Medical Center and the Douglas
Family Foundation.
Wilbur J. Fix has been a director since February 1993. He is Vice Chairman
of Access Long Distance Telephone Company and Chairman of the Board of Fix
Management Group. From 1980 to 1993, Mr. Fix was Chairman of the Board and Chief
Executive Officer of The Bon Marche, a Seattle-based chain of department stores
which was acquired by Campeau Corporation in 1986. Mr. Fix ultimately became
Senior Vice President of Allied Stores Corporation, the parent company of The
Bon Marche, and a member of the Boards of Directors of Allied Stores Corporation
and Federated Stores Inc. He is a limited partner of a partnership affiliated
with MDC, which partnership does not hold any Common Stock of the Company. Mr.
Fix is a member of the Board of Directors of Savi, a privately-held retailer of
ready-to-wear apparel, Access Long Distance Telephone Company, BMC West
Corporation, a publicly traded corporation, and Thrifty Foods of Burlington,
Inc. Mr. Fix received a B.A. from the University of Washington.
Kathleen M. Gardarian has been a director since December 1994. Since 1988,
she has been the owner and President of Qualis International, Inc., an
international trading and distribution company. Ms. Gardarian is a founding
Trustee and Board member of the World Business Academy, an international network
of business executives, and is on the Advisory Boards of The Gorbachev U.S.A.
Foundation and The Institute of Ecolonomics. She is also on the Board of Red
Rose Collection Inc., a nationwide catalog company, and the Institute of
Transpersonal Psychology in Palo Alto, California. Ms. Gardarian received a B.A.
from the University of California at Los Angeles.
Robert B. Hellman, Jr. has been a director since December 1993. Mr. Hellman
has been associated with MDC since 1987, becoming a partner in 1991. MDC is a
significant stockholder of the Company. See "Principal and Selling
Stockholders." Mr. Hellman is a member of the Board of Directors of BMC West
Corporation, a publicly traded corporation, Nimbus CD International Inc.,
Pelican Companies, Inc. and
43
<PAGE> 46
International Data Response Corporation. Mr. Hellman received a B.A. in
Economics from Stanford University, an M.S. in Economics from the London School
of Economics and an M.B.A. from Harvard University.
Peter M. Husting has been a director since June 1995. He is a consultant to
Eaglemark Financial Services, Inc., a provider of private label financial
services for dealers and customers of Harley-Davidson and other branded products
manufacturers. From November 1959 to December 1992, he was employed in numerous
capacities with Leo Burnett Company Inc., a leading advertising agency,
eventually becoming an Executive Vice President and a member of the Board of
Directors. While at Leo Burnett, Mr. Husting had many years of responsibility
for the Procter & Gamble Co. account. He was also the Senior Manager on other
well-known accounts, such as Pillsbury, Green Giant Company, Heinz, Keebler and
Kentucky Fried Chicken. Mr. Husting is a director of several privately-held
companies. Mr. Husting received a B.A. from the University of Wisconsin and
graduated from the Advanced Management Program of Harvard University.
Philip H. Schaff, Jr. has served as a director since January 1989. Mr.
Schaff has owned and operated his own investment and consulting firm, Phil
Schaff Enterprises, Inc. since 1983. From 1947 to 1983, Mr. Schaff was employed
by Leo Burnett Co., Inc., eventually becoming its Chairman of the Board and
Chief Executive Officer. Mr. Schaff is a limited partner of MDC.
James R. Sulat has been a director since October 1994. He is the Chief
Financial Officer of Stanford Health Services, a not-for-profit health care
provider which operates the Stanford University Hospital and Clinic. From 1990
to 1993, Mr. Sulat was Chief Financial Officer and Vice President of Operations
of Esprit de Corp, a San Francisco-based apparel company. He is a limited
partner of a partnership affiliated with MDC, which partnership does not hold
any Common Stock. Mr. Sulat received a B.S. from Yale University and an M.B.A.
and M.S. from Stanford University.
Board Committees. The Board of Directors has a Compensation Committee,
which makes recommendations concerning salaries and incentive compensation for
officers and employees of the Company; an Audit Committee, which reviews the
results and scope of the audit and other services provided by the Company's
independent auditors; an Executive Committee, which reviews the Company's
operations on a periodic basis; and a Real Estate Committee, which reviews the
Company's real estate and retail store operations.
The current members of the Compensation Committee are Wilbur J. Fix,
Chairman, and Philip H. Schaff, Jr. The members of the Audit Committee are David
E. De Leeuw, Chairman, Philip H. Schaff, Jr. and Wilbur J. Fix. The members of
the Executive Committee are Walter E. Schoenfeld, Chairman, George E. McCown,
David E. De Leeuw and Gary H. Schoenfeld. The members of the Real Estate
Committee are Wilbur J. Fix, Chairman, and Walter E. Schoenfeld.
CERTAIN RELATIONSHIP
MDC and MDC/JAFCO Ventures, an investment partnership affiliated with MDC
("MDC/JAFCO"), have granted the Underwriters an option to purchase up to an
aggregate of 390,000 additional shares of Common Stock to cover over-allotments,
if any. Pursuant to a management agreement, MDC Management Company, the general
partner of MDC, has provided management, consulting and financial services to
the Company for a fixed annual fee. Services rendered by MDC Management Company
include, but are not necessarily limited to, advice and assistance concerning
the operation, planning and financing of the Company. During the past three
years, MDC has received an annual fee of $350,000, except that MDC waived the
quarterly payment of such fee with respect to the third and fourth quarters of
fiscal 1996. MDC is a significant stockholder of the Company and George E.
McCown and David E. De Leeuw, each of whom is a director and officer of the
Company, are general partners of MDC Management Company. Additionally, Robert B.
Hellman, Jr., a director of the Company, is a partner of MDC, and Gary H.
Schoenfeld, the Executive Vice President and Chief Operating Officer and a
director of the Company, is a former partner of MDC. See "Principal and Selling
Stockholders" and "Underwriting."
44
<PAGE> 47
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 11, 1996, and after the sale
of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option): (i) by each person who is known by the Company to own
beneficially more than 5% of the Company's Common Stock; (ii) by each director;
and (iii) by all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(1) OF AFTER OFFERING(1)(2)
--------------------- SHARES ---------------------
NUMBER BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
- ----------------------------------------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
McCown De Leeuw & Co.(3)................. 1,870,414 19.2% 0 1,870,414 15.2%
3000 Sand Hill Road
Bldg. 3, Suite 290
Menlo Park, CA 94025
George E. McCown(4)...................... 1,890,414 19.4 0 1,890,414 15.3
David E. De Leeuw(5)..................... 1,870,414 19.2 0 1,870,414 15.2
Walter E. Schoenfeld(6).................. 262,000 2.6 100,000 162,000 1.3
Philip H. Schaff, Jr.(7)................. 75,014 * 0 75,014 *
Wilbur J. Fix(8)......................... 32,334 * 0 32,334 *
Robert B. Hellman, Jr.(9)................ 2,850 * 0 2,850 *
James R. Sulat(10)....................... 2,500 * 0 2,500 *
Kathleen M. Gardarian(11)................ 2,500 * 0 2,500 *
Peter M. Husting(12)..................... 1,400 * 0 1,400 *
Gary H. Schoenfeld(13)................... 44,500 * 0 44,500 *
Lisa M. Douglas(14)...................... 0 * 0 0 *
All directors and executive officers as a 2,375,175 23.5% 100,000 2,275,175 18.0%
group (21 persons)(15).................
</TABLE>
- -----------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them. Percentage of beneficial ownership is based on
9,742,418 shares of Common Stock outstanding as of April 11, 1996 and
12,332,418 shares of Common Stock outstanding after completion of this
Offering.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of 390,000 shares of Common Stock from MDC and
MDC/JAFCO.
(3) Includes 157,892 shares held by MDC/JAFCO. MDC and MDC/JAFCO have granted
an option to the Underwriters to purchase up to an aggregate of 390,000
shares of Common Stock solely to cover over-allotments, if any. See
"Underwriting." If the Underwriters' over-allotment option is exercised in
full, the percentage beneficial ownership of MDC and MDC/JAFCO after this
Offering will be 11.6%.
(4) Includes 1,712,522 shares held by MDC and 157,892 shares held by MDC/JAFCO.
See Note 3 above. Mr. McCown is a general partner of MDC Management
Company, the general partner of MDC and MDC/JAFCO, and may be deemed to own
beneficially all of the shares held by MDC and MDC/JAFCO.
(5) Includes 1,712,522 shares held by MDC and 157,892 shares held by MDC/JAFCO.
See Note 3 above. Mr. De Leeuw is a general partner of MDC Management
Company, the general partner of MDC and MDC/JAFCO. Mr. De Leeuw has no
direct ownership of any Common Stock.
45
<PAGE> 48
(6) Includes 252,000 shares of Common Stock that are subject to stock options
which are exercisable within 60 days of April 11, 1996. Excludes 148,000
shares of Common Stock that are subject to stock options which are not
exercisable within 60 days of April 11, 1996.
(7) Excludes 1,870,414 shares held by MDC and its affiliate, MDC/JAFCO. Mr.
Schaff is a limited partner of MDC and is entitled to receive a portion of
such shares upon distribution by the partnership. MDC currently controls
the power to vote and dispose of such shares, therefore, Mr. Schaff
disclaims beneficial ownership of such shares. Excludes 29,666 shares of
Common Stock that are subject to non-statutory stock options which are not
exercisable within 60 days of April 11, 1996. Includes 23,514 shares of
Common Stock that are subject to non-statutory stock options which are
exercisable within 60 days of April 11, 1996.
(8) Includes 20,334 shares of Common Stock that are subject to non-statutory
stock options which are exercisable within 60 days of April 11, 1996.
Excludes 49,666 shares of Common Stock that are subject to non-statutory
stock options which are not exercisable within 60 days of April 11, 1996.
(9) Includes 850 shares of Common Stock held by the wife of Mr. Hellman.
Excludes an aggregate of 1,870,414 shares of Common Stock held by MDC and
MDC/JAFCO. Mr. Hellman is a partner of MDC.
(10) Includes 2,500 shares of Common Stock that are subject to a non-statutory
stock option that is exercisable within 60 days of April 11, 1996. Excludes
5,000 shares of Common Stock that are subject to the same non-statutory
stock option and 5,000 shares of Common Stock that are subject to another
non-statutory stock option, both of which are not exercisable within 60
days of April 11, 1996.
(11) Includes 2,500 shares of Common Stock that are subject to a non-statutory
stock option that is exercisable within 60 days of April 11, 1996. Excludes
5,000 shares of Common Stock that are subject to the same non-statutory
option and 5,000 shares of Common Stock that are subject to another non-
statutory stock option, both of which are not exercisable within 60 days of
April 11, 1996.
(12) Excludes 12,500 shares of Common Stock that are subject to two
non-statutory stock options that are not exercisable within 60 days of
April 11, 1996.
(13) Includes 34,000 shares of Common Stock that are subject to a stock option
which is exercisable within 60 days of April 11, 1996. Excludes 66,000
shares of Common Stock that are subject to the same stock option which is
not exercisable within 60 days of April 11, 1996.
(14) Excludes 7,500 shares of Common Stock that are subject to a non-statutory
stock option which is not exercisable within 60 days of April 11, 1996.
(15) Includes an aggregate of 1,870,414 shares held by MDC and MDC/JAFCO,
entities affiliated with George E. McCown and David E. De Leeuw, both of
whom are directors and officers of the Company. See Notes 3, 4, and 5
above. Also includes 373,850 shares subject to non-statutory and incentive
stock options which are exercisable within 60 days of April 11, 1996 and
held by certain executive officers and directors of the Company.
46
<PAGE> 49
UNDERWRITING
Subject to certain terms and conditions contained in the Underwriting
Agreement (the "Underwriting Agreement"), the Underwriters named below, for whom
Donaldson, Lufkin & Jenrette Securities Corporation, Montgomery Securities and
Robertson, Stephens & Company LLC are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and a
Selling Stockholder an aggregate of 2,600,000 shares of Common Stock. The number
of shares of Common Stock that each Underwriter has agreed to purchase is set
forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..................
Montgomery Securities................................................
Robertson, Stephens & Company LLC....................................
----------------
Total...................................................... 2,600,000
=============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to accept delivery of the shares of Common Stock offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions. If any shares of Common Stock are purchased by the Underwriters
pursuant to the Underwriting Agreement, all such shares (other than the shares
subject to the over-allotment option described below) must be purchased.
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock in part
directly to the public initially at the price set forth on the cover page of
this Prospectus and in part to certain dealers at such price less a concession
not in excess of $ per share; that the Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share on sales
to other dealers; and that after this Offering, the Price to the Public
concession and discount to dealers may be changed by the Representatives.
MDC and MDC/JAFCO have granted the Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of an
additional 390,000 shares of Common Stock at the Price to the Public less
underwriting discounts and commissions. The Underwriters may exercise such
option from time to time only for the purpose of covering over-allotments, if
any, incurred in connection with the sale of shares of Common Stock offered
hereby. To the extent the Underwriters exercise such option, each Underwriter
will become obligated, subject to certain conditions, to purchase the same
proportion of additional shares as the number of other shares to be purchased by
that Underwriter bears to the total number of shares set forth on the cover page
of this Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Subject to certain exceptions, the Company, all of its executive officers
and directors and certain stockholders of the Company, including the Selling
Stockholders, have agreed not to, directly or indirectly, offer, sell, contract
to sell, grant any option to purchase, or otherwise dispose of any shares of
Common Stock, or any securities convertible or exercisable or exchangeable for
shares of Common Stock or cause to be filed with the Commission a registration
statement under the Securities Act to register any shares of the Common Stock
or, in any manner, transfer all or a portion of the economic consequences
associated with the ownership of the Common Stock without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation for a period of
120 days after the date of this Prospectus.
47
<PAGE> 50
In connection with this Offering, certain Underwriters and selling group
members (and any of their affiliated purchasers) who are qualified registered
market makers on the Nasdaq National Market, may engage in passive market
transactions in the Common Stock on the Nasdaq National Market in accordance
with Rule 10b-6A under the Exchange Act during the two business day period
before commencement of offers or sales of the Common Stock in this Offering. The
passive market making transactions must comply with the applicable volume and
price limits and be identified as such. In general, a passive market maker may
display its bid at a price not in excess of the highest independent bid for the
security, and, if all independent bids are lowered below the passive market
maker's bid, then such bid must be lowered when certain purchase limits are
exceeded.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Cooley Godward Castro Huddleson & Tatum,
Menlo Park, California ("Cooley Godward"). Certain other legal matters relating
to this Offering will be passed upon for the Company by Craig E. Gosselin, Vice
President-General Counsel and Secretary, and by Cooley Godward. Certain legal
matters will be passed upon for the Underwriters by Latham & Watkins, Los
Angeles, California. Mr. Gosselin owns 6,273 shares of Common Stock and options
to purchase 36,773 shares of Common Stock, 3,464 of which are currently
exercisable.
EXPERTS
The financial statements and schedule as of May 31, 1994 and 1995, and for
each of the years in the three-year period ended May 31, 1995, have been
included herein or incorporated by reference herein and in the registration
statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
auditors, appearing elsewhere herein or incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A registration statement on Form S-3 with respect to the Common Stock
offered hereby (the "Registration Statement") has been filed with the Commission
under the Securities Act. This Prospectus does not contain all of the
information contained in such Registration Statement and the exhibits and
schedules thereto, certain portions of which have been omitted pursuant to the
rules and regulations of the Commission. For further information with respect to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus regarding the contents of any contract or any other
document are not necessarily complete and, in each instance, reference is hereby
made to the copy of such contract or document filed as an exhibit to the
Registration Statement. The Registration Statement, including exhibits thereto,
may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from the
Commission's Public Reference Section, 450 Fifth Street, N.W., Room 1024,
Washington, D.C., 20549, upon payment of the prescribed fees.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act
and in accordance therewith, files annual and quarterly reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information may be inspected and copied at the Commission's
Public Reference Section, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, as well as at the Commission's Regional Offices at 7 World Trade Center,
13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material may be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Common Stock of the Company is quoted on the
Nasdaq National Market. Reports and other information concerning the Company may
be inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W. Washington, D.C. 20006.
48
<PAGE> 51
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the Commission under the Exchange Act
(File No. 0-19402), are hereby incorporated by reference into this Prospectus:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1995 and the amendments to the Company's Annual Report on Form
10-K/A filed on September 15, 1995 and May 15, 1996;
(ii) The Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended August 26 and November 25, 1995 and February 24, 1996, each
as amended on May 15, 1996;
(iii) The Company's Current Reports on Form 8-K, filed on June 9, June
12 and October 17, 1995 and February 1 and February 14, 1996; and
(iv) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed on July 15, 1991.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this Offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the documents that have been
incorporated by reference herein (not including exhibits to such documents
unless such exhibits are specifically incorporated by reference herein or into
such documents). Such request may be directed to Vans, Inc., Attention: General
Counsel, 2095 North Batavia Street, Orange, California 92665-3101, telephone
(714) 974-7414.
49
<PAGE> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
VANS, INC.
Condensed Consolidated Balance Sheets as of May 31, 1995 and February 24, 1996
(unaudited)...................................................................... F-2
Condensed Consolidated Statements of Earnings for the Thirty-Nine Weeks Ended
February 25, 1995 and February 24, 1996 (unaudited).............................. F-3
Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended
February 25, 1995 and February 24, 1996 (unaudited).............................. F-4
Notes to Condensed Consolidated Financial Statements (unaudited).................... F-5
Consolidated Balance Sheets as of May 31, 1994 and 1995............................. F-6
Consolidated Statements of Operations for the Years Ended May 31, 1993, 1994 and
1995............................................................................. F-7
Consolidated Statements of Stockholders' Equity for the Years Ended
May 31, 1993, 1994 and 1995...................................................... F-8
Consolidated Statements of Cash Flows for the Years Ended May 31, 1993, 1994 and
1995............................................................................. F-9
Notes to Consolidated Financial Statements.......................................... F-10
Independent Auditors' Report........................................................ F-22
</TABLE>
F-1
<PAGE> 53
VANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 24,
1995 1996
-----------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................... $ 3,279,843 $ 560,795
Accounts receivable, net of allowance for doubtful accounts
and sales returns and allowances of $812,631 and $1,061,179
at May 31, 1995 and February 24, 1996, respectively........ 12,584,244 18,441,931
Inventories (note 2).......................................... 16,997,738 17,529,043
Income taxes receivable....................................... 3,530,128 --
Deferred income taxes......................................... 1,615,000 1,615,000
Prepaid expenses.............................................. 498,555 969,591
----------- -----------
Total current assets.................................. 38,505,508 39,116,360
Property, plant and equipment, net.............................. 10,747,450 10,753,385
Excess of cost over the fair value of net assets acquired, net
of accumulated amortization of $31,966,872 and $32,538,807 at
May 31, 1995 and February 24, 1996, respectively.............. 17,272,527 16,700,593
Deferred financing costs, net of accumulated amortization of
$270,454 and $324,547 at May 31, 1995 and February 24, 1996,
respectively.................................................. 306,489 252,396
Property held for sale.......................................... 5,299,771 4,687,106
Other assets.................................................... 934,290 1,199,216
----------- -----------
$ 73,066,035 $ 72,709,056
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings......................................... $ 2,608,173 $ 5,953,408
Current portion of senior notes............................... 7,025,069 5,800,000
Accounts payable.............................................. 8,579,473 6,352,877
Accrued payroll and related expenses.......................... 2,026,229 1,851,737
Restructuring costs........................................... 6,083,934 2,364,180
Accrued workers' compensation................................. 1,540,046 1,012,902
Accrued interest.............................................. 907,660 168,829
Income taxes payable.......................................... -- 1,756,109
----------- -----------
Total current liabilities............................. 28,770,584 25,260,042
Deferred income taxes........................................... 1,615,000 1,615,000
Capital lease obligations....................................... 441,384 333,900
Long-term credit facility....................................... -- 4,647,745
Senior notes.................................................... 21,974,931 17,400,000
----------- -----------
52,801,899 49,256,687
----------- -----------
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,
9,639,877 and 9,730,917 shares issued and outstanding at
May 31, 1995 and February 24, 1996, respectively........... 9,640 9,731
Additional paid-in capital.................................... 46,803,649 47,357,631
Accumulated deficit........................................... (26,549,153) (23,914,993)
----------- -----------
20,264,136 23,452,369
----------- -----------
$ 73,066,035 $ 72,709,056
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE> 54
VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
FEBRUARY 25, FEBRUARY 24,
1995 1996
<S> <C> <C>
(UNAUDITED)
Net sales......................................................... $ 63,469,566 $ 85,433,783
Cost of sales..................................................... 37,215,422 52,289,897
----------- -----------
Gross profit............................................ 26,254,144 33,143,886
Operating expenses:
Selling and distribution........................................ 12,842,232 17,518,527
Marketing, advertising and promotion............................ 3,559,091 5,816,744
General and administrative...................................... 4,606,734 3,645,049
Provision for doubtful accounts................................. 518,320 245,086
Amortization of intangibles..................................... 1,230,996 571,935
----------- -----------
Total operating expenses................................ 22,757,373 27,797,341
----------- -----------
Earnings from operations................................ 3,496,771 5,346,545
Interest income................................................... 81,634 59,478
Interest and debt expense......................................... (2,142,089) (2,452,216)
Other income...................................................... 1,549,207 1,436,462
----------- -----------
Earnings before income taxes............................ 2,985,523 4,390,269
Income tax expense................................................ 1,194,210 1,756,109
----------- -----------
Net earnings............................................ 1,791,313 2,634,160
=========== ===========
Per share information (note 3):
Primary:
Earnings per share........................................... $ 0.18 $ 0.26
=========== ===========
Weighted average common and common equivalent shares......... 9,830,478 10,199,937
Fully diluted:
Earnings per share........................................... $ 0.18 $ 0.25
=========== ===========
Weighted average common and common equivalent shares......... 9,894,394 10,613,426
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE> 55
VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
FEBRUARY 25, FEBRUARY 24,
1995 1996
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................... $ 1,791,313 $ 2,634,160
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization.............................. 3,287,362 2,378,234
Amortization of deferred financing costs................... 54,093 54,093
Provision for losses on accounts receivable and sales
returns.................................................. 518,320 245,086
Provision for losses on inventories........................ 300,000 --
Changes in assets and liabilities:
Accounts receivable...................................... (379,994) (6,106,235)
Income taxes receivable.................................. 245,827 3,530,128
Inventories.............................................. (10,264,123) (531,305)
Prepaid expenses......................................... (1,230,091) (471,036)
Other assets............................................. 1,836,889 (264,926)
Accounts payable......................................... 3,540,717 (2,226,596)
Accrued payroll and related expenses..................... (1,634,547) (174,492)
Accrued workers' compensation............................ (12,974) (527,144)
Restructuring costs...................................... -- (3,719,754)
Accrued interest......................................... (744,169) (738,831)
Income taxes payable..................................... -- 1,756,109
------------ ------------
Net cash used in operating activities................. (2,691,377) (4,162,509)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...................... (2,489,036) (1,913,251)
Proceeds from sale of property held for sale.................... -- 717,143
------------ ------------
Net cash used in investing activities................. (2,489,036) (1,196,108)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings............................. 1,500,000 3,345,235
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..................... 244,410 554,073
------------ ------------
Net cash provided by financing activities............. 1,744,410 2,639,569
Net decrease in cash and cash equivalents............. (3,436,003) (2,719,048)
Cash and cash equivalents, beginning of period.................. 7,129,172 3,279,843
------------ ------------
Cash and cash equivalents, end of period........................ $ 3,693,169 $ 560,795
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION -- AMOUNTS PAID FOR:
Interest...................................................... $ 2,786,800 $ 2,912,619
Income taxes.................................................. $ 914,969 $ 41,265
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE> 56
VANS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. 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. 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
MAY 31, 24,
1995 1996
----------- -----------
<S> <C> <C>
Raw materials................................. $ 1,978,760 $ 2,016,152
Work-in-process............................... 695,995 81,337
Finished goods................................ 14,922,983 16,031,554
----------- -----------
17,597,738 18,129,043
Inventory reserves............................ (600,000) (600,000)
----------- -----------
$16,997,738 $17,529,043
========== ==========
</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.
F-5
<PAGE> 57
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-6
<PAGE> 58
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-7
<PAGE> 59
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)
-------
---
------ ----------- -----------
BALANCE 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-8
<PAGE> 60
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-9
<PAGE> 61
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 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 represents
trademarks, manufacturing know-how and dealer relationships and is 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-10
<PAGE> 62
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.
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.
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-11
<PAGE> 63
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 Facility; and (iv) the discontinuance of certain domestically-produced
product.
F-12
<PAGE> 64
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-13
<PAGE> 65
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-14
<PAGE> 66
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-15
<PAGE> 67
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-16
<PAGE> 68
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 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-17
<PAGE> 69
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-18
<PAGE> 70
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-19
<PAGE> 71
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-20
<PAGE> 72
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-21
<PAGE> 73
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-22
NOTES
<PAGE> 74
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 28
Management............................ 41
Certain Relationship.................. 44
Principal and Selling Stockholders.... 45
Underwriting.......................... 47
Legal Matters......................... 48
Experts............................... 48
Additional Information................ 48
Available Information................. 48
Incorporation of Certain Documents by
Reference........................... 49
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
2,600,000 SHARES
[VANS LOGO]
COMMON STOCK
--------------------------
PROSPECTUS
--------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
, 1996
======================================================
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Registration fee.................................................. $ 14,306
NASD filing fee................................................... 4,649
Nasdaq listing fee................................................ 17,500
Blue sky qualification fees and expenses.......................... 10,000
Printing and engraving expenses................................... 80,000
Legal fees and expenses........................................... 225,000
Accounting fees and expenses...................................... 100,000
Transfer agent and registrar fees................................. 5,000
Miscellaneous..................................................... 13,545
--------
Total................................................... $470,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Registrant's Restated Certificate of Incorporation and Restated Bylaws
include provisions to (i) eliminate the personal liability of its directors for
monetary damages resulting from breaches of their fiduciary duty to the extent
permitted by Section 102(b)(7) of the General Corporation Law of Delaware (the
"Delaware Law") and (ii) authorize the Registrant to indemnify its directors and
officers to the fullest extent permitted by Section 145 of the Delaware Law,
including circumstances in which indemnification is otherwise discretionary.
Pursuant to Section 145 of the Delaware Law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of a
corporation, and with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that these
provisions are necessary to attract and retain qualified persons as directors
and officers. These provisions do not eliminate liability for breach of the
director's duty of loyalty to the Registrant or its stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for any transaction from which the director derived an
improper personal benefit or for any willful or negligent payment of any
unlawful dividend or any unlawful stock purchase agreement or redemption.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its listed enterprises, provided such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Registrant and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
The indemnification agreements also set forth certain procedures that will apply
in the event of a claim for indemnification thereunder.
The Registrant has purchased an insurance policy covering the officers and
directors of the Registrant with respect to certain liabilities arising under
the Securities Act or otherwise.
II-1
<PAGE> 76
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
- ------------- --------------------------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement (draft dated May 10, 1996)
(1) 3.1 Restated Certificate of Incorporation of the Registrant, dated August 30, 1991
(1) 3.1.1 Certificate of Retirement of Class A and Class B Preferred Stock of the
Registrant, dated August 29, 1991
(1) 3.2 Restated By-laws of the Registrant
(3) 3.2.1 Amendment No. 1 of Restated By-laws of the Registrant
(3) 3.2.2 Amendment No. 2 of Restated By-laws of the Registrant
(5) 3.3 Certificate of Designation of Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2
(5) 4.2 Specimen Stock Certificate
(1) 4.12 Note Purchase Agreement, dated as of August 21, 1991, between the Registrant and
holders of the Registrant's Senior Notes due August 1, 1999 (executed composite)
(3) 4.12.1 Amendment No. 1 to the Note Purchase Agreement, dated as of August 5, 1993, by
and between the Registrant and Teachers Insurance and Annuity Association (the
"Teachers Note Agreement")
(3) 4.12.2 Amendment No. 2 to Note Purchase Agreement, dated as of August 9, 1993, by and
among the Registrant and Connecticut General Life Insurance Company, Connecticut
General Life Insurance Company, on behalf of one or more separate accounts, and
Life Insurance Company of North America (the "CIGNA Note Agreement")
(2) 4.12.3 Amendment No. 2 to the Teachers Note Agreement, dated as of December 15, 1993
(2) 4.12.4 Amendment No. 2 to the CIGNA Note Agreement, dated as of December 20, 1993
(6) 4.12.5 Amendment No. 3 to the Teachers Note Agreement, dated as of May 13, 1994
(6) 4.12.6 Amendment No. 3 to the CIGNA Note Agreement, dated as of May 23, 1994
(7) 4.12.7 Modification Letter, dated as of July 1, 1995, by and among the Registrant,
Teachers and Cigna
(8) 4.12.8 Modification Letter No. 2, dated as of August 25, 1995, by and among the
Registrant, Teachers and Cigna
* 4.12.9 Modification Letter No. 3, dated as of March 29, 1996, by and among the
Registrant, Teachers and Cigna
(4) 4.13 Form of Preferred Stock Purchase Rights Certificate
(4) 4.14 Rights Agreement, dated as of February 22, 1994, by and between the Registrant
and Chemical Trust Company of California, as Rights Agent
* 5.1 Opinion of Cooley Godward Castro Huddleson & Tatum
* 10.1 Amendments No. 1, 2 and 3, dated as of August 2, 1995, January 5, 1996 and March
20, 1996, respectively, to Agreement, dated as of April 26, 1995, by and among
the Registrant and Ssangyong Corporation
* 10.2 Fourth Amendment, dated April 11, 1996, to Loan and Security Agreement, dated as
of July 1, 1995, by and among the Registrant and Bank of the West
11.1 Computation of Earnings Per Share
23.1 Consent of Independent Auditors
* 23.2 Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to Exhibit
5.1
* 23.3 Consent of Craig E. Gosselin
* 24 Power of Attorney (reference is made to the Signature Page)
27 Financial Data Schedule
</TABLE>
- ------------------------------
* Previously filed
(1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1992, and incorporated herein by this reference
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the period ended November 28, 1993, and incorporated herein by this
reference
II-2
<PAGE> 77
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1993, and incorporated herein by this reference
(4) Filed as an exhibit to the Registrant's Form 8-A Registration Statement (SEC
File No. 0-19402), and incorporated herein by this reference
(5) Filed as an exhibit to the Registrant's Report on Form 8-K, dated February
15, 1994, and incorporated herein by this reference
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1994, and incorporated herein by this reference
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1995 and incorporated herein by this reference
(8) Filed as an exhibit to the Registrant's Report on Form 8-K, dated October
17, 1995, and incorporated herein by this reference
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the Registration Statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the Registration Statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be in the initial bona fide offering thereof.
II-3
<PAGE> 78
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA,
ON THE 15TH DAY OF MAY, 1996.
VANS, INC.
By: /s/ WALTER E. SCHOENFELD*
------------------------------------
Walter E. Schoenfeld
President and Chief Executive
Officer
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<C> <S> <C>
/s/ WALTER E. SCHOENFELD* President, Chief Executive May 15, 1996
- ------------------------------------- Officer and Director
Walter E. Schoenfeld (Principal Executive
Officer)
/s/ KYLE B. WESCOAT Vice President and Chief May 15, 1996
- ------------------------------------- Financial Officer
Kyle B. Wescoat (Principal Financial and
Accounting Officer)
/s/ GEORGE E. MCCOWN* Director and Chairman of the May 15, 1996
- ------------------------------------- Board
George E. McCown
/s/ DAVID E. DE LEEUW* Director and Vice Chairman of May 15, 1996
- ------------------------------------- the Board
David E. De Leeuw
/s/ GARY H. SCHOENFELD* Executive Vice President, May 15, 1996
- ------------------------------------- Chief Operating Officer and
Gary H. Schoenfeld Director
/s/ PHILIP H. SCHAFF, JR.* Director May 15, 1996
- -------------------------------------
Philip H. Schaff, Jr.
/s/ WILBUR J. FIX* Director May 15, 1996
- -------------------------------------
Wilbur J. Fix
/s/ ROBERT B. HELLMAN, JR.* Director May 15, 1996
- -------------------------------------
Robert B. Hellman, Jr.
/s/ JAMES R. SULAT* Director May 15, 1996
- -------------------------------------
James R. Sulat
/s/ KATHLEEN M. GARDARIAN* Director May 15, 1996
- -------------------------------------
Kathleen M. Gardarian
/s/ PETER M. HUSTING* Director May 15, 1996
- -------------------------------------
Peter M. Husting
/s/ LISA M. DOUGLAS* Director May 15, 1996
- -------------------------------------
Lisa M. Douglas
*By: KYLE B. WESCOAT
- -------------------------------------
Kyle B. Wescoat
Attorney-In-Fact
</TABLE>
II-4
<PAGE> 79
EDGAR APPENDIX
GRAPHIC ON INSIDE COVER PAGE
Photograph of person wearing VANS shoes sitting on front bumper of a car. The
car's license plate reads "SINCE 66."
GRAPHICS ON FOLD-OUT OF INSIDE COVER PAGE.
TEXT AT TOP OF PAGE:
As a key element of the VANS marketing strategy, the Company sponsors over 100
of the world's top athletes in alternative sports such as skateboarding,
snowboarding and BMX bicycling. These athletes reinforce the Company's
authenticity and credibility with its core customers and generate exposure of
the VANS brand at sporting events, in magazines and on sports-related television
programming.
Photograph of Steve Caballero captioned
"STEVE CABALLERO Skateboarding Champion and holder of the "Big Air" world
record."
Photograph of Shaun Palmer captioned
"SHAUN PALMER One of the world's top professional snowboarders."
Photograph of Pete Loncarevich captioned
"PETE LONCAREVICH Top BMX racer for over a decade."
Five photographs of VANS shoes from the Company's catalogue: the Lucy(TM), the
Razor(TM), the Trench(TM), the Classic slip-on, and the Authentic(TM).
INSIDE BACK COVER
Photograph of crowd watching the vertical ramp competition at the 1995 World
Championships of Skateboarding at Newport Beach, California.
<PAGE> 80
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
------- --------------------------------------------------------------------------
<S> <C> <C> <C>
1.1 Form of Underwriting Agreement (draft dated May 10, 1996).................
(1) 3.1 Restated Certificate of Incorporation of the Registrant, dated August 30,
1991......................................................................
(1) 3.1.1 Certificate of Retirement of Class A and Class B Preferred Stock of the
Registrant, dated August 29, 1991.........................................
(1) 3.2 Restated By-laws of the Registrant........................................
(3) 3.2.1 Amendment No. 1 of Restated By-laws of the Registrant.....................
(3) 3.2.2 Amendment No. 2 of Restated By-laws of the Registrant.....................
(5) 3.3 Certificate of Designation of Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant...........................
4.1 Reference is made to Exhibits 3.1 and 3.2.................................
(5) 4.2 Specimen Stock Certificate................................................
(1) 4.12 Note Purchase Agreement, dated as of August 21, 1991, between the
Registrant and holders of the Registrant's Senior Notes due August 1, 1999
(executed composite)......................................................
(3) 4.12.1 Amendment No. 1 to the Note Purchase Agreement, dated as of August 5,
1993, by and between the Registrant and Teachers Insurance and Annuity
Association (the "Teachers Note Agreement")...............................
(3) 4.12.2 Amendment No. 2 to Note Purchase Agreement, dated as of August 9, 1993, by
and among the Registrant and Connecticut General Life Insurance Company,
Connecticut General Life Insurance Company, on behalf of one or more
separate accounts, and Life Insurance Company of North America (the "CIGNA
Note Agreement")..........................................................
(2) 4.12.3 Amendment No. 2 to the Teachers Note Agreement, dated as of December 15,
1993......................................................................
(2) 4.12.4 Amendment No. 2 to the CIGNA Note Agreement, dated as of December 20,
1993......................................................................
(6) 4.12.5 Amendment No. 3 to the Teachers Note Agreement, dated as of May 13,
1994......................................................................
(6) 4.12.6 Amendment No. 3 to the CIGNA Note Agreement, dated as of May 23, 1994.....
(7) 4.12.7 Modification Letter, dated as of July 1, 1995, by and among the
Registrant, Teachers and Cigna............................................
(8) 4.12.8 Modification Letter No. 2, dated as of August 25, 1995, by and among the
Registrant, Teachers and Cigna............................................
* 4.12.9 Modification Letter No. 3, dated as of March 29, 1996, by and among the
Registrant, Teachers and Cigna............................................
(4) 4.13 Form of Preferred Stock Purchase Rights Certificate.......................
(4) 4.14 Rights Agreement, dated as of February 22, 1994, by and between the
Registrant and Chemical Trust Company of California, as Rights Agent......
* 5.1 Opinion of Cooley Godward Castro Huddleson & Tatum........................
* 10.1 Amendments No. 1, 2 and 3, dated as of August 2, 1995, January 5, 1996 and
March 20, 1996, respectively, to Agreement, dated as of April 26, 1995, by
and among the Registrant and Ssangyong Corporation........................
* 10.2 Fourth Amendment, dated April 11, 1996, to Loan and Security Agreement,
dated as of July 1, 1995, by and among the Registrant and Bank of the
West......................................................................
11.1 Computation of Earnings Per Share.........................................
23.1 Consent of Independent Auditors...........................................
* 23.2 Consent of Cooley Godward Castro Huddleson & Tatum. Reference is made to
Exhibit 5.1...............................................................
* 23.3 Consent of Craig E. Gosselin..............................................
* 24 Power of Attorney (reference is made to the Signature Page)...............
27 Financial Data Schedule...................................................
</TABLE>
<PAGE> 81
- ------------------------------
* Previously filed
(1) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1992, and incorporated herein by this reference
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the period ended November 28, 1993, and incorporated herein by this
reference
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1993, and incorporated herein by this reference
(4) Filed as an exhibit to the Registrant's Form 8-A Registration Statement (SEC
File No. 0-19402), and incorporated herein by this reference
(5) Filed as an exhibit to the Registrant's Report on Form 8-K, dated February
15, 1994, and incorporated herein by this reference
(6) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1994, and incorporated herein by this reference
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
year ended May 31, 1995 and incorporated herein by this reference
(8) Filed as an exhibit to the Registrant's Report on Form 8-K, dated October
17, 1995, and incorporated herein by this reference
<PAGE> 1
Exhibit 1.1
2,600,000 Shares
Vans, Inc.
Common Stock
UNDERWRITING AGREEMENT
__________, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
ROBERTSON, STEPHEN & COMPANY
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Vans, Inc., a Delaware corporation (the "Company") and the
stockholder of the Company named in Schedule II hereto, (the "Firm Selling
Stockholder"), propose to sell an aggregate of 2,600,000 shares of the common
stock, par value $.001 per share of the Company (the "Firm Shares"), to the
several underwriters named in Schedule I hereto (the "Underwriters"). The Firm
Shares consist of 2,500,000 shares to be issued and sold by the Company and
100,000 outstanding shares to be sold by the Selling Stockholder. McCown De
Leeuw & Co., a California limited partnership and MDC/JAFCO Ventures, a
California limited partnership (collectively the "Additional Selling
Stockholders") also propose to issue and sell to the several Underwriters an
aggregate of not more than 390,000 additional shares of the common stock, par
value $.001 per share of the Company (the "Additional Shares") if requested by
the Underwriters as provided in Section 2 hereof. The Firm Selling Stockholder
and the Additional Selling Stockholders are herein collectively called the
Selling Stockholders. The Firm Shares and the Additional Shares are herein
collectively
<PAGE> 2
called the Shares. The shares of common stock of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the Common Stock. The Company and the Selling Stockholders are hereinafter
collectively called the Sellers.
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively called the "Act"), a registration statement on Form S-3 including
a prospectus relating to the Shares, which may be amended. The registration
statement as amended at the time when it becomes effective, including a
registration statement (if any) filed pursuant to Rule 462(b) under the Act
increasing the size of the offering registered under the Act and information (if
any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Act, is hereinafter
referred to as the Registration Statement; and the prospectus including any
prospectus subject to completion taken together with any term sheet meeting the
requirements of Rule 434(b) or Rule 434(c) under the Act in the form first used
to confirm sales of Shares is hereinafter referred as the Prospectus. Any
reference in this Agreement to the registration statement, Registration
Statement, any preliminary prospectus or any Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Item
12 of Form S-3 under the Act as of the date of the registration statement, the
Registration Statement, such preliminary prospectus or the Prospectus, as the
case may be, and any reference to any amendment or supplement to the
registration statement, the Registration Statement, any preliminary prospectus
or the Prospectus shall be deemed to refer to and include any documents filed
after such date under the Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder (collectively, the "Exchange
Act"), that, upon filing, are incorporated by reference therein, as required by
paragraph (b) of Item 12 of Form S-3. As used herein, the term "Incorporated
Documents" means, at any time, the documents that at such time are incorporated
by reference in the registration statement, the Registration Statement, any
preliminary prospectus, the Prospectus, or any amendment or supplement thereto.
2. Agreements to Sell and Purchase. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, (i) the Company agrees to issue and sell 2,500,000 Firm
Shares, (ii) the Firm Selling Stockholder agrees, to sell
2
<PAGE> 3
the number of Firm Shares set forth opposite such Selling Stockholder's name in
Schedule II hereto and (iii) each Underwriter agrees, severally and not jointly,
to purchase from each Seller at a price per share of $_______ (the "Purchase
Price") the number of Firm Shares (subject to such adjustments to eliminate
fractional shares as you may determine) which bears the same proportion to the
total number of Firm Shares to be sold by such Seller as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto
bears to the total number of Firm Shares. The Additional Shares shall be
purchased from the Additional Selling Stockholders in the following proportions:
91.56% of the Additional Shares shall be purchased from McCown De Leeuw & Co.,
and 8.44% of the Additional Shares shall be purchased from MDC/JAFCO Ventures;
provided, however, that no fractional shares shall be purchased.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, (i) the Additional
Selling Stockholders agree to sell up to 390,000 Additional Shares and (ii) the
Underwriters shall have the right to purchase, severally and not jointly, up to
an aggregate of 390,000 Additional Shares from the Additional Selling
Stockholders at the Purchase Price. Additional Shares may be purchased solely
for the purpose of covering over-allotments made in connection with the offering
of the Firm Shares. The Underwriters may exercise their right to purchase
Additional Shares in whole or in part from time to time by giving written notice
thereof to the Company and the Additional Selling Stockholders within 30 days
after the date of this Agreement. You shall give any such notice on behalf of
the Underwriters and such notice shall specify the aggregate number of
Additional Shares to be purchased pursuant to such exercise and the date for
payment and delivery thereof. The date specified in any such notice shall be a
business day (i) no earlier than the Closing Date (as hereinafter defined), (ii)
no later than ten business days after such notice has been given and (iii) no
earlier than two business days after such notice has been given. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Additional Selling Stockholders the number
of Additional Shares (subject to such adjustments to eliminate fractional shares
as you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Additional Selling Stockholders as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I bears to the total number of Firm Shares.
Sellers hereby agree severally and not jointly, and the
Company shall, concurrently with the execution of
3
<PAGE> 4
this Agreement, deliver an agreement executed by (i) each of the directors and
officers of the Company, and (ii) McCown De Leeuw & Co., pursuant to which each
such person agrees, not to offer, sell, contract to sell, grant any option to
purchase, or otherwise dispose of any common stock of the Company or any
securities convertible into or exercisable or exchangeable for such common stock
or in any other manner transfer all or a portion of the economic consequences
associated with the ownership of any such common stock, except to the
Underwriters pursuant to this Agreement, for a period of 120 days after the date
of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plans; (ii) the Company may issue shares of its common
stock upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and (iii) if the conditions contained in the
Rights Agreement, dated as of February 22, 1994 (the "Rights Agreement"),
between the Company and Chemical Trust Company of California relating to the
exercisability of the preferred stock purchase rights described therein are
satisfied, the Company may issue shares of its Series A Junior Participating
Preferred Stock or Common Stock upon the terms set forth in the Rights
Agreement.
3. Terms of Public Offering. Sellers are advised by you that
the Underwriters propose (i) to maker a public offering of their respective
portions of the Shares as soon after the effective date of the Registration
Statement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on
the third or fourth business day unless otherwise permitted by the Commission
pursuant to Rule 15c6-1 of the Exchange Act (the "Closing Date") following the
date of the public offering, at the offices of Cooley Godward Castro Huddleson &
Tatum located in Menlo Park, California. The Closing Date and the location of
delivery of and the form of payment for the Firm Shares may be varied by
agreement between you and the Sellers.
Delivery to the Underwriters of and payment for any Additional
Shares to be purchased by the Underwriters shall be made at such place as you
shall designate at 10:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "Option
Closing Date"). Any such Option
4
<PAGE> 5
Closing Date and the location of delivery of and the form of payment for such
Additional Shares may be varied by agreement between you and the Company.
Certificates for the Shares shall be registered in such names
and issued in such denominations as you shall request in writing not later than
two full business days prior to the Closing Date or an Option Closing Date, as
the case may be. Such certificates shall be made available to you for inspection
not later than 9:30 A.M., New York City time, on the business day next preceding
the Closing Date or an Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, with any transfer taxes
thereon duly paid by the respective Sellers, for the respective accounts of the
several Underwriters, against payment of the Purchase Price therefor by
certified or official bank checks payable in Federal funds to the order of the
applicable Sellers.
5. Agreements of the Company. The Company agrees with you:
(a) To use its best efforts to cause the Registration
Statement to become effective at the earliest possible time.
(b) To advise you promptly and, if requested by you, to
confirm such advice in writing, (i) when the Registration Statement has
become effective and when any post-effective amendment to it becomes
effective, (ii) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus
or for additional information, (iii) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration
Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction, or the initiation of any
proceeding for such purposes, and (iv) of the happening of any event
during the period referred to in paragraph (e) below which makes any
statement of a material fact made in the Registration Statement or the
Prospectus untrue or which requires the making of any additions to or
changes in the Registration Statement or the Prospectus in order to
make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of
the Registration Statement, the Company will make every reasonable
effort to obtain the withdrawal or lifting of such order at the
earliest possible time.
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(c) To furnish to you, without charge, four (4) signed copies
of the Registration Statement as first filed with the Commission and of
each amendment to it, including all exhibits, and to furnish to you and
each Underwriter designated by you (i) such number of conformed copies
of the Registration Statement as so filed and of each amendment to it,
without exhibits, as you may reasonably request, (ii) such number of
copies of Incorporated Documents, without exhibits, as you may
reasonably request and (iii) such copies of each of the exhibits to the
Incorporated Documents as you may reasonably request.
(d) Not to file any amendment or supplement to the
Registration Statement, whether before or after the time when it
becomes effective, or to make any amendment or supplement to the
Prospectus (including the issuance or filings of any term sheet within
the meaning of Rule 434) or, prior to the end of the period of time
referred to in subsection (e) below, to file any document pursuant to
the Exchange Act that will, upon filing, become an Incorporated
Document of which you shall not previously have been advised and
provided a copy within two business days prior to the filing thereof or
to which you shall reasonably object; and to prepare and file with the
Commission, promptly upon your reasonable request, any amendment to the
Registration Statement or supplement to the Prospectus (including the
issuance or filings of any term sheet within the meaning of Rule 434)
which may be necessary or advisable in connection with the distribution
of the Shares by you, and to use its best efforts to cause the same to
become promptly effective.
(e) Promptly after the Registration Statement becomes
effective, and from time to time thereafter for such period as in the
opinion of counsel for the Underwriters a prospectus is required by law
to be delivered in connection with sales by an Underwriter or a dealer,
to furnish to each Underwriter and dealer as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as
such Underwriter or dealer may reasonably request.
(f) If during the period specified in paragraph (e) any event
shall occur as a result of which, in the opinion of counsel for the
Underwriters it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if it is necessary to amend or supplement the Prospectus
to comply with any law, forthwith to prepare and file with the
Commission
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<PAGE> 7
an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not
in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with law, and to
furnish to each Underwriter and to such dealers as you shall specify,
such number of copies thereof as such Underwriter or dealers may
reasonably request.
(g) Prior to any public offering of the Shares, to cooperate
with you and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by the
several Underwriters and by dealers under the state securities or Blue
Sky laws of such jurisdictions as you may request, to continue such
qualification in effect so long as required for distribution of the
Shares and to file such consents to service of process or other
documents as may be necessary in order to effect such registration or
qualification.
(h) To mail and make generally available to its stockholders
as soon as reasonably practicable an earnings statement covering a
period of at least twelve months after the effective date of the
Registration Statement (but in no event commencing later than 90 days
after such date) which shall satisfy the provisions of Section 11(a) of
the Act, and to advise you in writing when such statement has been so
made available.
(i) During the period of five years after the date of this
Agreement, but only so long as the Common Stock is registered under the
Exchange Act, (i) to mail as soon as reasonably practicable after the
end of each fiscal year to the record holders of its Common Stock a
financial report of the Company and its subsidiaries on a consolidated
basis (and a similar financial report of all unconsolidated
subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
shareholders' equity as of the end of and for such fiscal year,
together with comparable information as of the end of and for the
preceding year, certified by independent certified public accountants,
and (ii) to mail and make generally available as soon as practicable
after the end of each quarterly period (except for the last quarterly
period of each fiscal year) to such holders, a consolidated balance
sheet, a consolidated statement of operations and a consolidated
statement of cash flows (and similar
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<PAGE> 8
financial reports of all unconsolidated subsidiaries, if any) as of the
end of and for such period, and for the period from the beginning of
such year to the close of such quarterly period, together with
comparable information for the corresponding periods of the preceding
year.
(j) During the period referred to in paragraph (i), to furnish
to you as soon as available a copy of each report or other publicly
available information of the Company mailed to the holders of Common
Stock or filed with the Commission and such other publicly available
information concerning the Company and its subsidiaries as you may
reasonably request.
(k) To pay all costs, expenses, fees and taxes incident to (i)
the preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits),
each preliminary prospectus and all amendments and supplements to any
of them prior to or during the period specified in paragraph (e), and
the Incorporated Documents, (ii) the printing and delivery of the
Prospectus and all amendments or supplements to it during the period
specified in paragraph (e), (iii) the printing and delivery of this
Agreement, the Preliminary and Supplemental Blue Sky Memoranda and all
other agreements, memoranda, correspondence and other documents printed
and delivered in connection with the offering of the Shares (including
in each case any disbursements of counsel for the Underwriters relating
to such printing and delivery), (iv) the registration or qualification
of the Shares for offer and sale under the securities or Blue Sky laws
of the several states (including in each case the fees and
disbursements of counsel for the Underwriters relating to such
registration or qualification and memoranda relating thereto), (v)
filings and clearance with the National Association of Securities
Dealers, Inc. in connection with the offering, (vi) the listing of the
Shares on the National Association of Securities Dealers Automated
Quotation system ("NASDAQ") National Market System, (vii) furnishing
such copies of the Registration Statement, the Prospectus and all
amendments and supplements thereto as may be requested for use in
connection with the offering or sale of the Shares by the Underwriters
or by dealers to whom Shares may be sold and (viii) the performance by
the Sellers of their other obligations under this Agreement.
(l) To use its best efforts to maintain the inclusion of the
Common Stock in the Nasdaq National Market (or on a national securities
exchange) for a
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<PAGE> 9
period of five years after the effective date of the Registration
Statement.
(m) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by
the Company prior to the Closing Date or any Option Closing Date, as
the case may be, and to satisfy all conditions precedent to the
delivery of the Shares.
6. Representations and Warranties of the Company. The
Company represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the Company's knowledge, threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such
part became effective, did not contain and each such part, as amended
or supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Act and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except
that the representations and warranties set forth in this paragraph (b)
do not apply to statements or omissions in the Registration Statement
or the Prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you
expressly for use therein. The Company and the transactions
contemplated by this Agreement meet the requirements for using Form S-3
under the Act.
(c) The Incorporated Documents heretofore filed, when they
were filed (or, if any amendment with respect to any such document was
filed, when such amendment was filed), conformed in all material
respects with the requirements of the Exchange Act, and any further
Incorporated Documents so filed will, when they are filed, conform in
all material respects with the requirements of the Exchange Act; no
such document when
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<PAGE> 10
it was filed (or, if an amendment with respect to any such document was
filed, when such amendment was filed), contained an untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and no such further document, when it is filed, will
contain an untrue statement of a material fact or will omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(d) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, and each
Registration Statement filed pursuant to Rule 462(b) under the Act, if
any, complied when so filed in all material respects with the Act; and
did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(e) All of the Company's subsidiaries are listed in an exhibit
to the Company's Annual Report on Form 10-K for the year ended May 31,
1995, which is incorporated by reference into the Registration
Statement. The Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as it is
currently being conducted and to own, lease and operate its properties,
and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires
such qualification, except where the failure to be so qualified would
not have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(f) All of the outstanding shares of capital stock of, or
other ownership interests in, each of the Company's subsidiaries have
been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any
nature.
(g) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and
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<PAGE> 11
validly issued and are fully paid, non-assessable and not subject to
any preemptive or similar rights; and the Shares to be issued and sold
by the Company hereunder have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by
this Agreement, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not be subject to any preemptive
or similar rights.
(h) The authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof
contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws or in default (which
default has not been waived in writing) in the performance of any
obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the business of the
Company and its subsidiaries, taken as a whole, to which the Company or
any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require
any consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body
(except as such may be required under the Act, the NASD rules and
regulations, the rules and regulations of the Nasdaq National Market or
the securities or Blue Sky laws of the various states) and will not
conflict with or constitute a breach of any of the terms or provisions
of, or a default under, the charter or by-laws of the Company or any of
its subsidiaries or any agreement, indenture or other instrument to
which it or any of its subsidiaries is a party or by which it or any of
its subsidiaries or their respective property is bound, or violate or
conflict with any laws, administrative regulations or rulings or court
decrees applicable to the Company, any of its subsidiaries or their
respective property.
(k) Except as otherwise set forth in the Prospectus, there are
no material legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any of their
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<PAGE> 12
respective property is the subject, and, to the Company's knowledge, no
such proceedings are threatened or contemplated. No contract or
document of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement is not so described or filed as required, or
filed as an exhibit to the Incorporated Documents.
(l) Neither the Company nor any of its subsidiaries has
violated any foreign, federal, state or local law or regulation
relating to the protection of human health and safety, the environment
or hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees nor any
applicable federal or state wages and hours laws, nor any provisions of
the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, which in each case would result in
any material adverse change in the business, prospects, financial
condition or results of operation of the Company and its subsidiaries,
taken as a whole.
(m) The Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease and
operate its respective properties and to conduct its business; the
Company and each of its subsidiaries has fulfilled and performed all of
its material obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time would allow,
revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such permit; and, except
as described in the Prospectus, such permits contain no restrictions
that are materially burdensome to the Company or any of its
subsidiaries.
(n) In the ordinary course of its business, the Company
conducts a periodic review of the effect of Environmental Laws on the
business, operations and properties of the Company and its
subsidiaries, in the course of which it identifies and evaluates
associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license
or approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis
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<PAGE> 13
of such review, the Company has reasonably concluded that such
associated costs and liabilities would not, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(o) Except as otherwise set forth in the Prospectus or such as
are not material to the business, prospects, financial condition or
results of operation of the Company and its subsidiaries, taken as a
whole, the Company and each of its subsidiaries has good and marketable
title, free and clear of all liens, claims, encumbrances and
restrictions except liens for taxes not yet due and payable, to all
property and assets described in the Registration Statement as being
owned by it. All leases to which the Company or any of its subsidiaries
is a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse
change in the business, prospects, financial condition or results of
operation of the Company and its subsidiaries taken as a whole, and the
Company and its subsidiaries enjoy peaceful and undisturbed possession
under all such leases to which any of them is a party as lessee with
such exceptions as do not materially interfere with the use made by the
Company or such subsidiary.
(p) The Company and each of its subsidiaries maintains
reasonably adequate insurance.
(q) KPMG Peat Marwick LLP are independent public accountants
with respect to the Company as required by the Act and the Exchange
Act.
(r) The financial statements, together with related schedules
and notes forming part of the Registration Statement and the Prospectus
(and any amendment or supplement thereto), present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis
stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial
and statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto)
is, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and
records of the Company.
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(s) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(t) No holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of
the Company that has not been effectively and fully satisfied or
waived.
(u) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire
any shares of the capital stock of, or other ownership interest in, the
Company or any subsidiary thereof except as otherwise disclosed in the
Registration Statement or the Incorporated Documents.
(v) There is (i) no significant unfair labor practice
complaint pending against the Company or any of its subsidiaries or, to
the knowledge of the Company, threatened against any of them, before
the National Labor Relations Board or any state or local labor
relations board, and no significant grievance or more significant
arbitration proceeding arising out of or under any collective
bargaining agreement is so pending against the Company or any of its
subsidiaries or, to the knowledge of the Company, threatened against
any of them, and (ii) no significant strike, labor dispute, slowdown or
stoppage pending against the Company or any of its subsidiaries or, to
the knowledge of the Company, threatened against it or any of its
subsidiaries except for such actions specified in clause (i) or (ii)
above, which, singly or in the aggregate could not reasonably be
expected to have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(w) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
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(x) All material tax returns required to be filed by the
Company and each of its subsidiaries in any jurisdiction have been
filed, other than those filings being contested in good faith, and all
material taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due pursuant to such returns or
pursuant to any assessment received by the Company or any of its
subsidiaries have been paid, other than those being contested in good
faith and for which adequate reserves have been provided.
(y) The Company has filed an application to list the Shares on
the Nasdaq National Market, and has received notification that the
listing has been approved, subject to notice of issuance of the Shares.
(z) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
7. Representations and Warranties of the Selling
Stockholders. Each Selling Stockholder severally represents and warrants to
each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder pursuant to this Agreement and
has, and on the Closing Date (and Option Closing Date, if applicable)
will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to
this Agreement, good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer (other than any
restrictions on transfer under state or federal securities laws or
under this Agreement), liens, encumbrances, security interests and
claims whatsoever.
(c) Such Selling Stockholder has, and on the Closing Date will
have, full legal right, power and authority to enter into this
Agreement and the Custody Agreement between the Selling Stockholders
and Chemical Trust Company of California, as Custodian (the "Custody
Agreement") and to sell, assign, transfer and deliver such Shares in
the manner provided herein and therein, and this Agreement and the
Custody Agreement have been duly authorized, executed and delivered by
such Selling Stockholder and each of this Agreement and the Custody
Agreement is a valid and binding agreement of such Selling Stockholder
enforceable in accordance with its
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<PAGE> 16
terms, except as rights to indemnity and contribution hereunder may be
limited by applicable law.
(d) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Shares pursuant to the distribution
contemplated by this Agreement, and other than as permitted by the Act,
the Selling Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering
and sale of the Shares.
(e) The execution, delivery and performance of this Agreement
by such Selling Stockholder, compliance by such Selling Stockholder
with all the provisions hereof and the consummation of the transactions
contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body,
administrative agency or other governmental body (except as such may be
required under the Act, the NASD rules and regulations, the rules and
regulations of the Nasdaq National Market or the state securities laws
or Blue Sky laws) and will not conflict with or constitute a breach of
any of the terms or provisions of, or a default under, organizational
documents of such Selling Stockholder, if not an individual, or any
agreement, indenture or other instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder or property
of such Selling Stockholder is bound, or violate or conflict with any
laws, administrative regulation or ruling or court decree applicable to
such Selling Stockholder or property of such Selling Stockholder.
(f) Such parts of the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relate to such
Selling Stockholder do not, and will not on the Closing Date (and any
Option Closing Date, if applicable), contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of
circumstances under which they were made, not misleading.
(g) At any time during the period described in paragraph 5(e)
hereof, if there is any change in the information referred to in
paragraph 7(f) above, such Selling Stockholder will immediately notify
you of such change.
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8. Indemnification. (a) The Company and each Selling
Stockholder, severally and not jointly, agree to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages, liabilities and judgments caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriters furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use therein. Notwithstanding the
foregoing, the aggregate liability of any Selling Stockholder pursuant to the
provisions of this paragraph shall be limited to an amount equal to the net
proceeds received by such Selling Stockholder from the sale of such Selling
Stockholder's Shares hereunder and further provided, the Selling Stockholders
will be liable in any case only to the extent that any such loss, claim, damage,
liability or judgment arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission, made in the
Registration Statement or Prospectus (as amended or supplemented if the Company
shall have furnished any amendments or supplements thereto), in reliance upon
and in conformity with information furnished to the Company by or through the
Selling Stockholders specifically for use in the preparation thereof; provided,
however, that the foregoing indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages and liabilities and judgments
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended and supplemented) would have cured
the defect giving rise to such loss, claim, damage, liability or judgment.
(b) In case any action shall be brought against any
Underwriter or any person controlling such Underwriter, based upon any
preliminary prospectus, the Registration
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<PAGE> 18
Statement or the Prospectus or any amendment or supplement thereto and with
respect to which indemnity may be sought against the Company or the Selling
Stockholders, jointly or severally, such Underwriter shall promptly notify the
Company and the Selling Stockholders in writing and the Company and the Selling
Stockholders shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Company and such indemnified party and
payment of all reasonable fees and expenses. Any Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the employment of such counsel has been specifically authorized in
writing by the Company, (ii) the Company and the Selling Stockholders shall have
failed to assume the defense and employ counsel or (iii) the named parties to
any such action (including any impleaded parties) include both such Underwriter
or such controlling person and the Company or the Selling Stockholders, as the
case may be, and such Underwriter or such controlling person shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the Company
or the Selling Stockholders, as the case may be, (in which case the Company and
the Selling Stockholders shall not have the right to assume the defense of such
action on behalf of such Underwriter or such controlling person, it being
understood, however, that the Company and the Selling Stockholders shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all such
Underwriters and controlling persons, which firm shall be designated in writing
by Donaldson, Lufkin & Jenrette Securities Corporation and that all such fees
and expenses shall be reimbursed as they are incurred). A Seller shall not be
liable for any settlement of any such action effected without the written
consent of such Seller but if settled with the written consent of such Seller,
such Seller agrees to indemnify and hold harmless any Underwriter and any such
controlling person from and against any loss or liability by reason of such
settlement. Notwithstanding the immediately preceding sentence, if in any case
where the fees and expenses of counsel are at the expense of the indemnifying
party and an indemnified party shall have requested the indemnifying party to
reimburse the indemnified party for such fees and expenses of counsel as
incurred, such indemnifying party agrees that it shall be liable for any
settlement of any action effected without its written consent if (i) such
settlement is entered into more
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than ten business days after the receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request for
reimbursement prior to the date of such settlement. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person controlling the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, controlling such Selling Stockholder within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Sellers to each Underwriter but
only with reference to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. In case
any action shall be brought against the Company, any of its directors, any such
officer or any person controlling the Company or any Selling Stockholder or any
person controlling such Selling Stockholder based on the Registration Statement,
the Prospectus or any preliminary prospectus and in respect of which indemnity
may be sought against any Underwriter, the Underwriter shall have the rights and
duties given to the Sellers (except that if any Seller shall have assumed the
defense thereof, such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and the
Company, its directors, any such officers and any person controlling the Company
and the Selling Stockholders and any person controlling such Selling
Stockholders shall have the rights and duties given to the Underwriter, by
Section 8(b) hereof.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a
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<PAGE> 20
result of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Sellers and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
benefits received by the Sellers and the Underwriters shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Sellers, and the total underwriting
discounts and commissions received by the Underwriters, bear to the total price
to the public of the Shares, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Sellers and the Underwriters
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the Company, the Selling Stockholders or
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8(d) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
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<PAGE> 21
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) Each Seller hereby designates the address for notices
specified in Section 12 as the address at which process may be served in any
action, suit or proceeding which may be instituted in any state or federal court
in the State of New York by any Underwriter or person controlling an Underwriter
asserting a claim for indemnification or contribution under or pursuant to this
Section 8, and each Seller will accept the jurisdiction of such court in such
action, and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue.
9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct on the Closing
Date with the same force and effect as if made on and as of the Closing
Date.
(b) The Registration Statement shall have become effective not
later than 5:00 p.m. (and in the case of a Registration Statement filed
under Rule 462 (b) of the Act, not later than 10:00 p.m.), New York
City time, on the date of this Agreement or at such later date and time
as you may approve in writing, and at the Closing Date no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
commenced or shall be pending before or contemplated by the Commission.
(c)(i) Since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a
prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, affairs or business prospects, whether
or not arising in the ordinary course of business, of the Company, (ii)
since the date of the latest balance sheet included in the Registration
Statement and the Prospectus there shall not have been any change, or
any development involving a prospective material adverse change, in the
capital stock or in the long-term debt of the Company from that set
forth in the Registration Statement and Prospectus,
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<PAGE> 22
(iii) the Company and its subsidiaries shall have no liability or
obligation, direct or contingent, which is material to the Company and
its subsidiaries, taken as a whole, other than those reflected in the
Registration Statement and the Prospectus and (iv) on the Closing Date
you shall have received a certificate dated the Closing Date, signed by
Walter E. Schoenfeld and Kyle B. Wescoat, in their capacities as the
Vice Chairman of the Board, President and Chief Executive Officer and
Vice President and Chief Financial Officer of the Company, confirming
the matters set forth in paragraphs (a), (b), and (c) of this Section
9.
(d) All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on
the Closing Date with the same force and effect as if made on and as of
the Closing Date and you shall have received a certificate to such
effect, dated the Closing Date, from each Selling Stockholder.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the
Closing Date, of Cooley Godward Castro Huddleson & Tatum, counsel for
the Company and the Selling Stockholder, to the effect of the matters
set forth in clauses (i), (v), (vi), (vii), (viii), (ix), (xi)(but only
with respect to the Selling Stockholders), (xviii), (xx), (xxi),
(xxii), and (xxiii) and you shall have received on the Closing Date an
opinion (satisfactory to you and counsel for the Underwriters), dated
the Closing Date, of Craig Gosselin, Vice President and General Counsel
of the Company, to the effect of the matters set forth in clauses (ii),
(iii), (iv), (x), (xi) (but only with respect to the Company), (xii),
(xiii), (xiv), (xv), (xvi), (xvii) and (xix), that:
(i) the Company and Vans Footwear International, Inc.
have each been duly incorporated, each is validly existing as
a corporation in good standing under the laws of its
jurisdiction of incorporation and each has the corporate power
and authority required to carry on their respective businesses
as they are currently being conducted and to own, lease and
operate their respective properties;
(ii) the Company and Vans Footwear International,
Inc. are each duly qualified and each is in good standing as a
foreign corporation authorized to do business in each
jurisdiction in which the nature of their respective
businesses or
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<PAGE> 23
their respective ownership or leasing of property requires
such qualification, except where the failure to be so
qualified would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole;
(iii) all of the outstanding shares of capital stock
of, or other ownership interests in, Vans Footwear
International, Inc. have been duly and validly authorized and
issued and are fully paid and non-assessable, and are owned by
the Company, free and clear of any security interest, claim,
lien, encumbrance or adverse interest of any nature;
(iv) all the outstanding shares of Common Stock
(including the Shares to be sold by the Selling Stockholders)
have been duly authorized and validly issued and are fully
paid, non-assessable and, to the knowledge of such counsel,
not subject to any preemptive or similar rights;
(v) the certificates evidencing the Shares are in due
and proper form under Delaware law;
(vi) the Shares to be issued and sold by the Company
hereunder have been duly authorized, and when issued and
delivered to the Underwriters against payment therefor as
provided by this Agreement, will have been validly issued and
will be fully paid and non-assessable, and the issuance of
such Shares is not subject to any preemptive or similar
rights;
(vii) this Agreement has been duly authorized,
executed and delivered by the Company and each of the Selling
Stockholders and is a valid and binding agreement of the
Company and each Selling Stockholder enforceable in accordance
with its terms (except as enforceability may be limited by
general equitable principles and bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other
rights affecting creditors rights generally and except as
rights to indemnity and contribution hereunder may be limited
by applicable law);
(viii) the Registration Statement has become
effective under the Act, no stop order suspending its
effectiveness has been issued and no proceedings for that
purpose are, to the knowledge
23
<PAGE> 24
of such counsel, pending before or contemplated by the
Commission;
(ix) the statements in the first, second, fourth,
fifth and sixth paragraphs under the caption "Underwriting" in
the Prospectus and Items 14 and 15 of Part II of the
Registration Statement insofar as such statements constitute a
summary of legal matters documents or proceedings referred to
therein, fairly present the information called for with
respect to such legal matters, documents and proceedings in
all material respects;
(x) neither the Company nor Vans Footwear
International, Inc. is in violation of its respective charter
or by-laws and, to the best of such counsel's knowledge after
due inquiry, neither the Company nor any of its subsidiaries
is in default in the performance of any obligation, agreement
or condition contained in any bond, debenture, note or any
other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the
business of the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a
party or by which it or any of its subsidiaries or their
respective property is bound and which is described or filed
as an exhibit to the Registration Statement or the
Incorporated Documents;
(xi) the execution, delivery and performance of this
Agreement by the Company and each Selling Stockholder,
compliance by the Company and each Selling Stockholder with
all the provisions hereof and the consummation of the
transactions contemplated hereby will not require any consent,
approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental
body (except as such may be required under the Act, the NASD
rules and regulations, the rules and regulations of the Nasdaq
National Market or the securities or Blue Sky laws of the
various states) and will not conflict with or constitute a
breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any of its
subsidiaries or the organizational documents of any Selling
Stockholder that is not an individual or any agreement,
indenture or other instrument to which the Company or any of
its subsidiaries or any Selling Stockholder is a party or by
which the Company or any of its subsidiaries or any Selling
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<PAGE> 25
Stockholder or their respective properties are bound which, in
the case of the Company, is filed as an exhibit to the
Registration Statement or the Incorporated Documents, or, to
such counsel's knowledge violate or conflict with any laws,
administrative regulations or rulings or court decrees
applicable to the Company or Vans Footwear International, Inc.
or any Selling Stockholder or their respective properties;
(xii) after due inquiry, such counsel does not know
of any legal or governmental proceeding pending or threatened
to which the Company or any of its subsidiaries is a party or
to which any of their respective property is subject which is
required to be described in the Registration Statement or the
Prospectus and is not so described, or of any contract or
other document which is required to be described in the
Registration Statement or the Prospectus or is required to be
filed as an exhibit to the Registration Statement which is not
described or filed as required;
(xiii) to such counsel's knowledge, neither the
Company nor any of its subsidiaries has violated any
Environmental Laws, nor any federal or state law relating to
discrimination in the hiring, promotion or pay of employees
nor any applicable federal or state wages and hours laws, nor
any provisions of the Employee Retirement Income Security Act
or the rules and regulations promulgated thereunder, which in
each case might result in any material adverse change in the
business, prospects, financial condition or results of
operation of the Company and its subsidiaries, taken as a
whole;
(xiv) the Company is not an "investment company" or a
company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended;
(xv) no holder of any security of the Company has any
right to require registration of shares of Common Stock or any
other security of the Company that has not been effectively
and fully satisfied or waived;
(xvi) to the best of such counsel's knowledge, there
are no outstanding options, warrants or other rights calling
for the issuance of, and no commitments, plans or arrangements
to
25
<PAGE> 26
issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of
the Company except as described in the Prospectus and the
Incorporated Documents;
(xvii) to the best of such counsel's knowledge, after
due inquiry, all leases to which the Company or any of its
subsidiaries is a party are valid and binding and no default
has occurred or is continuing thereunder, which might result
in any material adverse change in the business, prospects,
financial condition or results of operation of the Company and
its subsidiaries taken as a whole, and the Company and its
subsidiaries enjoy peaceful and undisturbed possession under
all such leases to which any of them is a party as lessee with
such exceptions as do not materially interfere with the use
made by the Company or such subsidiary;
(xviii) No transfer taxes are required to paid in
connection with the sale and delivery of the Shares to the
Underwriters hereunder;
(xix) Each of the Incorporated Documents (except for
financial statements, the notes thereto and related schedules
and other financial, numerical, statistical or accounting data
included therein or omitted therefrom, as to which no opinion
need be expressed) complies as to form in all material
respects with the Exchange Act;
(xx) the Custody Agreement has been duly authorized,
executed and delivered by each Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder
enforceable in accordance with its terms (except as
enforceability may be limited by general equitable principles
and bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other rights affecting
creditors' rights generally and except as rights to indemnity
and contribution thereunder may be limited by applicable law);
(xxi) each Selling Stockholder has full legal right,
power and authority, and any approval required by law (other
than any approval imposed by the applicable state securities
and Blue Sky laws) to sell, assign, transfer and deliver the
Shares to be sold by him in the manner provided in this
Agreement and the Custody Agreement;
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<PAGE> 27
(xxii) upon delivery of the Shares to be sold by the
Selling Stockholder, pursuant hereto and payment therefor,
good and clear title will pass to the Underwriters, severally,
free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever assuming purchase by
the Underwriters in good faith and without prior notice of any
adverse claim; and
(xxiii) the Registration Statement (including any
Registration Statement filed under 462 (b) of the Act, if any)
and the Prospectus and any supplement or amendment thereto
(except for financial statements the schedules included
therein and other financial or statistical data as to which no
opinion need be expressed) comply as to form in all material
respects with the Act.
Cooley Godward Castro Huddleson & Tatum shall also
include a statement to the effect that nothing has come to
such counsel's attention to cause it to believe that (except
for financial statements, the schedules included therein and
other financial or statistical data, as aforesaid) the
Registration Statement (including the Incorporated Documents)
and the prospectus included therein at the time the
Registration Statement became effective contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus, as
amended or supplemented, if applicable (except for financial
statements, the schedules included therein and other financial
or statistical data, as aforesaid), including the Incorporated
Documents, contained any untrue statement of a material fact
or omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading.
In giving such opinion with respect to the matters covered by
clause (xxiii) and making the statement set forth in the immediately preceding
paragraph such counsel may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and discussion
of the contents thereof, but are without independent check or verification
except as specified. In addition, for purposes of the opinion covered by clause
(xii) above, the opining counsel may state that the phrase "after due inquiry"
is intended to indicate that,
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<PAGE> 28
in addition to such inquiry as such counsel may customarily undertake, such
counsel has undertaken to inquire of senior officers of the Company, outside
counsel of the Company, those employees of the Company principally responsible
for the matters addressed by clause (xii) and such other individuals or entities
as such counsel shall deem reasonable and appropriate (and such entities shall
be identified) as respects the matters addressed by clause (xii).
The opinion of Cooley Godward Castro Huddleson & Tatum
described in paragraph (e) above shall be rendered to you at the request of the
Company or one or more of the Selling Stockholders, as the case may be, and
shall so state therein.
(f) You shall have received on the Closing Date an opinion,
dated the Closing Date, of Latham & Watkins, counsel for the
Underwriters, as to the matters referred to in clauses (vi), (vii) (but
only with respect to the Company and with respect to due authorization,
execution and delivery), (viii), (xxiii) and the statement set forth in
the final paragraph of the foregoing paragraph (e). In giving such
opinion with respect to the matters covered by clause (xxiii) and the
statement set forth in the final paragraph of the foregoing paragraph
(e) such counsel may state that their opinion and belief are based upon
their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check
or verification except as specified.
(g) You shall have received a letter on and as of the Closing
Date, in form and substance satisfactory to you, from KPMG Peat Marwick
LLP, independent public accountants, with respect to the financial
statements and certain financial information contained in the
Registration Statement and the Prospectus and substantially in the form
and substance of the letter delivered to you by KPMG Peat Marwick LLP
on the date of this Agreement.
(h) You shall have received an opinion from Nichols, Newman &
Silverlight as to the due formation, good standing and valid issuance
of outstanding capital stock of Vans International, Inc., a Virgin
Islands corporation and wholly owned subsidiary of the Company.
(i) You shall have received an opinion from Baker
& McKenzie as to the due formation, good standing and
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<PAGE> 29
valid issuance of outstanding capital stock of Vans Far East Limited, a
Hong Kong corporation and wholly owned subsidiary of the Company.
(j) The Company shall have delivered to you the agreements
specified in Section 2 hereof.
(k) The Company and the Selling Stockholders shall not have
failed at or prior to the Closing Date to perform or comply with any of
the agreements herein contained and required to be performed or
complied with by the Company at or prior to the Closing Date.
(l) You shall have received on the Closing Date, a certificate
of each Selling Stockholder who is not a U.S. Person to the effect that
such Selling Stockholder is not a U.S. Person (as defined under
applicable U.S. federal tax legislation), which certificate may be in
the form of a properly completed and executed United States Treasury
Department Form W-8 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of such Additional
Shares and other matters related to the issuance of such Additional Shares.
10. Effective Date of Agreement and Termination. This
Agreement shall become effective upon the later of (i) execution of this
Agreement and (ii) when notification of the effectiveness of the Registration
Statement has been released by the Commission.
This Agreement may be terminated at any time prior to the
Closing Date by you by written notice to the Sellers if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or
development involving a prospective material adverse change in the condition,
financial or otherwise, of the Company and its subsidiaries, taken as a whole,
or the earnings, affairs, or business prospects of the Company and its
subsidiaries, taken as a whole, whether or not arising in the ordinary course of
business, which would, in your judgment, make it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) any
outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic conditions or in the financial markets
of
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<PAGE> 30
the United States or elsewhere that, in your judgment, is material and adverse
and would, in your judgment, make it impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus, (iii) the suspension or
material limitation of trading in securities on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market or limitation on prices
for securities on any such exchange or National Market System, (iv) the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects, or will materially and
adversely affect, the business or operations of the Company and its subsidiaries
taken as a whole, (v) the declaration of a banking moratorium by either federal
or New York State authorities or (vi) the taking of any action by any federal,
state or local government or agency in respect of its monetary or fiscal affairs
which in your opinion has a material adverse effect on the financial markets in
the United States.
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If on the Closing Date or on an Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase the Firm Shares or Additional Shares, as the case may be, which it or
they have agreed to purchase hereunder on such date and the aggregate number of
Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase on such date; provided that in no event shall the number of Firm Shares
or Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date or on an Option Closing Date, as the case may be, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or
Additional Shares, as the case may be, and the aggregate number of Firm Shares
or Additional Shares, as the case may be, with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date by all Underwriters and arrangements satisfactory to you and the
applicable Sellers for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the applicable Sellers. In any such case
which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of any such Underwriter under this
Agreement.
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<PAGE> 32
11. Agreements of the Selling Stockholders. Each
Selling Stockholder severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes with
respect to the Shares to be sold by such Selling Stockholder; and
(b) To take all reasonable actions in cooperation with the
Company and the Underwriters to cause the Registration Statement to
become effective at the earliest possible time, to do and perform all
things to be done and performed under this Agreement prior to the
Closing Date and to satisfy all conditions precedent to the delivery of
the Shares pursuant to this Agreement.
12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (a) if to the Company, to Vans,
Inc., 2095 Batavia, Orange, California 92665-3101, Attention: Craig Gosselin,
Vice President and General Counsel, (b) if to the Selling Stockholder, to Vans,
Inc., 2095 Batavia, Orange, California 92665-3101, Attention: Walter E.
Schoenfeld, President and Chief Executive Officer, (c) if to the Additional
Selling Stockholders, to McCown De Leeuw & Co., 3000 Sand Hill Road, Building 3,
Suite 290, Menlo Park, California 94025, Attention : George E. McCown, and (d)
if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette
Securities Corporation, 277 Park Avenue, New York, New York 10172, Attention:
Syndicate Department, or in any case to such other address as the person to be
notified may have requested in writing.
The respective indemnities, contribution agreements,
representations, warranties and other statements of the Selling Stockholders,
the Company, its officers and directors and of the several Underwriters set
forth in or made pursuant to this Agreement shall remain operative and in full
force and effect, and will survive delivery of and payment for the Shares,
regardless of (i) any investigation, or statement as to the results thereof,
made by or on behalf of any Underwriter or by or on behalf of the Sellers, the
officers or directors of the Company or any controlling person of the Sellers
(ii) acceptance of the Shares and payment for them hereunder and (iii)
termination of this Agreement.
If this Agreement shall be terminated by the Underwriters
because of any failure or refusal on the part of the Sellers to comply with the
terms or to fulfill any of the conditions of this Agreement, the Sellers agree
to reimburse the several Underwriters for all out-of-pocket
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<PAGE> 33
expenses (including the fees and disbursements of counsel) reasonably incurred
by them.
Except as otherwise provided, this Agreement has been and is
made solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance
with the laws of the State of New York.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
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<PAGE> 34
Please confirm that the foregoing correctly sets forth the
agreement between the Company and the several Underwriters.
Very truly yours,
VANS, INC.
By____________________________
Name:
Title:
THE SELLING STOCKHOLDER NAMED IN
SCHEDULE II HERETO
By____________________________
Walter E. Schoenfeld
MCCOWN DE LEEUW & CO., a
California limited partnership
By MDC Management Company,
its general partner
By____________________________
Name:
Title:
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<PAGE> 35
MDC/JAFCO Ventures, a
California limited partnership
By MDC Management Company,
its general partner
By____________________________
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
ROBERTSON, STEPHENS & COMPANY
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By__________________________
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<PAGE> 36
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
------------ ----------------------
<S> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation
Montgomery Securities
Robertson, Stephens & Company
-----------------------
Total:
</TABLE>
36
<PAGE> 37
SCHEDULE II
Selling Stockholders
<TABLE>
<CAPTION>
Number of Firm
Name Shares Being Sold
---- ------------------
<S> <C>
Walter E. Schoenfeld 100,000
----------------
Total: 100,000
</TABLE>
37
<PAGE> 1
EXHIBIT 11.1
VANS, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS
ENDED
YEARS ENDED MAY 31, -------------------
------------------------------ FEB 25, FEB 24,
1993 1994 1995 1995 1996
------ ------ -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income (loss).......................... $2,709 $1,361 $(37,135) $ 1,791 $ 2,634
====== ====== ======== ====== =======
Weighted average number of common shares
outstanding during the year.............. 9,245 9,472 9,606 9,608 9,685
Incremental common shares attributable to
exercise of stock options............. 400 259 5 222 515
------ ------ -------- ------ -------
9,645 9,731 9,611 9,830 10,200
====== ====== ======== ====== =======
Primary earnings (loss) per share.......... $ 0.28 $ 0.14 $ (3.86) $ 0.18 $ 0.26
====== ====== ======== ====== =======
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS
ENDED
YEARS ENDED MAY 31, -------------------
------------------------------ FEB 25, FEB 24,
1993 1994 1995 1995 1996
------ ------ -------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss).......................... $2,709 $1,361 $(37,135) $ 1,791 $ 2,634
====== ====== ======== ====== =======
Weighted average number of common shares
outstanding during the year.............. 9,245 9,472 9,606 9,608 9,685
Incremental common shares attributable to
exercise of stock options............. 403 259 5 286 928
------ ------ -------- ------ -------
9,648 9,731 9,611 9,894 10,613
====== ====== ======== ====== =======
Fully diluted earnings (loss) per share.... $ 0.28 $ 0.14 $ (3.86) $ 0.18 $ 0.25
====== ====== ======== ====== =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Vans, Inc.:
The audits referred to in our report dated July 24, 1995, except as to the
first paragraph of note 10, which is as of February 6, 1996, included the
related financial statement schedule as of May 31, 1995 and for each of the
years in the three-year period ended May 31, 1995 incorporated by reference in
the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein or incorporated herein
by reference and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Orange County, California
May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<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> 85,433,783
<TOTAL-REVENUES> 85,433,783
<CGS> 52,289,897
<TOTAL-COSTS> 52,289,897
<OTHER-EXPENSES> 27,797,341
<LOSS-PROVISION> 245,086
<INTEREST-EXPENSE> 2,452,216
<INCOME-PRETAX> 4,390,269
<INCOME-TAX> 1,756,109
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,634,160
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>