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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended May 31, 1998, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission file number: 0-19402
VANS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0272893
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15700 Shoemaker Avenue, Santa Fe Springs, California 90670
(Address of principal executive offices) (Zip Code)
(562) 565-8267
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The approximate aggregate market value of the Common Stock held by
non-affiliates of registrant (computed based on the average bid and asked prices
of the Common Stock, as reported on the NASDAQ National Market System on August
25, 1998), is $96,886,036.
The number of shares of registrant's Common Stock outstanding at August 28,
1998, is 13,207,585.
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Documents Incorporated By Reference:
Portions of registrant's definitive Proxy Statement for its 1998 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report; and
certain exhibits are incorporated by reference into Part IV of this report.
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VANS, INC.
FORM 10-K
For the Fiscal Year Ended May 31, 1998
TABLE OF CONTENTS
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PART I
Item 1. Business ................................................ 1
Item 2. Properties .............................................. 13
Item 3. Legal Proceedings ....................................... 14
Item 4. Submission of Matters to a Vote of Security
Holders ................................................. 14
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................... 14
Item 6. Selected Financial Data ................................. 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 15
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk ....................................... 23
Item 8. Financial Statements and Supplementary Data ............. 24
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure ................. 40
Part III
Item 10. Directors and Executive Officers of the
Registrant .............................................. 40
Item 11. Executive Compensation .................................. 40
Item 12. Security Ownership of Certain Beneficial
Owners and Management .................................. 40
Item 13. Certain Relationships and Related Transactions .......... 40
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................ 40
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ITEM 1. BUSINESS
GENERAL
Vans, Inc. (the "Company") is a leading designer, marketer and distributor
of high quality casual and active-casual footwear and clothing, performance
footwear for enthusiast sports such as skateboarding, BMX and mountain biking,
and snowboard boots and snowboarding outerwear. The Company was founded in 1966
in Southern California as a domestic manufacturer of vulcanized canvas shoes.
The Company markets its products worldwide to a target customer base of young
men and women 10 to 24 years old. The Company is incorporated in Delaware.
To capitalize on the strength of the VANS brand with young men and women
worldwide, the Company repositioned itself during Fiscal 1996 from a domestic
manufacturer to a marketing-driven company. In particular, the Company: (i)
began sourcing new products from overseas; (ii) leveraged its brand equity with
young people to create products centered around increasingly popular enthusiast
sports, such as the Company's snowboard boot line, and products that have a
lifestyle orientation; (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 by closing its Orange, California manufacturing
facility (the "Orange Facility"), the largest of its two manufacturing
facilities; and (v) enhanced its management information and inventory control
systems to better control costs and increase operational efficiencies.
In May 1998, the Company took the last steps to complete this repositioning
by announcing its intention to close its last U.S. manufacturing facility,
located in Vista, California (the "Vista Facility") and to restructure its
operations in Europe. See "Sales and Distribution - International Sales" and
"Sourcing and Manufacturing." The Company incurred a one-time after tax
restructuring charge and write-down of domestically-produced inventory totaling
$11.9 million, or $0.90 per share, in connection with these matters in the
fourth quarter of Fiscal 1998. See Note 3 to the Company's Financial Statements.
The Vista Facility was closed on August 6, 1998.
OTHER DEVELOPMENTS: ACQUISITION OF SWITCH
On July 21, 1998, the Company acquired all of the outstanding capital stock
of Switch Manufacturing, a California corporation ("Switch"), through the merger
of Switch with and into a wholly-owned subsidiary of the Company (the "Merger").
Switch is the manufacturer of the Autolock(TM) step-in boot binding system, one
of the leading step-in snowboard boot binding systems in the world (the
"Autolock System"). The Company licensed the Autolock System from Switch from
1995 until the effective time of the Merger, and during that time became
Switch's key customer. The Company and Switch agreed to merge in order to allow
the Company to solidify its presence in the snowboard market and to enable
Switch to capitalize on the Company's distribution and marketing capabilities.
The Merger consideration paid by the Company consisted of: (i) 133,292
shares of the Company's Common Stock; (ii) $2,000,000 principal amount of
unsecured, non-interest bearing promissory notes due and payable on July 20,
2001; and (iii) $12,000,000 principal amount of unsecured, non-interest bearing
promissory notes which are subject to potentially downward adjustment based on
the performance of Switch during the fiscal year ending May 31, 2001, and are
also payable on July 20, 2001.
See "Certain Considerations - Acquisition-Related Risks" for a discussion of
potential risks associated with acquisitions like the Switch transaction, and
see also Item 3. "Legal Proceedings."
MARKETING AND PROMOTION
The Company markets the VANS 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 customers, as well as the design of the Company's retail stores
and factory outlets, further promote the VANS brand.
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ALTERNATIVE SPORTS AND ENTERTAINMENT EVENT SPONSORSHIPS
The Company's marketing and promotion strategy includes the sponsorship of
alternative sporting and entertainment events. Among the events and activities
the Company has sponsored are the 1995, 1996 and 1997 World Championships of
Skateboarding (with the Hard Rock Cafe), the 1997 Vans World Championship of
Snowboarding and the 1998 Vans Championship of Snowboarding, and contests such
as the Battle of the Bay, the Vans All-Girls Skate Jam, the 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.
During Fiscal 1997, the Company commenced a strategy of "owning" key events
for the sports it has traditionally sponsored. First, the Company purchased the
assets and rights associated with the Triple Crown of Surfing, which encompasses
three of the premier events in professional surfing, the Hawaiian Pro Surfing
Championship, the World Cup of Surfing, and the Pipe Masters Surfing Classic.
Then, during Fiscal 1998, the Company purchased the assets and rights associated
with the Triple Crown of Skateboarding; entered into a long-term agreement to
act as the title sponsor of the Triple Crown of Wakeboarding; and took steps to
form the VANS Triple Crown of Snowboarding. These four series of events are
known as the "VANS Triple Crown Series." In Fiscal 1999, the Company intends to
expand the VANS Triple Crown Series to additional sports.
The Company is also the exclusive title sponsor, and a part-owner, of the
"VANS Warped Tour." This traveling music/sports tour visits top young adult
markets throughout the world. The 1997 Tour visited 29 U.S. and Canadian
markets, and 21 cities in Japan, Europe and Australia, and appeared before
approximately 500,000 people. The Tour is an affordable daytime lifestyle, music
and sports festival for teenagers and young adults, with skateboarding, biking
demonstrations, retailer booths, video games, prize giveaways and performances
by top alternative bands. It also features an amateur skateboarding competition
in selected locations, with the winners being invited to participate at the VANS
Amateur World Skateboarding Championship. The Tour is promoted through local
radio, print, poster and flyer distribution, supplemented by national promotion
via television, print and the Internet. The 1998 Tour is traveling to 34 cities
in North America and 30 cities in Europe, Australia, Japan and Hawaii.
The Company has combined the VANS Triple Crown Series and the VANS Warped
Tour as a package and sold sub-sponsorships to key advertisers, such as
Casio/G-Shock and Pepsi/ Mountain Dew. The Company has also reached a worldwide
agreement with ESPN Networks to televise all events comprising the VANS Triple
Crown Series on ESPN and espn2, and has agreed to an arrangement with MTV
whereby MTV will be the Company's media partner in the U.S., Europe and
Australia for the VANS Warped Tour.
The Company also owns a minority interest in Board Wild LLC ("BW"), producer
of the syndicated "Board Wild" television series, a program which features board
sports, such as snowboarding, surfing and skateboarding, and the athletes who
participate in them. The series is aired 52 weeks per year on Fox Sports
nationwide and is syndicated worldwide. The Company is a permanent sponsor of
the series and receives preferred advertising placement and rates on series
episodes. The series also gives added exposure to the Company's athletes and
events.
ATHLETE ENDORSEMENTS
The Company sponsors over 200 of the world's top male and female athletes in
numerous sports including skateboarding, snowboarding, surfing, wakeboarding,
BMX and mountain biking. The Company's sponsored athletes aid in the design of
the Company's products, 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 trading cards and print and
television advertising featuring its sponsored athletes.
PRINT AND TELEVISION ADVERTISEMENTS
The VANS alternative sports image is enhanced by print and television
advertising campaigns which depict youthful, contemporary lifestyles and
attitudes and are carried on networks such as MTV, Comedy Central, Fox Sports
Net and espn2, 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, Spin, Vibe, Option, Maxium, Bikini, and Details.
In addition, the Company selectively advertises in widely circulated fashion and
lifestyle
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magazines, such as Seventeen and Jump. 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.
ARTIST RELATIONS
The Company's artist relations group seeks to generate alliances among the
Company, retailers and motion picture studios through promotional ties-ins.
Additionally, this group helps build the VANS brand through product placement
with key artists in the music, television and motion picture industries.
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 (www.vans.com) to
customers who directly access the Internet. The Website, which was recently
significantly upgraded, includes a product pictorial, 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,
and the Company's history. The Company is currently expanding its website into
e-commerce, with plans to sell custom-designed footwear over the Internet.
Seeking to further capitalize on the opportunities presented by the World
Wide Web, during Fiscal 1997, the Company acquired a minority interest in The
Zone Network, a Seattle-based company ("Zone") which publishes "The Mountain
Zone," a Website focusing on mountain-related events, including snowboarding and
mountain biking. Zone also assists the Company in operating and updating its Web
page and provides the Company with the opportunity to market the VANS brand and
VANS products on The Mountain Zone website.
PRODUCT DESIGN AND DEVELOPMENT
The Company's product design and development efforts are centered around
leading edge trends in the worldwide youth culture, including such areas as
enthusiast sports, alternative music, television, clothing and movies. 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 sports, music, media and fashions which appeal to
the Company's core customers.
The Company designs and merchandises four lines of footwear products per
year, two for Spring, one for the "Back to School" season and one for the
Holiday season. The Company also introduces two lines of clothing per year and
one line of snowboard boots per year.
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 $30 to $80 for casual and performance footwear, and from $109 to $279
for snowboard boots. The Company's clothing and accessories lines offer knit
shirts, T-shirts, hats, shorts and snowboard outerwear, bags and backpacks.
The Company's footwear line is segmented into the following categories:
High Performance Series.(TM) This line includes the most technical
skateboarding shoes which are sold in independent skate shops.
Performance Unlimited Series.(TM) This line includes technical,
performance-oriented skateboarding and biking shoes which are mainly sold in
athletic footwear and fashion/lifestyle stores.
Prelims Series.(TM) This line includes skate-influenced, non-technical
casual canvas and leather shoes which are mainly sold to mass merchandisers.
Classics. This line includes traditional vulcanized canvas and suede shoes
which are sold through all retail levels.
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MEN'S FOOTWEAR
High Performance Series(TM) , Performance Unlimited Series(TM) and Signature
Skate Shoes. Throughout its 32-year history, the VANS brand has long been
associated with skateboarding. The Company offers a variety of High Performance
and Performance Unlimited skate shoes that are designed and developed for
skateboarding, and that have specific features for the sport, such as grippy gum
rubber outsoles, double or triple layers of suede or leather in the ollie area
for extra durability, double or triple stitching for durability, and extra
padded tongues and collars for comfort and support. In addition, High
Performance skate shoes have additional features for the most demanding riders,
such as an internal elastic tongue holder, extra durable laces, and rubber toe
guards. During fiscal 1998, the Company introduced the first-ever skate-specific
technology in its skate shoes, as part of the High Performance Series.(TM)
Impulse Technology(TM) helps to prevent heel bruising (one of the main injuries
in skateboarding), and lengthens the life of heel cushioning. During Spring
1999, Impulse Technology will be expanded into the Performance Unlimited Series.
The Company also offers Signature Skate Shoes, and works with some of the
world's top skaters, such as Steve Caballero, Salman Agah, Omar Hassan and Willy
Santos to develop performance 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 High Performance Series(TM) shoes are Thirteen
and C.T. Performance Unlimited Series(TM) shoes include Fuleffect,(TM)
Engage(TM) and Shake,(TM) and the Signature Skate Series(TM) shoes include Cab
5,(TM) Willy Santos and Salman Agah.
Prelims Series(TM) and Classics. The Company's Prelims Series includes a
wide variety of casual suede, leather and canvas shoes with skate influence. The
Classics include traditional vulcanized surf and skate-oriented footwear, as
well as basic canvas styles. Some of the Company's Prelims Series(TM) shoes are
the Wally,(TM) Sonus(TM) and Deak.(TM) The Classics include the Classic Slip-On,
Authentic(TM), Old Skool(TM) and SK8-Hi.(TM)
WOMEN'S FOOTWEAR
The Company's footwear products for women include skate-influenced casual
shoes, as well as basic, classic deck shoes. Many of these products incorporate
fundamental features of the Company's skate shoes with fashion-conscious
detailing, colors and fabrics, such as suede, leather and canvas. The line
includes vulcanized shoes, as well as cemented cup-soled shoes and sandals. Some
of the Company's women's shoes include the Cara-Beth,(TM) Plat Skool,(TM)
Smooth(TM) and Old Skool.(TM)
CHILDREN'S FOOTWEAR
The Company offers a variety of boys' and youth's casual footwear that
follow the direction of the men's Prelims Series(TM) (i.e. shoes which are
skate-influenced without technical features), as well as Classics. These shoes
include the Wally,(TM) Sonus,(TM) Deak(TM) and Old Skool.(TM)
SNOWBOARD BOOTS
For the 1998/1999 snowboard season, the Company has divided its product
categories into six product groups: Technical, featuring the Jamie Lynn
signature boot; Performance, which is exclusive to special snowboard accounts;
Womens, featuring the Circe Wallace signature boot; World Traveler, featuring
the Daniel Franck signature boot; and Step-in, featuring the Shaun Palmer
signature boot and Switch's Autolock System. The categories functionally address
all snowboard riding styles and incorporate 11 conventional strap binding boot
styles and six Step-in compatible boots. The Crosslink(TM) is the Company's
newest and most advanced Step-in boot. It features a three position in-step
strap which is integrated to a lateral flexing adjustable forward lean system.
All of the Company's boots are marketed through merchandising programs which
enable both consumers and retailers to easily understand and communicate the
boots' technical features.
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CLOTHING
The Company's clothing and apparel line offers a wide variety of snowboard,
skateboard and crossover lifestyle apparel such as T-shirts, polo shirts,
shorts, caps and pants under both the VANS brand and the TRIPLE CROWN OF
SURFING(R) brand. The Company also sells technical snowboarding outerwear items,
including nylon jackets and pants, and a variety of sweaters and polar fleece.
The Company's snowboard apparel is primarily sold to snow, ski and sporting
goods stores. Skate and lifestyle apparel is sold to skate and surf shops and to
national retailers.
SALES AND DISTRIBUTION
The Company has two primary distribution channels for its products: (i)
wholesale sales, which consist of domestic sales through national and regional
retailers, as well as independent specialty stores, including skate and surf
shops, and international sales through a wholly-owned foreign subsidiary which
contracts with distributors and also sells through sales agents; and (ii) sales
through Company-operated retail and factory outlet stores.
DOMESTIC SALES
The Company sells its products through approximately 3,000 active accounts,
including Journeys, Pacific Sunwear, Foot Action, The Sports Authority, Kinney
Shoe Corporation (which includes Foot Locker, Kids Foot Locker, Kinney Shoe
Stores, Lady Foot Locker, Champs Sporting Goods and Foot Quarters), Mervyns,
Just For Feet and Nordstrom. 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 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 sells products to its
domestic accounts primarily through independent sales representatives. Several
of the Company's larger accounts are managed by Company sales executives. The
Company typically engages its independent sales representatives pursuant to one
year agreements. Compensation of independent sales representatives is limited to
commissions on sales.
INTERNATIONAL SALES
The Company licenses the right to sell VANS products internationally to its
Hong Kong subsidiary, Vans Far East Limited ("VFEL"), which in turn sells VANS
products to distributors and through sales agents in approximately 80 foreign
countries. International distributors of VANS products receive a discount on the
wholesale price of 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.
VFEL receives payment from all its distributors in United States dollars.
In Fiscal 1997, the Company undertook a strategy to capture increased
international sales and profit by commencing direct operations in selected
countries. In connection with that strategy, the Company acquired 51% of the
common shares of Global Accessories Limited, its distributor for the United
Kingdom ("Global") in November 1996. The Company acquired another 9% of the
shares of Global in Fiscal 1998 and will acquire the remaining 40% of the common
shares of Global over the next four years. The Company has also formed
jointly-owned subsidiaries with a third party to sell the Company's products in
Mexico, Brazil, Argentina and Uruguay. Under these arrangements, the Company
provides product and its footwear marketing expertise to the ventures, and the
third party provides financial, advertising and operational support. See " --
Certain Considerations - International Business Operations; Foreign Currency
Fluctuations."
Commencing in August 1998, the Company, through VFEL, began utilizing sales
agents, instead of distributors, in certain key European countries. This
strategy, like the strategy of direct foreign operations discussed above,
enables the Company to capture the sales and profits previously realized by the
distributors, and also enables the Company to better coordinate marketing
strategies and increase the inventory available to local customers through the
establishment of a distribution center in Europe. See "Distribution Facilities."
Under the new sales agency agreements, the agents are paid a commission on sales
and are responsible for all sales
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efforts in a particular territory. VFEL, in turn, provides all operational
functions associated with such sales efforts. See " -- Certain Considerations -
International Business Operations; Foreign Currency Fluctuations."
Financial information about the Company's export sales through VFEL is
included in Note 13 of Notes to the Company's Financial Statements.
RETAIL SALES
The Company currently operates 103 retail stores. The Company's retail
stores are divided into three store groups: conventional mall and freestanding
stores, factory outlet stores and clearance stores. 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. The stores are
an integral part of the Company's strategy for building the VANS brand,
providing wide exposure to all of the Company's products and enabling the
Company to stay close to the needs of its customers. During Fiscal 1998, the
Company continued its strategy of expanding its retail stores beyond Southern
California, opening stores in six new states outside California. The Company
also opened its first international store in the United Kingdom.
The standard Company retail store is approximately 1,400 to 2,700 square
feet. A typical Company store is open seven days a week, for an average of
eleven 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 49 factory outlets. The Company opened 17 factory
outlets during Fiscal 1998. 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 also, as a matter of course, seeks to identify
underperforming stores for possible closure. The Company closed two stores in
Fiscal 1998.
In Fiscal 1999, the Company intends to expand its retail concept by opening
an approximately 50,000 square foot skateboard park in Orange, California at an
entertainment center to be known as "The Block." The park will feature designs
created with input from the Company's skate athletes and will include a Company
retail store and skate shop. It is expected that the park will open in November
1998.
DISTRIBUTION FACILITIES
Domestic distribution of the Company's products is centralized in the
Company's 180,000 square foot facility located in Santa Fe Springs, California
(the "Santa Fe Springs Facility"). See Item 2. "Properties - Corporate
Headquarters and Distribution Facility." 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 product for domestic accounts is generally shipped to the Santa
Fe Springs Facility, such product for international sales is typically shipped
directly from the overseas manufacturers to VFEL's customers. In the case of
Europe, future shipments of product to European countries will be made through a
distribution facility located in Holland, which will be managed for VFEL by the
Company's wholly-owned subsidiary, Vans Holland B.V., pursuant to an
Administrative Services Agreement.
SOURCING AND MANUFACTURING
The Company purchases footwear and snowboard boots from VFEL, which sources
such product from independent manufacturers in South Korea, China and Mexico.
During Fiscal 1998, approximately 90% of the Company's shoes and 100% of the
Company's snowboard boots were manufactured offshore by third party
manufacturers. VFEL utilizes sourcing agents for its footwear and snowboard
boots in South Korea. These agents assist the Company in selecting and
overseeing third party contractors, ensuring quality, sourcing fabrics and
monitoring quotas and other trade regulations. The Company's and VFEL's
production staff and independent sourcing agents together oversee all aspects of
manufacturing and production. VFEL executes Manufacturing Agreements with each
of the factories which produce products for it.
Approximately 60% to 70% of the Company's clothing is sourced off-shore in
countries such as China, Korea, Israel and India. The Company's clothing
division works directly with the foreign factories to source and develop all
fabrics, trims and styles for the line.
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Until August 6, 1998, the Company manufactured vulcanized footwear at the
Vista Facility. As a result of a significant reduction in orders for vulcanized
footwear from the Japanese market, which in turn caused sales of footwear
produced at the Vista Facility to decrease by more than 50% over a six-month
period commencing in November 1997, the Company closed the Vista Facility and
shifted most of its production of vulcanized footwear to Mexico and Spain.
LICENSING
The Company has licensed certain of its trademarks for footwear, snowboard
boots, clothing 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 two third party
licensees. The licensees have the exclusive right to manufacture and sell
certain products under the Company's trademarks in Japan. The licenses provide
for a royalty payment to the Company, establish minimum annual royalty amounts,
and cover footwear, caps, sports bags, snowboards, apparel, watches and
sunglasses. The licenses have varying expiration dates.
COMPETITION
Footwear Industry. The athletic and casual footwear industry is highly
competitive. The Company competes on the basis of the quality and technical
aspects of its products, the 32-year heritage of the VANS brand, and the brand's
authenticity with its core customers and the athletes who participate in the
sports sponsored by the Company. Many of the Company's competitors, such as
Nike, Inc., Reebok International Ltd., Adidas AG and Fila Holdings SpA, have
significantly greater financial resources 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 this regard, the Company faces significant
competition from large, well-known companies, such as Tommy Hilfiger and
Nautica, which have significant brand recognition. 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. The
Company also competes with smaller companies, such as D.C., Duffs and Etnies,
which specialize in marketing to the Company's core skateboarding customers. The
Company competes on the basis of the quality and technical aspects of its
products, the 32-year heritage of the VANS brand, and the brand's authenticity
with its core customers and the athletes who participate in the sports sponsored
by the Company.
Snowboard Boot Industry. Although the Company has experienced substantial
growth in sales of its line of snowboard boots, and is now one of the industry
leaders, it faces significant competition, most notably from Burton Snowboards,
Inc., Northwave and Airwalk. The Company also anticipates that several large,
well-known companies, such as Nike, Inc. and Fila Holdings SpA will enter the
snowboard boot industry in the future. These companies are much larger and have
greater financial resources than the Company, and have significant brand
recognition.
Apparel Industry. The Company is a relatively new entrant in the apparel
business. The apparel industry is highly competitive and fragmented, and many of
the Company's competitors have significantly greater financial resources than
the Company and spend substantially more on product advertising than the
Company. Additionally, the apparel industry is particularly dependent on changes
in fashion, which will require the Company to devote substantial resources to
responding to changes in consumer preferences in a timely manner.
BACKLOG
As of August 22, 1998, the Company's backlog of orders for delivery in the
second quarter of Fiscal 1999 was approximately $23.1 million, as compared to
approximately $17.9 million as of August 22, 1997. The Company's backlog amounts
exclude orders from the Company's retail stores. The Company's backlog depends
upon a number of factors, including the timing of trade shows, during which some
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.
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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.
Additionally, backlog orders are subject to both cancellation by customers and
the ability of manufacturers to timely deliver product to fill such orders.
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, various designs incorporating the VANS trademark, and the striped
designs known as the "Old Skool,(TM)" "Knu Skool,(TM)" and "Fairlane(TM)" are
significant to its business and have gained acceptance among consumers and in
the footwear industry. 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. See "--Certain Considerations
- - Ability to Protect Intellectual Property Rights."
EMPLOYEES
As of August 26, 1998, the Company had 929 employees. Of the Company's 929
employees, 426 are full-time employees and 503 are part-time employees (most of
whom work at the Company's retail stores). The Company considers its employee
relations to be satisfactory. The Company has never suffered a material
interruption of business caused by labor disputes.
CERTAIN CONSIDERATIONS
Information contained or incorporated by reference in this Report contains
"forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates." Set forth below are cautionary statements
identifying important factors, risks and uncertainties that could cause the
Company's actual results to differ materially from those contained in
forward-looking statements of the Company and its management.
BRAND STRENGTH; CHANGES IN FASHION TRENDS
The Company's success is largely dependent on the continued strength of the
VANS brand and 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 consumers will continue to
prefer the VANS brand or 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 and apparel. 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.
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<PAGE> 12
In response to consumer demand, the Company also uses certain specialized
fabrics in its footwear and clothing. The failure of footwear or clothing 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.
The Company also has recently significantly increased the technical aspects
of certain of its footwear and snowboard boots. The failure of such technical
features to operate as expected or satisfy customers, or the failure of the
Company to develop new and innovative technical features in a timely fashion,
could adversely affect the VANS brand and could have a material adverse effect
on the Company's business and results of operations.
COMPETITION
Footwear Industry. The athletic and casual footwear industry is highly
competitive. The Company competes on the basis of the quality and technical
aspects of its products, the 32-year heritage of the VANS brand, and the brand's
authenticity with its core customers and the athletes who participate in the
sports sponsored by the Company. Many of the Company's competitors, such as
Nike, Inc., Reebok International Ltd., Adidas AG and Fila Holdings SpA, have
significantly greater financial resources 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 this regard, the Company faces significant
competition from large, well-known companies, such as Tommy Hilfiger and
Nautica, which have brand recognition. 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. The
Company also competes with smaller companies, such as D.C., Duffs and Etnies,
which specialize in marketing to the Company's core skateboarding customers.
Snowboard Boot Industry. Although the Company has experienced substantial
growth in sales of its line of snowboard boots, and is now one of the industry
leaders, it faces significant competition, most notably from Burton Snowboards,
Inc., Northwave and Airwalk, the other industry leaders. The Company also
anticipates that several large, well-known companies, such as Nike, Inc. and
Fila Holdings SpA will enter the snowboard boot industry in the future. These
companies are much larger and have greater financial resources than the Company,
and have significant brand recognition.
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 snowboarding 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 continue to introduce innovative, well-received
products, and there can be no assurance that it will do so.
Apparel Industry. The Company is a relatively new entrant in the apparel
business. The apparel industry is highly competitive and fragmented, and many of
the Company's competitors have significantly greater financial resources than
the Company and spend substantially more on product advertising than the
Company. Additionally, the apparel industry is particularly dependent on changes
in fashion, which will require the Company to devote substantial resources to
responding to changes in consumer preferences in a timely manner. See "--Changes
in Fashion Trends."
DEPENDENCE ON FOREIGN MANUFACTURERS
Approximately 90% of the Company's shoes and 100% of the Company's snowboard
boots sold during fiscal 1998 were manufactured by independent suppliers located
in South Korea. The Company has increased its reliance on offshore manufacturers
by commencing sourcing of footwear and apparel in the Peoples Republic of China,
India and Israel and anticipates that it will begin sourcing vulcanized footwear
in Mexico and Spain in the near future in response to the closing of the Vista
Facility, and some clothing from other Far East countries, such as Thailand and
Taiwan. The Company sources its foreign-produced products through VFEL. Although
VFEL executes Manufacturing Agreements with its foreign manufacturers, there can
be no assurance that VFEL will not experience difficulties with such
manufacturers, including but not limited to reduction in the availability of
production capacity, errors in complying with product specifications, inability
to obtain sufficient raw materials, insufficient quality control,
9
<PAGE> 13
failure to comply with VFEL's requirements for the proper utilization of the
Company's intellectual property, failure to meet production deadlines or
increases in manufacturing costs. In addition, if VFEL's relationship with any
of its manufacturers were to be interrupted or terminated, alternative
manufacturing sources will have to be located. The establishment of new
manufacturing relationships involves numerous uncertainties, and there can be no
assurance that VFEL would be able to obtain alternative manufacturing sources on
terms satisfactory to it. Should a change in its suppliers become necessary,
VFEL would likely experience increased costs, as well as substantial disruption
and resulting loss of sales. In addition, VFEL utilizes international sourcing
agents who assist it 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 such agents
could significantly affect the ability of VFEL to efficiently source products
from overseas, which could have a material adverse effect on VFEL's and the
Company's business, financial condition and results of operations.
Foreign manufacturing is subject to a number of risks, including work
stoppage, transportation delays and interruptions, political instability,
foreign currency fluctuations, changing economic conditions, an increased
likelihood of counterfeit, knock-off or gray market goods, expropriation,
nationalization, 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
VFEL's and the Company's business, financial conditions and result of
operations.
All VANS 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 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.
Also, the Company may be subjected to additional duties, significant
monetary penalties, the seizure and the forfeiture of the products the Company
is attempting to import or the loss of its import privileges if the Company or
its suppliers are found to be in violation of U.S. laws and regulations
applicable to the importation of the Company's products. Such violations may
include (i) inadequate record keeping of its imported products, (ii)
misstatements or errors as to the origin, quota category, classification,
marketing or valuation of its imported products, (iii) fraudulent visas or (iv)
labor violations under U.S. or foreign laws. There can be no assurance that the
Company will not incur significant penalties (monetary or otherwise) if the
United States Customs Service determines that these laws or regulations have
been violated or that the Company failed to exercise reasonable care in its
obligations to comply with these laws or regulations on an informed basis.
Although the products sold by the Company are not currently subject to
quotas in the United States, certain countries in which the Company's products
are sold are subject to certain quotas and restrictions on foreign products
which to date have not had a material adverse effect on the Company's business,
financial condition and results of operations. However, such countries may alter
or modify such quotas or restrictions. Countries in which the Company's products
are manufactured may, from time to time, impose new or adjust quotas or other
tariffs and other restrictions on imported products, any of which could have a
material adverse effect on the Company's business, financial condition and
current or increased quantity levels. Other restrictions on the importation of
the Company's products are periodically considered by the U.S. Congress, and
there can be no assurance that tariffs or duties on the Company's products may
not be raised, resulting in higher costs to the Company, or that import quotas
with respect to such products may not be imposed or made more restrictive.
MANAGEMENT GROWTH
The Company intends to pursue its 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 clothing 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 its 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
10
<PAGE> 14
management to manage growth effectively could have a material adverse effect on
the Company's business, financial condition and results of operations.
SEASONALITY AND QUARTERLY FLUCTUATION
The footwear industry generally is characterized by significant seasonality
of net sales and results of operations. The Company's business is moderately
seasonal, with the largest percentage of sales realized in the first fiscal
quarter (June through August), the "Back to School" months. In addition, because
snowboarding is a winter sport, sales of the Company's snowboard boots, and
Switch's Autolock System, have historically been strongest in the first and
second fiscal quarters. As the Company increases its international sales through
VFEL and experiences changes in its product mix, it expects that its quarterly
results will vary from historical trends. 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. The
Company's gross 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.
TRADE CREDIT RISK
The Company's results of operations are affected by the timely payment for
products by its customers. 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.
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 of the occurrence of events that adversely affect the economy in
general. In addition, a significant portion of the Company's revenues continue
to 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.
INTERNATIONAL BUSINESS OPERATIONS; RISK OF FOREIGN CURRENCY FLUCTUATIONS
The Company has recently begun to do business directly in the United Kingdom
through a subsidiary, and in Mexico, Brazil, Argentina and Uruguay through
subsidiaries co-owned with a third party. Additionally, the Company is currently
restructuring its operations in Europe by eliminating certain distributor
relationships and replacing them with sales agent relationships. In connection
with this strategy, the Company is establishing an operational structure in
Europe to support the activities of the sales agents. See "--Sales and
Distribution - International Sales." The Company may experience certain risks of
doing business directly in foreign countries including, but not limited to,
managing operations effectively and efficiently from a far distance and
understanding and complying with local laws, regulations and customs.
Additionally, the Company's foreign subsidiaries may, from time to time, collect
payments in customers' local currencies and purchase raw materials or product in
currencies other than U.S. dollars. Accordingly, the Company is exposed to
transaction gains and losses that could result from changes in foreign currency
exchange rates.
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<PAGE> 15
ABILITY TO PROTECT INTELLECTUAL PROPERTY RIGHTS
The Company considers its intellectual property to be material to its
business. See "--Intellectual Property." The Company relies on trademark,
copyright and trade secret protection, patents, non-disclosure agreements and
licensing arrangements to establish, protect and enforce intellectual property
rights in its products. Despite the Company's efforts to safeguard and maintain
its intellectual property rights, there can be no assurance that the Company
will be successful in this regard. There can be no assurance that third parties
will not assert intellectual property claims against the Company in the future.
Furthermore, there can be no assurance that the Company's trademarks, products
and promotional materials do not or will not violate the intellectual property
rights of others, that they would be upheld if challenged or that the Company
would, in such an event, not be prevented from using its trademarks and other
intellectual property. Such claims, if proved, could materially and adversely
affect the Company's business, financial condition and results of operations. In
addition, although any such claims may ultimately prove to be without merit, the
necessary management attention to and legal costs associated with litigation or
other resolution of future claims concerning trademarks and other intellectual
property rights could materially and adversely affect the Company's business,
financial condition and results of operations. The Company has in the past sued
and been sued by third parties in connection with certain matters regarding its
trademarks, none of which has materially impaired the Company's ability to
utilize its trademarks. See, however, Item 3. "Legal Proceedings" for a
discussion of certain litigation regarding the Switch Autolock System.
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its intellectual property rights vigorously, there can be no
assurance that these efforts will be successful or that the costs associated
with protecting its rights in certain jurisdictions will not be prohibitive.
From time to time, the Company discovers products in the marketplace that
are counterfeit reproductions of the Company's products or that otherwise
infringe upon intellectual property rights held by the Company. There can be no
assurance that actions taken by the Company to establish and protect its
intellectual property rights will be adequate to prevent imitation of its
products by others or to prevent others from seeking to block sales of the
Company's products as violating intellectual property rights. If the Company is
unsuccessful in challenging a third party's rights, continued sales of such
product by that or any other third party could adversely impact the VANS
trademark, result in the shift of consumer preferences away from the Company and
generally have a material adverse effect on the Company's business, financial
condition and results of operations.
NATURE OF ENDORSEMENT CONTRACTS
A key element of the Company's marketing strategy has been to obtain
endorsements from prominent enthusiast sports athletes. See "--Marketing and
Promotion - Athletic Endorsements." These contracts typically have fixed terms,
and there can be no assurance that they will be renewed or that endorsers signed
by the Company will continue to be effective promoters of the Company's
products. If the Company were unable in the future to secure suitable athletes
to endorse its products on terms it deemed reasonable, it would be required to
modify its marketing plans and could have to rely more heavily on other forms of
advertising and promotion, which might not be as effective.
PRODUCT LIABILITY
The Company's snowboard boots, and the recently acquired Switch Autolock
System, 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 and the Autolock System 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.
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<PAGE> 16
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
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.
ACQUISITION-RELATED RISKS
From time to time, the Company evaluates and considers the acquisition of
businesses. 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 intangibles assets, all of which could materially
adversely affect the Company's business, financial condition, results of
operations or stock price.
YEAR 2000 COMPLIANCE
The Company is dependent upon complex computer systems for many phases of
its operations, including production, sales, distribution and delivery. Many
existing computer programs use only two digits to identify a year in the date
field. These programs were designed and developed without considering the impact
of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000
(i.e., read the year 2000 as "1900") (the "Year 2000 Issue"). The Company has
commenced a program intended to timely identify, mitigate and/or prevent the
adverse effects of the Year 2000 Issue, and to pursue compliance by its
suppliers, creditors and financial service organizations. It is not possible, at
present, to quantify the overall cost of this work, or the financial effect of
the Year 2000 Issue on the Company if it is not timely resolved. Although the
Company presently believes that the cost of fixing the Year 2000 Issue will not
have a material effect on the Company's current financial position, liquidity or
results of operations, there can be no assurance of this. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Compliance," for a further discussion of the Company's
efforts in this arena.
ITEM 2. PROPERTIES
Corporate Headquarters. The Company leases approximately 180,000 square feet
of space in Santa Fe Springs, California which houses the Company's corporate
headquarters and distribution operations. The initial term of the lease is 10
years and the Company has one option to extend the lease an additional 10 years.
The rental structure under the lease is triple net, and the current monthly rent
is approximately $67,000. Such rent is subject to adjustment according to the
C.P.I. Index throughout the term of the lease.
Vista Facility. The Company leases the 90,400 square foot Vista Facility.
The term of the lease is eleven years and six months, with two consecutive
five-year extension options. The rental structure under the lease is triple net.
The current monthly base rent under the lease is approximately $41,000 and is
subject to adjustment according to the C.P.I. Index throughout the term of the
lease. In connection with the closing of the Vista Facility, the Company is
negotiating an agreement with the landlord to terminate the lease in exchange
for a lease termination fee and the performance by the Company of certain
improvements to the Vista Facility for a new tenant.
Retail Stores. Of the Company's 103 retail stores, two are owned by the
Company and the remainder are leased. Two of the leases are with the Company's
founders, who are no longer affiliated with the Company. The Company does not
have any franchised stores.
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Lease of the Orange Facility. The Company leases the Orange Facility to two
companies, one of whom currently pays the Company rent of $24,000 per month
pursuant to a gross lease, and one of whom currently pays the Company rent of
$20,000 per month pursuant to a triple net lease. Each of such leases has an
initial term of five years, and each lessee has one option to extend the term of
their lease an additional five years. The leases also provide for annual rent
increases.
Sublease of City of Industry Facility. During Fiscal 1997, the Company
subleased its former distribution center, located in City of Industry,
California, to a distribution company. Under the sublease, such company pays the
Company $40,500 per month and all operating charges associated with the master
lease. The Company remains primarily liable under the master lease. The term of
the sublease expires upon the expiration of the master lease in February 27,
2000.
The Company believes that its operating facilities are adequate for its
current needs, but the Company continues to seek profitable retail locations in
connection with its retail expansion program.
ITEM 3. LEGAL PROCEEDINGS
Mark A. Raines; Gregory A. Deeney; Preston Binding Company vs. Switch
Manufacturing (Civil Action No. C96-2648-DLJ, District Court of Northern
California). In March 1996, Switch was sued for patent infringement by Mark
Raines, Gregory Deeney and Preston Binding Company ("Preston"), a division of
Ride, Inc. The suit alleges that the Autolock System infringes the patent of a
binding system developed by Messrs. Raines and Deeney which was subsequently
assigned to Preston, and seeks a permanent injunction against such alleged
infringement and an unspecified amount of damages. Switch has responded to the
suit by filing an answer denying such allegations. The parties are currently
conducting discovery in this matter.
The Company has not been named as a defendant in the Preston suit or
threatened with litigation in such suit; however, there can be no assurance that
the Company will not be named in the Preston suit, and there can be no assurance
as to the outcome of the litigation between Switch and Preston. In the event
Switch is found liable in the Preston suit, the Company and Switch may be unable
to use the Autolock System, which could adversely impact the Company's
competitive position in the snowboard boot market and deprive the Company of the
key asset acquired by it in the Merger.
In addition to the foregoing, the Company is a party to certain litigation
which arises in the ordinary course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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>
HIGH LOW
---- ---
(IN DOLLARS)
<S> <C> <C>
FISCAL YEAR ENDED MAY 31, 1998:
1st Quarter................................... 16 1/4 10 7/8
2nd Quarter................................... 17 3/8 12 1/2
3rd Quarter................................... 16 3/8 8 1/4
4th Quarter................................... 12 5/32 8 7/8
FISCAL YEAR ENDED MAY 31, 1997:
1st Quarter................................... 20 1/8 12
2nd Quarter................................... 21 3/4 14 3/8
3rd Quarter................................... 17 1/4 10 3/4
4th Quarter................................... 13 7/8 9
</TABLE>
On August 27, 1998, the last reported sales price on the Nasdaq National
Market for the Company's Common Stock was $6.50 per share. As of August 26,
1998, there were 207 holders of record of the Common Stock.
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<PAGE> 18
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 Company's
line of credit prohibit the payment of such dividends without the consent of the
Bank.
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
1998 1997 1996 1995 1994
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .......................... $ 174,497 $ 159,391 $ 117,407 $ 88,056 $ 80,476
Net earnings (loss) ................ $ (2,677)(1) $ 10,437 $ 3,148 $ (37,135)(2) $ 1,361
Earnings Per Share Information:
Basic:
Net earnings (loss) per share before
extraordinary item ............. $ (0.20)(1) $ 0.81 $ 0.42 $ (3.86)(2) $ 0.14
Weighted average common shares
and equivalents(3) .............. 13,284 12,963 9,747 9,611 9,550
Diluted:
Net earnings (loss) per share before
extraordinary item .............. $ (0.20)(1) $ 0.76 $ 0.40 $ (3.86)(2) $ 0.14
Weighted average common shares and
equivalents (3) ................. $ 13,284 13,805 10,406 9,611 9,731
BALANCE SHEET DATA:
Total assets ....................... $ 113,338 $ 105,824 $ 90,461 $ 73,066 $ 97,204
Long-term debt ..................... $ 1,874 $ 481 $ 344 $ 22,416 $ 29,000
Stockholders' equity ............... $ 86,148 $ 88,282 $ 72,728 $ 20,264 $ 57,155
</TABLE>
- ----------
(1) Reflects: (i) $8.2 million of restructuring costs associated with the
closure of the Vista Facility and the restructuring of the Company's
European distribution system; and (ii) a $9.4 million write-down of
inventory in Q4 Fiscal 1998.
(2) Reflects: (i) a $20.0 million write-off of goodwill associated with the
closure of the Company's Orange, California manufacturing facility; (ii)
$10.0 million of restructuring costs associated with such facility closure;
and (iii) a $6.3 million write-down of inventory in the fourth quarter of
fiscal 1995.
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used in per share
computations.
ITEM 7. 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. Important factors that could cause or contribute to
such differences include, but are not limited to, those discussed hereunder, as
well as those discussed under Item 1. "Business - Certain Considerations."
OVERVIEW
The Company is a leading designer, manufacturer and distributor of high
quality stylish-casual and active-casual footwear and clothing, as well as
performance footwear for enthusiast sports such as skateboarding, snowboarding,
surfing, wakeboarding, BMX racing, and mountain bike racing, under the brand
name "VANS."* The Company is the successor to Van Doren Rubber Company, Inc., a
California corporation that was founded in 1966 ("VDRC"). VDRC was acquired by
the Company in February 1988 in a
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series of related transactions for a total cost (including assumed liabilities)
of $74.4 million. VDRC was merged with and into the Company in August 1991 at
the time of the Company's initial public offering.
During the fourth quarter of Fiscal 1998 ("Q4 Fiscal 1998") the Company took
the last steps to complete its repositioning as a marketing-driven company by
announcing the closure of its last U.S. manufacturing facility, located in
Vista, California (the "Vista Facility") and to restructure its operations in
Europe. The Company incurred a one-time restructuring charge of $8.2 million
(the "Restructuring Costs") and a write-down of domestic inventory of $9.4
million (the "Inventory Write-Down") in connection with these matters in Q4
Fiscal 1998. See Note 3 of Notes to Consolidated Financial Statements. The Vista
Facility was closed on August 6, 1998.
On July 21, 1998, the Company acquired all of the outstanding capital stock
of Switch Manufacturing, a California corporation ("Switch"), through a merger
(the "Merger") with and into a wholly-owned subsidiary of the Company. The
Merger was accounted for under the purchase method of accounting and,
accordingly, the purchase price will be allocated to the net assets acquired
based on their values. Switch is the manufacturer of the Autolock(TM) step-in
boot binding system, one of the leading snowboard boot binding systems in the
world. The Merger consideration paid by the Company consisted of: (i) 133,292
shares of the Company's Common Stock; (ii) $2,000,000 principal amount of
unsecured, non-interest bearing promissory notes due and payable on July 20,
2001; and (iii) $12,000,000 principal amount of unsecured, non-interest bearing
promissory notes which are subject to potential downward adjustment based on the
performance of Switch during the fiscal year ending May 31, 2001, and are also
due and payable on July 20, 2001. The results of Switch will be consolidated in
the Company's financial statements.
On November 20, 1996, the Company acquired 51% of the outstanding shares of
Global Accessories Limited, the Company's exclusive distributor for the United
Kingdom ("Global"), in a stock-for-stock transaction. During Q2 Fiscal 1998, the
Company acquired another 9% of the Global common shares in exchange for Common
Stock of the Company. The remaining 40% of the Global common shares will be
acquired by the Company over the next four years. The results of Global are
consolidated in the Company's financial statements.
The Company has also established a subsidiary in Mexico, Vans
Latinoamericana (Mexico), S.A. de C.V. ("Vans Latinoamericana"), a subsidiary in
Argentina, Vans Argentina S.A. ("Vans Argentina"), a subsidiary in Brazil, Vans
Brazil S.A., ("Vans Brazil"), and a subsidiary in Uruguay, Vans Uruguay, S.A.
("Vans Uruguay"). The results of these subsidiaries are also consolidated in the
Company's financial statements. All significant intercompany balances and
transactions have been eliminated in consolidation.
RESULTS OF OPERATIONS
FISCAL YEAR 1998 AS COMPARED TO FISCAL YEAR 1997
Net Sales
Net sales for Fiscal 1998 increased 9.5% to $174,497,000, compared to
$159,391,000 for Fiscal 1997. The sales increase was driven by increased sales
through the Company's retail and international sales channels, as discussed
below.
Sales to the Company's wholesale accounts on a worldwide basis increased
4.2% to $127,513,000 for Fiscal 1998 from 122,392,000 for Fiscal 1997. Within
the Company's wholesale business, sales to domestic wholesale accounts were
essentially flat for the year at $77,501,000, compared to $78,127,000 for last
year. Domestic wholesale sales for Fiscal 1998 were adversely affected by the
soft market for athletic footwear in the United States particularly in Q4 Fiscal
1998, with such sales in Q4 Fiscal 1998 decreasing 23.8% on a period-to-period
basis.
- ----------------------------------------------
* VANS is a registered trademark of Vans, Inc.
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Sales to international distributors through the Company's Hong Kong
subsidiary, Vans Far East Limited ("VFEL"), increased 13.0% to $50,012,000 for
Fiscal 1998, as compared to $44,265,000 for Fiscal 1997, primarily due to
increased sales to the United Kingdom, Mexico, Japan and Argentina. However,
international sales were down sharply in Q4 Fiscal 1998, versus the same period
a year ago, due to difficult economic conditions in the Far East, particularly
Japan. The Company anticipates that international sales for Fiscal 1999 will
continue to be adversely affected by the economic situation in Japan and the
rest of the Far East.*
Domestic and international sales of the Company's line of snowboard boots
increased 21.0% to $14.8 million, or 8.5% of Company-wide net sales for Fiscal
1998, increasing from $12.3 million, or 7.7% of Company-wide net sales for
Fiscal 1997.
Sales through the Company's 98-store retail chain (at May 31, 1998)
increased 27.0% to $46,985,000 for Fiscal 1998 from $36,999,000 for Fiscal 1997
due to the opening of a net 14 stores during the year and strong comparable
store sales increases of 16.2% for the year. Sales per square foot increased to
$322 in Fiscal 1998 from $300 in Fiscal 1997.
Gross Profit
Gross profit was essentially flat at $62,300,000 in Fiscal 1998 versus
$62,700,000 in Fiscal 1997 primarily as a result of the Inventory Write-Down
resulting from closure of the Vista Facility. As a percentage of net sales,
after the Inventory Write-Down, gross profit decreased to 35.7% for Fiscal 1998
from 39.3% for Fiscal 1997. Before the Inventory Write-Down, gross profit as a
percentage of sales had increased to 41.1% for Fiscal 1998. The improvement in
gross profit was primarily due to: (i) increased sales through the Company's
retail stores; (ii) improved mix of higher margin foreign-sourced product; and
(iii) benefits from the devaluation of the South Korean won as it related to the
Company's manufacturing efforts in South Korea.
Earnings from Operations
As a result of the Inventory Write-Down and the Restructuring Costs, the
Company incurred a loss from operations of $4,962,000 in Fiscal 1998 versus
earnings of $13,794,000 in Fiscal 1997. As a result of the Restructuring Costs,
operating expenses in Fiscal 1998 increased 37.5% to $67,262,000 from
$48,906,000 in Fiscal 1997. Excluding the Restructuring Costs, operating
expenses increased to $59,050,000 in Fiscal 1998, versus $48,906,000 in Fiscal
1997 primarily due to a $5.5 million increase in selling and distribution
expense and a $4.0 million increase in marketing, advertising and promotion
expense, each as discussed below. As a percentage of net sales, operating
expenses, including the Restructuring Costs, increased from 30.7% in Fiscal 1997
to 38.5% in Fiscal 1998. Excluding the Restructuring Costs, operating expenses
as a percentage of net sales increased from 30.7% in Fiscal 1997 to 33.8% in
Fiscal 1998.
Selling and distribution. Selling and distribution expenses increased
19.4% to $33,570,000 in Fiscal 1998 from $28,112,000 in Fiscal 1997, primarily
due to: (i) increased personnel costs, rent expense and other operating costs
associated with the expansion of the Company's retail division by the net
addition of 14 new stores; (ii) the inclusion of operating costs related to the
Company's subsidiaries which were not included in the consolidated financial
statements for Fiscal 1997; and (iii) costs required to support Company's sales
growth and the addition of the Company's apparel division.
Marketing, advertising and promotion. Marketing, advertising and
promotion expenses increased 30.2% to $17,138,000 in Fiscal 1998 from
$13,162,000 in Fiscal 1997, primarily due to: (i) costs associated with the Vans
Warped Tour '98; (ii) the Company's continued support of sales growth through
increased television, print and cooperative advertising; (iii) increased royalty
expense related to footwear, snowboard boot and clothing which bear licensed
athlete names and logos; and (iv) an increased number of athletes who are paid
to endorse the Company's products.
- ------------------------------
* This is a forward-looking statement regarding the Company's international
sales for Fiscal 1999. The Company's actual international sales could vary
significantly due to a number of important factors including, but not limited
to, the ability of Far Eastern countries to stabilize their economies and
currencies and return to growth levels.
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General and administrative. General and administrative expenses
increased 10.3% to $6,711,000 in Fiscal 1998 from $6,085,000 in Fiscal 1997,
primarily due to: (i) the addition of rent expense associated with the Company's
new distribution facility, located in Santa Fe Springs, California (the "Santa
Fe Springs Facility"); (ii) increased legal fees associated with the worldwide
protection of the Company's trademarks; and (iii) increased depreciation expense
associated with new equipment and tenant improvements at the Santa Fe Springs
Facility.
Restructuring costs. See "Overview" for a discussion of the Restructuring
Costs.
Provision for doubtful accounts. The amounts provided for bad debt expense
were essentially flat for the year at $698,000 for Fiscal 1998, compared to
$711,000 for Fiscal 1997. The slight improvement was due to continued
improvements in the management of past due accounts.
Amortization of intangibles. Amortization of intangibles increased from
$836,000 in Fiscal 1997 to $933,000 in Fiscal 1998 due to the increase in
goodwill associated with the Company's increased ownership of Global. See
"Overview."
INTEREST INCOME
Interest income was derived primarily from the investment of a portion of
the net proceeds of the Company's May 1996 public offering of securities (the
"Offering") and the investment of surplus cash. See "--Liquidity and Capital
Resources."
INTEREST AND DEBT EXPENSE
Interest and debt expense decreased from $438,000 in Fiscal 1997 to $262,000
in Fiscal 1998 due to the Company's use of operating capital to finance its
snowboard boot line, which was previously financed by a third party.
OTHER INCOME
Other income primarily consists of royalty payments from the licensing of
the Company's trademarks to its distributor for Japan. Other income decreased
22.4% to $2,161,000 for Fiscal 1998 from $2,783,000 for Fiscal 1997 primarily
due to a significant decline in royalty payments from such distributor in Q3 and
Q4 Fiscal 1998.
MINORITY INTEREST
Minority interest increased to $603,000 for Fiscal 1998 versus $302,000 for
Fiscal 1997 due to: (i) the inclusion of a full year of operations of Global
versus the prior year; and (ii) the formation of Vans Latinoamericana, Vans
Argentina, and Vans Uruguay which were not included in the Company's
consolidated financial statements for Fiscal 1997.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense decreased from an expense of $5,996,000 in Fiscal 1997 to
a benefit of $510,000 in Fiscal 1998 primarily as a result of the Fiscal 1998
loss. See "Overview" and Note 8 of Notes to Consolidated Financial Statements.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
NET SALES
Net sales for fiscal 1997 increased 35.8% to $159.4 million, compared to
$117.4 million for fiscal 1996. The sales increase was primarily driven by
continued increased unit sales in each of the Company's sales channels.
Sales to the Company's wholesale accounts on a worldwide basis increased
39.0% to $122.4 million in fiscal 1997, compared to $88.1 million for fiscal
1996. Within the Company's wholesale business, sales to national accounts
increased 26.6% during fiscal 1997 to $78.1 million, compared to $61.7 million
for fiscal 1996. Increased sales to existing accounts was the primary reason for
the increase, as evidenced by a 25.6% increase in sales to the Company's top ten
national accounts. Sales to international distributors
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increased 68.0% to $44.3 million for fiscal 1997, compared to $26.3 million for
fiscal 1996. Increased sales to Japan, France and United Kingdom were the
principal reasons for the increase.
Domestic and international sales of the Company's line of snowboard boots
increased 69.0% to approximately $12.3 million, or 7.7% of net sales for fiscal
1997, from approximately $7.2 million, or 6.2% of net sales for fiscal 1996.
Sales through the Company's 84-store retail chain (as of May 31, 1997)
increased 26.0% to $37.0 million in fiscal 1997 from $29.4 million for fiscal
1996. Comparable store sales (sales at stores open one year or more) increased
17.1% from the prior fiscal year. Comparable store sales increased overall for
each store type category with the exception of the Company's three clearance
stores, which represent less than 5.0% of retail sales.
GROSS PROFIT
Gross profit increased 35.4% to $62.7 million in fiscal 1997 from $46.3
million in fiscal 1996. As a percentage of net sales, gross profit was flat at
39.3% for fiscal 1997, versus 39.4% for fiscal year 1996. Fiscal 1997 margins
were affected by: (i) a continued shift in sales mix toward the international
sales channel which historically has had lower gross margins because
international distributors absorb certain operating costs which otherwise would
be absorbed by the Company; (ii) a continued shift in production mix to lower
gross margin snowboard boots; and (iii) an approximately 50% ramp-up in
production at the Vista Facility.
EARNINGS FROM OPERATIONS
Earnings from operations increased 65.3% to $13.8 million in fiscal 1997
from $8.3 million in fiscal 1996. Operating expenses in fiscal 1997 increased to
$48.9 million from $38.0 million in fiscal 1996, primarily due to a $4.7 million
increase in selling and distribution expense and a $4.9 million increase in
marketing, advertising and promotion expense, each as discussed below. As a
percentage of net sales, operating expenses declined from 32.3% in fiscal 1996
to 30.7% in fiscal 1997.
Selling and distribution. Selling and distribution expenses increased 19.9%
to $28.1 million in fiscal 1997 from $23.4 million in fiscal 1996, primarily due
to: (i) increased personnel costs in the Company's retail division to
appropriately manage sales growth; (ii) the addition of a new apparel division;
(iii) increased building and equipment rents related to new retail store
openings and new point-of-sale registers installed throughout the Company's
retail chain; (iv) increased commissions to independent sales representatives
due to increased sales to national accounts; (v) the cost of establishing VFEL,
Vans Latinoamericana, Vans Argentina and Vans Brazil; and (vi) costs related to
the operations of Global.
Marketing, advertising and promotion. In connection with the Company's
efforts to build the VANS brand, marketing, advertising and promotion expenses
increased 58.9% to $13.2 million in fiscal 1997 from $8.3 million in fiscal
1996, primarily due to: (i) increased television and print advertising; (ii)
sponsorship of the Vans World Championships of Snowboarding, the Vans Warped
Tour, and other promotional events; and (iii) an increase in the number of
athletes representing the Company's products.
General and administrative. General and administrative expenses increased
29.5% from $4.7 million in fiscal 1996 to $6.1 million in fiscal 1997, primarily
due to: (i) the payment of bonuses under the fiscal 1997 bonus program and a
full year of expense for two senior executives hired during fiscal 1996; (ii)
increased expenses associated with the prosecution of trademark and other
intellectual property infringement claims by the Company; (iii) the first annual
deposit required under the Company's deferred compensation plan; and (iv)
payment of the full management fee due to McCown De Leeuw & Co., a significant
stockholder of the Company ("MDC"), pursuant to a Management Services Agreement.
One-half of such fee was waived by MDC for the second half of fiscal 1996.
Provision for doubtful accounts. Provision for doubtful accounts decreased
slightly from $762,000 in fiscal 1996 to $711,000 in fiscal 1997. This was
primarily due to fewer accounts written off in fiscal 1997.
Amortization of intangibles. Amortization of intangibles increased from
$777,000 in fiscal 1996 to $836,000 in fiscal 1997 due to the increase in
goodwill associated with the acquisition of Global.
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INTEREST INCOME
Interest income increased from $79,000 in fiscal 1996 to $597,000 in fiscal
1997 primarily due to the investment of the net proceeds of the Offering.
INTEREST AND DEBT EXPENSE
Interest and debt expense decreased from $3.4 million in fiscal 1996 to
$438,000 in fiscal 1997 due to the repayment of the Company's 9.6% Senior Notes
and a secured bank line of credit with a portion of the net proceeds of the
Offering. See "--Liquidity and Capital Resources."
OTHER INCOME
Other income, primarily income from the licensing of the Company's
trademarks to its Japanese distributor, increased 44.0% to $2.8 million in
fiscal 1997 from $1.9 million in fiscal 1996.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense increased to $6.0 million in fiscal 1997 from $2.8
million for fiscal 1996 as a result of the higher earnings discussed above.
Income tax expense as a percentage of earnings before taxes decreased primarily
due to tax benefits derived from the establishment of VFEL.
MINORITY INTEREST
A minority interest of $302,000 was recorded in fiscal 1997 related to the
acquisition of Global and the formation of Vans Latinoamericana.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company finances its operations with a combination of cash flows from
operations and borrowings. On May 24, 1996, the Company completed the Offering.
The Company obtained net proceeds of $47.7 million from the Offering. Of such
amount, $25.4 million was utilized to repay the Company's 9.6% Senior Notes due
August 1, 1999 (including a $1.5 million makewhole amount resulting from the
prepayment of such Notes), and $8.1 million was utilized to repay debt under a
secured bank line of credit. The balance of the net proceeds was utilized for
general corporate purposes.
The Company experienced an inflow of cash from operating activities of
$6,114,000 during Fiscal 1998 compared to an inflow of $7,042,085 for Fiscal
1997. Cash provided by operations for Fiscal 1998 resulted primarily from the
add-back for depreciation and amortization, the add-back for the Inventory
Write-Down, the decrease in accounts receivable (described below) and the
increase in the accrual for the Restructuring Costs. Cash provided by operations
were partially offset by the net loss and increases in inventories (discussed
below), deferred income taxes, prepaid expenses and a decrease in income taxes
payable. Cash provided by operations in Fiscal 1997 was due to net earnings, the
add-back for depreciation and amortization, and the increase in income taxes
payable.
The Company had a net cash outflow from investing activities of $7,463,000
for Fiscal 1998, compared to a net cash outflow of $5,593,000 in Fiscal 1997.
These outflows were primarily due to tenant improvements at the Santa Fe Springs
Facility and capital expenditures related to new retail store openings. Cash
used in investing activities for the same period a year ago were primarily
related to new retail store openings, tenant improvements made to the Company's
former corporate headquarters, investments in the entity which owns the Vans
Warped Tour musical event, and costs related to upgrading the Company's
distribution and shipping software system.
The Company had a net cash inflow from financing activities of $2,962,000
for Fiscal 1998, compared to a net cash outflow of $314,000 for Fiscal 1997,
primarily due to proceeds from short-term borrowings, proceeds from long-term
debt incurred by Vans Latinoamericana and proceeds from the issuance of common
stock. See "Borrowings," below. The cash inflow was offset, to a certain extent,
by payments for the repurchase of 102,500 shares of common stock pursuant to the
Company's stock repurchase
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program. Cash used in financing activities for the same period a year ago was
primarily related to payments on short-term borrowings.
Accounts receivable, net of allowance for doubtful accounts, decreased from
$24.4 million at May 31, 1997 to $17.3 million at May 31, 1998, primarily due to
the decrease in net sales the Company experienced in Q4 Fiscal 1998. Inventories
increased to $29.8 million at May 31, 1998 from $25.1 million at May 31, 1997,
primarily due to: (i) an increased number of finished goods held for sale at the
Company's retail stores to support increased sales and the net addition of 14
new stores in Fiscal 1998; (ii) increased apparel inventory to support the first
full year of sales from the Company's apparel division; and (iii) the
consolidation of Vans Argentina and Vans Uruguay in the Company's financial
statements. These increases were partially offset by the Inventory Write-Down.
BORROWINGS
The Company has a line of credit (the "Revolving Line of Credit") with Bank
of the West (the "Bank"). The Revolving Line of Credit permits the Company to
borrow up $25.0 million. Effective as of May 31, 1998, in order to assist the
Company with seasonal needs for cash, the Revolving Line of Credit was increased
to $38.5 million. Such increase expires on December 31, 1998. The Revolving Line
of Credit is unsecured; however, if certain events of default occur by the
Company under the loan agreement establishing the Revolving Line of Credit (the
"Loan Agreement"), the Bank may obtain a security interest in the Company's
accounts receivable and inventory. The Company pays interest on the debt
incurred under the Revolving Line of Credit at the prime rate established by the
Bank from time to time, plus a percentage which varies depending on the
Company's ratio of debt to earnings before interest, taxes, depreciation, and
amortization (the "Debt to EBITDA Ratio"). The Company has the option to pay
interest at the LIBOR rate plus a percentage which varies with the Company's
Debt to EBITDA Ratio. Under the Loan Agreement, the Company must maintain
certain financial covenants and is prohibited from paying dividends or making
any other distribution without the Bank's consent. All amounts under the
Revolving Line of Credit are due and owing on November 1, 1999. At May 31, 1998,
the Company had no funds drawn down under the Revolving Line of Credit; however,
the Company had $15.2 million in open letters of credit, reducing the available
borrowings to $23.3 million.
The Company also maintains a $5.0 million facility with the Bank to fund the
Company's stock repurchase program which was adopted on February 3, 1998. See
"Cash Flows." At May 31, 1998 the Company had repurchased stock, but had no
funds drawn down under this facility.
Vans Latinoamericana and Vans Argentina maintain a two-year 12% note payable
to Tavistock Holdings A.G., a 49.99% owner of such companies ("Tavistock"). The
loan by Tavistock was made pursuant to a shareholders' agreement requiring
Tavistock to provide operating capital, on an as-needed basis, in the form of
loans to Vans Latinoamericana and Vans Argentina. The loan is secured by the
assets of Vans Latinoamericana and Vans Argentina. At May 31, 1998, Vans
Latinoamericana and Vans Argentina had a $2,185,000 outstanding balance under
this facility.
CURRENT CASH POSITION
The Company's cash position was $16,780,000 as of May 31, 1998, compared to
$15,350,000 at May 31, 1997. The Company believes that cash from operations,
together with borrowings under the Line of Credit, should be sufficient to meet
its working capital needs for the next 12 months.*
CAPITAL EXPENDITURES
The Company's capital expenditures for Fiscal 1998 were $5.0 million. The
majority of these expenditures were related to the relocation of the Company's
distribution center to the Santa Fe Springs Facility in the first month of
Fiscal 1998 and the opening of a net 14 new retail stores.
- --------
* Note: This is a forward-looking statement. The Company's actual cash position
could differ materially. Important factors that could cause or contribute to
such differences include: (i) the Company's rate of growth; (ii) the
Company's product mix between footwear and snowboard boots; (iii) the
Company's ability to effectively manage its inventory levels; (iv) timing
differences in payment for the Company's foreign-sourced product; (v) the
increased utilization of letters of credit for purchases of foreign-sourced
product; and (vi) timing differences in payment for product which is sourced
from countries which have longer shipping lead times, such as China.
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In Fiscal 1999, the Company plans to open approximately 8 - 10 new retail
stores. The stores will be opened throughout the year and consist primarily of
factory outlet stores. The Company estimates the aggregate cost of these new
stores to be approximately $600,000 - $1,000,000.
The Company continues to explore other projects which may involve capital
expenditures. While it is too early to estimate the amount of such expenditures,
the Company does not anticipate a significant increase in the level of capital
expenditures for Fiscal 1999.
The Company intends to utilize cash generated from operations and funds
drawn down under the Line of Credit to fulfill its capital expenditure
requirements for Fiscal 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards to measure all changes in equity
that result from transactions and other economic events other than transactions
with owners. Comprehensive income is the total of net earnings and all other
non-owner changes in equity. Except for net earnings and foreign currency
translation adjustments, the Company does not have any transactions and other
economic events that qualify as comprehensive income as defined under SFAS No.
130.
In 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 introduces a new model for
segment reporting called the "management approach." The management approach is
based on the manner in which management organizes segments within a company for
making operating decisions and assessing performance. The management approach
replaces the notion of industry and geographic segments. SFAS Nos. 130 and 131
are effective for the Company as of June 1, 1998. The Company believes the
adoption of SFAS Nos. 130 and 131 will not significantly affect the Company's
financial statement presentation.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for fiscal years beginning
after December 15, 1999. The Company has not yet determined the impact of
adopting this new standard on its consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company will adopt SOP
98-1 effective in 1999. The adoption of SOP 98-1 will require the Company to
modify its method of accounting for software. Based on information currently
available, the Company does not expect the adoption of SOP 98-1 to have a
significant impact on its financial position or results of operations.
SEASONALITY
Historically, the Company's business has been moderately seasonal, with the
largest percentage of sales realized in the first fiscal quarter (June through
August), the so-called "back to school" months. In addition, because
snowboarding is a winter sport, sales of the Company's snowboard boots, and
Switch's Autolock step-in boot binding system, have historically been strongest
in the first and second fiscal quarters. As the Company increases its
international sales and experiences changes in product mix, it believes that
future quarterly results may vary from historical trends. 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.
YEAR 2000 COMPLIANCE
The Company is dependent upon complex information technology ("IT") systems
for many phases of its operations, including production, sales, distribution and
delivery. Many existing IT programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000 (i.e., read the year 2000 as "1900") (the
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"Year 2000 Issue"). The Company has commenced a program intended to timely
identify, mitigate and/or prevent the adverse effects of the Year 2000 Issue
through an analysis of its own IT systems and non-IT systems, and pursue Year
2000 compliance by its vendors, creditors and financial service organizations.
The Company has completed the analysis of its IT system and has received
certifications of Year 2000 compliance from its IT systems vendors. The Company
is still analyzing its non-IT systems for Year 2000 compliance and expects to
complete substantially all of such analysis by the end of 1998.* With respect to
third party vendors, creditors and financial services organizations, the Company
has identified over 150 such third parties who the Company believes are material
to its business. The Company has inquired as to the Year 2000 readiness of each
of such parties and has sought certifications of Year 2000 compliance from them.
To date, the Company has received responses from approximately 60% of such third
parties which indicate either Year 2000 compliance or that they have instituted
programs to assure such compliance. The Company is pursuing answers from all
third parties who have, to date, failed to respond to the Company's inquiries.
The Company expects to receive substantially all of such answers by the end of
1998.*
Since the Company has not completed the data gathering phase of its Year
2000 compliance program, it cannot yet quantify the costs, if any, that may be
required to fix the Year 2000 Issue or any losses to the Company which might
result therefrom. However, to date, the Company has not incurred any material
expenses on fixing the Year 2000 Issue or experienced any losses therefrom. In
the event the Company discovers that either internal IT or non-IT systems or the
systems of key third party vendors, creditors or financial service organizations
will not be Year 2000 compliant, the Company will either obtain alternative IT
systems that are Year 2000 compliant or systems that do not rely on computers,
and, in the case of third parties, switch to other vendors which have Year 2000
compliant systems. The Company intends to develop a more specific contingency
plan upon completion of the data gathering phase of its compliance program.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
- -------------------------
* These are forward-looking statements regarding the completion date of the data
gathering phase of the Company's Year 2000 compliance program. The actual date
of completion may be different depending on a number of important factors,
including but not limited to (i) the complexity of the analyses needed to
determine Year 2000 compliance for non-IT systems embedded in items such as
machinery and equipment, and (ii) the level of cooperation the Company receives
from third parties with respect to its compliance inquiries.
23
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VANS, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................... $ 16,779,528 $ 15,350,175
Accounts receivable, net of allowance for doubtful
accounts and sales returns and allowances of $1,117,695
and $1,399,589 at May 31, 1998
and 1997, respectively (notes 6 and 12) .......................... 17,253,102 24,390,794
Inventories (notes 4 and 6) ........................................ 29,841,235 25,098,695
Deferred tax assets (note 8) ....................................... 5,469,456 --
Prepaid expenses ................................................... 4,884,184 2,960,435
------------- -------------
Total current assets ........................................ 74,227,505 67,800,099
Property, plant and equipment, net (notes 3, 5 and 9) ................ 12,994,043 13,346,452
Property on lease (notes 5 and 9) .................................... 4,789,314 4,953,522
Excess of cost over the fair value of net assets acquired,
net of accumulated amortization of $34,513,349 and $33,
580,138 at May 31, 1998 and 1997, respectively
(note 3) ........................................................... 18,500,327 17,862,389
Other assets ......................................................... 2,826,491 1,861,808
------------- -------------
$ 113,337,680 $ 105,824,270
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (note 6) ..................................... $ 5,514,664 $ 3,684,419
Accounts payable ................................................... 5,726,595 4,906,192
Accrued payroll and related expenses ............................... 2,672,047 2,047,509
Restructuring costs (note 3) ....................................... 6,412,758 --
Income taxes payable ............................................... 2,124,680 3,763,727
------------- -------------
Total current liabilities ................................... 22,450,744 14,401,847
Deferred tax liabilities (note 8) .................................... 1,862,452 1,636,605
Capital lease obligations ( notes 7 and 9) ........................... 135,143 222,605
Long-term debt, excluding current portion (note 7) ................... 1,874,153 258,594
------------- -------------
26,322,492 16,519,651
------------- -------------
Minority interest .................................................... 867,530 1,022,893
Stockholders' equity (notes 10 and 11):
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, 13,290,042 and 13,166,947
shares issued and outstanding at May 31,
1998 and 1997, respectively ...................................... 13,290 13,167
Additional paid-in capital ......................................... 101,836,186 101,113,448
Stock subscriptions ................................................ -- (4,500)
Cumulative foreign currency translation
Adjustment ....................................................... (60,159) 123,919
Accumulated deficit ................................................ (15,641,659) (12,964,308)
------------- -------------
Net stockholders' equity .................................... 86,147,658 88,281,726
Commitments and contingencies (note 9)
$ 113,337,680 $ 105,824,270
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
24
<PAGE> 28
VANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED MAY 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (note 12) ........................... $ 174,497,304 $ 159,390,654 $ 117,407,543
Cost of sales ................................. 112,197,573 96,690,956 71,095,123
------------- ------------- -------------
Gross profit ................................ 62,299,731 62,699,698 46,312,420
Operating expenses:
Selling and distribution .................... 33,569,858 28,111,805 23,446,501
Marketing, advertising and promotion ........ 17,137,722 13,162,123 8,281,129
General and administrative .................. 6,711,137 6,085,415 4,699,240
Restructuring costs (note 3) ................ 8,212,238 -- --
Provision for doubtful accounts ............. 697,926 710,611 762,295
Amortization of intangibles ................. 933,208 836,021 777,245
------------- ------------- -------------
Total operating expenses ............ 67,262,089 48,905,975 37,966,410
------------- ------------- -------------
Earnings (loss) from operations ..... (4,962,358) 13,793,723 8,346,010
Interest income ............................... 479,728 597,045 79,302
Interest and debt expense ..................... (262,181) (438,485) (3,418,559)
Other income (note 2) ......................... 2,160,640 2,782,671 1,932,505
------------- ------------- -------------
Earnings (loss) before income taxes, minority
interest in income of consolidated
subsidiaries and extraordinary item ...... (2,584,171) 16,734,954 6,939,258
Income tax expense (benefit)(note 8) .......... (510,067) 5,996,180 2,775,822
------------- ------------- -------------
Earnings (loss) before minority interest in
income of consolidated subsidiaries
and extraordinary item ................... (2,074,104) 10,738,774 4,163,436
Minority interest in income of consolidated
subsidiaries ............................. 603,247 301,917 --
------------- ------------- -------------
Earnings (loss) before extraordinary item ..... (2,677,351) 10,436,857 4,163,436
Extraordinary loss on early extinguishment of
debt, net of income tax benefit of $676,965
(note 7) .................................... -- -- 1,015,448
------------- ------------- -------------
Net earnings (loss) ........................... $ (2,677,351) $ 10,436,857 $ 3,147,988
============= ============= =============
Per share information (note 2):
Basic:
Earnings (loss) before extraordinary
Item ................................... $ (.20) $ .81 $ .42
Extraordinary item ....................... -- -- (.10)
------------- ------------- -------------
Net earnings (loss) ...................... $ (.20) $ .81 $ .32
============= ============= =============
Weighted average common and common
equivalent shares ...................... 13,283,674 12,962,826 9,746,871
Diluted:
Earnings (loss) before extraordinary
item ................................... $ (.20) $ .76 $ .40
Extraordinary item ....................... -- -- (.10)
------------- ------------- -------------
Net earnings (loss) ...................... $ (.20) $ .76 $ .30
============= ============= =============
Weighted average common and common
equivalent shares ...................... 13,283,674 13,805,000 10,405,993
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 29
VANS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED MAY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
ADDITIONAL RETAINED CUMULATIVE TOTAL
PAID-IN STOCK EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL SUBSCRIPTION (ACUM. DEFICIT) ADJUSTMENT EQUITY
------------- ---------- ------------- ------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1995 ....... 9,639,877 $ 9,640 $ 46,803,649 $ -- $ (26,549,153) $ -- 20,264,136
Issuance of common
stock for cash ............ 2,988,208 2,988 49,397,434 (85,000) -- -- 49,315,422
Net earnings ................ -- -- -- -- 3,147,988 -- 3,147,988
---------- ---------- ------------- ------------- ------------- ------------- -------------
BALANCE AT MAY 31, 1996 ....... 12,628,085 $ 12,628 $ 96,201,083 $ (85,000) $ (23,401,165) $ -- $ 72,727,546
Issuance of common
stock for cash ............. 368,862 369 2,269,565 80,500 -- -- 2,350,434
Issuance of common
stock for acquisition ......... 170,000 170 2,642,800 -- -- -- 2,642,970
Cumulative foreign
currency transla-
tion adjustment .......... -- -- -- -- -- 123,919 123,919
Net earnings ............... -- -- -- -- 10,436,857 -- 10,436,857
---------- ---------- ------------- ------------- ------------- ------------- -------------
BALANCE AT MAY 31, 1997 ....... 13,166,947 $ 13,167 $ 101,113,448 $ (4,500) $ (12,964,308) $ 123,919 $ 88,281,726
Issuance of common
stock for cash ............. 188,265 188 1,105,981 4,500 -- -- 1,110,669
Repurchase of common stock.. (102,500) (102) (980,523) -- -- -- (980,625)
Issuance of common
stock for acquisition ......... 37,330 37 597,280 -- -- -- 597,317
Cumulative foreign
currency transla-
tion adjustment .......... -- -- -- -- -- (184,078) (184,078)
Net earnings ............... -- -- -- -- (2,677,351) -- (2,677,351)
---------- ---------- ------------- ------------- ------------- ------------- -------------
BALANCE AT MAY 31, 1998 ....... 13,290,042 $ 13,290 $ 101,836,186 $ 0.00 $ (15,641,659) $ (60,159) $ 86,147,658
========== ========== ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 30
VANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ..................................... $ (2,677,351) $ 10,436,857 $ 3,147,988
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization ........................ 4,500,480 3,430,203 3,175,973
Minority share of income ............................. 603,247 -- --
Amortization of deferred financing costs ............. -- -- 306,489
Provision for losses on accounts
receivable and sales returns ....................... 697,926 710,611 762,295
Inventory write-down and other non-cash
restructuring costs ................................ 10,830,848 -- --
Changes in assets and liabilities:
Accounts receivable ................................ 6,475,843 (2,852,026) (9,021,040)
Income taxes receivable ............................ -- -- 3,530,128
Inventories ........................................ (13,389,087) (5,219,924) (2,402,906)
Deferred income taxes .............................. (5,243,609) 505,605 1,131,000
Prepaid expenses ................................... (1,923,749) (445,229) (1,958,746)
Other assets ....................................... 21,283 (96,483) (244,041)
Accounts payable ................................... 820,404 286,423 (4,250,652)
Accrued payroll and related expenses ............... 624,537 429,368 (414,323)
Accrued workers' compensation ...................... -- (803,964) (736,082)
Restructuring reserve .............................. 6,412,758 (1,750,782) (4,333,152)
Accrued interest ................................... -- -- (907,660)
Income taxes ....................................... (1,639,047) 2,411,426 967,659
------------ ------------ ------------
Net cash provided by (used in)
operating activities .......................... 6,114,483 7,042,085 (11,247,070)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment ............................................ (5,039,992) (5,092,936) (2,557,520)
Investment in unconsolidated subsidiary and trademarks .... (2,423,377) (500,000) --
Proceeds from sale of property, plant and
equipment ............................................. -- -- 717,143
------------ ------------ ------------
Net cash used in investing
activities .................................... (7,463,369) (5,592,936) (1,840,377)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) short-term borrowings ....... 1,830,245 (2,746,930) 3,823,176
Payments on capital lease obligations ................... (87,462) (121,137) (97,642)
Proceeds from (payments on) long term debt .............. 1,615,559 258,594 (29,000,000)
Consolidated subsidiary dividends
paid to minority shareholder ......................... (526,106) -- --
Proceeds from issuance of common stock, net ............. 1,110,604 2,295,504 49,315,422
Payment for repurchase of common stock .................. (980,523) -- --
------------ ------------ ------------
Net cash provided by (used in)
financing activities .......................... 2,962,317 (313,969) 24,040,956
Effect of exchange rate changes ................. (184,078) (18,357) --
------------ ------------ ------------
Net increase in cash and
cash equivalents .............................. 1,429,353 1,116,823 10,953,509
Cash and cash equivalents, beginning of year ............ 15,350,175 14,233,352 3,279,843
------------ ------------ ------------
Cash and cash equivalents, end of year .................. $ 16,779,528 $ 15,350,175 $ 14,233,352
============ ============ ============
SUPPLEMENTAL CASH FLOW Information -- amounts paid for:
Interest ................................................ $ 262,182 $ 438,485 $ 3,353,372
Income taxes ............................................ $ 6,310,168 $ 2,588,541 $ 41,265
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Supplemental Disclosures:
Purchase of Global Accessories, Ltd.
Acquired cash .......................................... $ -- $ 254,685 $ --
Accounts receivable .................................... -- 404,094 --
Inventories ............................................ -- 478,127 --
Property, plant and equipment .......................... -- 44,130 --
Goodwill ............................................... -- 2,203,126 --
Prepaid expenses ....................................... -- 57,905 --
Other assets ........................................... -- 86,994 --
Current liabilities .................................... -- (718,173) --
Increase in investment in consolidated subsidiary
Fair value of assets acquired .......................... 96,929 -- --
Stock issued ........................................... 597,280 -- --
------------ ------------ ------------
$ 694,209 $ 2,810,888 $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 31
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
1. BUSINESS AND ORGANIZATION
Vans, Inc. (the "Company") is a leading designer, marketer and distributor
of a collection of high quality casual and active-casual footwear for men, women
and children, as well as apparel and performance footwear for enthusiasts of
outdoor sports such as skateboarding, snowboarding and BMX bicycling.
On May 24, 1996, the Company completed a secondary offering of common stock
(the "Offering"). In connection with the Offering, 2,700,000 shares of the
Company's common stock were sold by the Company for net proceeds of
approximately $47.7 million and 100,000 shares were sold by a stockholder of the
Company. Additionally, 420,000 shares were sold by another selling stockholder
to cover over-allotments. The Company did not receive any of the proceeds from
the sale of shares of common stock by the selling stockholders. The Company used
the net proceeds from the Offering to (i) repay $25.4 million of the outstanding
principal amount of the Company's 9.6% senior notes due August 1, 1999 (the
"Senior Notes"), including accrued interest and a makewhole amount resulting
from the prepayment of the Senior Notes; (ii) repay $8.1 million outstanding
under a secured line of credit (the "Secured Line of Credit") with a financial
institution; and (iii) increase working capital for the financing of inventory
and accounts receivable.
On May 9, 1996, the Company established a wholly-owned Hong Kong subsidiary,
Vans Far East Limited ("VFEL"), and granted a worldwide license (excluding the
United States) to VFEL to use the Company's trademark on and in connection with
the manufacture and distribution of footwear. VFEL, in turn, contracts with
distributors for foreign countries.
On November 20, 1996, the Company acquired 51% of the outstanding Common
Shares of Global Accessories Limited, the Company's exclusive distributor for
the United Kingdom ("Global"), in a stock-for-stock transaction (the "Global
Acquisition"). In November 1997 the Company acquired an additional 9% of the
common shares of Global, to bring the total investment to 60%. The Company will
acquire the remaining 40% of the Global Shares over the remaining four-year
period. The Global Acquisition has been accounted for under the purchase method
of accounting, and accordingly, the purchase price was allocated to assets
acquired based on their estimated fair values. The excess of the purchase price
over the fair market value of net assets acquired has been recorded as goodwill.
The results of operations of Global have been included in the Company's
consolidated statements of operations since the date of acquisition.
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). The
Company has entered into partnership ventures in Mexico, Vans Latinoamericana
(Mexico), S.A. de C.V. ("Vans Latinoamericana"), in Argentina, Vans Argentina
S.A. ("Vans Argentina"), in Brazil, Vans Brazil S.A. ("Vans Brazil"), and in
Uruguay, Vans S.A. Uruguay ("Vans Uruguay") in which the Company owns 50.01%.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries, Vans International, Inc., a
foreign sales corporation ("FSC"), Vans Footwear International, Inc., a
California corporation, Vans Far East Limited ("VFEL"), a wholly owned Hong Kong
subsidiary, Vans Footwear Limited, a wholly-owned United Kingdom subsidiary,
Global Accessories Limited, a 60.0%-owned subsidiary located in the United
Kingdom, Vans Latinoamericana (Mexico), S.A. de C.V., a 50.01%-owned Mexico
subsidiary, Vans Argentina S.A., a 50.01%-owned Argentina subsidiary, Vans
Brazil S.A., a 50.01%-owned Brazilian subsidiary, Vans Uruguay S.A., a
50.01%-owned Uruguay subsidiary, and Vans Shoes Outlets, Ltd., a Texas Limited
Partnership of which the Company is a general partner.
Use of Estimates. 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, revenues and expenses and the
disclosure of contingent assets and liabilities to prepare the consolidated
financial statements in conformity with generally accepted accounting principles
for the periods. Actual results could differ from those estimates.
28
<PAGE> 32
Foreign Currency Translation. The financial statements of subsidiaries
outside the United States are generally measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet date. Income and expense items are
translated at a weighted average rate of exchange during the period of
existence. The resultant translation adjustments are included in cumulative
foreign currency translation adjustment, a separate component of stockholders'
equity. Foreign currency transaction gains and losses are included in income
currently.
Foreign Currency Contracts. Global enters into foreign currency contracts
from time to time to hedge against currency fluctuations on the settlement of
receivables and payables. The transaction gains or losses on the contracts are
netted against the gains or losses on the hedged obligations.
Cash Equivalents. For purposes of the consolidated statements of cash flows,
the Company considers all highly liquid 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. Global uses the weighted average cost method.
Excess of cost over the fair value of net assets acquired. Excess of cost
over the fair value of net assets acquired resulted from both the Acquisition
and the Global Acquisition (see note 1). Excess of cost over the fair value of
net assets acquired in the Acquisition represented trademarks, manufacturing
know-how and dealer relationships and is being amortized on a straight-line
basis over 30 years. Excess of cost over the fair value of net assets acquired
in the Global Acquisition represented dealer relationships and distribution
know-how and is being amortized on a straight-line basis over 15 years.
Revenue Recognition. Revenue is recognized upon shipment of product or at
point of sale for retail operations. For product manufactured outside the U.S.,
revenue is recognized when goods are accepted by the freight forwarder. This
relates to those products that are shipped directly to the international
customers. Revenues from royalty agreements are recognized as earned.
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>
Property held for lease...................... 5-31.5
Machinery and equipment...................... 5-10
Store fixtures and equipment................. 5-7
Automobiles and trucks....................... 5-7
Computer, office furniture and equipment..... 3-7
</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 accounted for under the asset and liability
method. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Long-Lived Assets
The Company accounts for long-lived assets, including intangibles, at
amortized cost. As part of an ongoing review of the valuation and amortization
of long-lived assets, management assesses the carrying value of assets if facts
and circumstances suggest that such assets may be impaired. If this review
indicates that the assets will not be recoverable, as determined by a
nondiscounted cash flow analysis over the remaining amortization period, the
carrying value of the assets would be reduced to its estimated fair market
value, based on discounted cash flows. As a result, management has determined
that its long-lived assets, aside from those involved in the restructuring (see
Note 3), are not impaired as of May 31, 1998.
Advertising, Start-Up and Product Design and Development Costs
The Company charges all advertising costs, start-up costs and product design
and development costs to expense as incurred.
29
<PAGE> 33
Other Income. Other income is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Royalty income ....... $ 2,216,619 $ 2,617,297 $ 1,791,800
Rental income ........ (48,608) 36,373 72,718
Other ................ (7,371) 129,001 67,987
----------- ----------- -----------
$ 2,160,640 $ 2,782,671 $ 1,932,505
=========== =========== ===========
</TABLE>
Fair Value of Financial Instruments. As of May 31, 1998, the fair value of
all financial instruments approximated carrying value. The carrying value of
cash and cash equivalents, accounts receivable, accounts payable, accrued
payroll and related expenses and short-term borrowings approximates fair value
because of the short term maturity of these financial instruments.
Stock-Based Compensation
The Company has continued 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 to make pro forma
disclosures of net earnings and earnings per share as if the fair value method
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123 had
been applied (see note 10).
NET EARNINGS (LOSS) PER COMMON SHARE
In February 1997, the FASB issued SFAS No. 128 specifies new standards
designed to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that the common
stock equivalents are not considered in computing basic EPS, (b) eliminating the
modified treasury stock method and the three percent materiality provision, and
(c) revising the contingent share provisions and the supplemental EPS data
requirements. SFAS No. 128 also makes a number of changes to existing disclosure
requirements. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. The financial
statements included herein reflect the application of SFAS No. 128. Prior
periods have been retroactively restated.
In Fiscal 1998, the weighted average shares used in the diluted earnings
(loss) per share calculation were the same as the weighted average shares used
in the basic earnings (loss) per share calculation because the inclusion of any
stock options would have an anti-dilutive effect because the Company has
incurred a net loss.
In Fiscal 1997 and 1996 the weighted average shares used in the diluted
earnings per share calculation differ from the weighted average shares used in
the basic earnings per share calculation solely due to the dilutive effect of
stock options.
Options to purchase 105,334, 371,540 and 40,040 shares of common stock at
prices ranging from $10.88 to $20.50 were outstanding during fiscal years 1998,
1997 and 1996, respectively, but were not included in the computation of diluted
EPS because the options' exercise prices were greater than the average market
price of the common shares.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company will adopt SFAS No. 130, "Reporting Comprehensive Income,"
beginning with the fiscal year ending May 31, 1999. SFAS No. 130 establishes
standards to measure all changes in equity that result from transactions and
other economic events other than transactions with owners. Comprehensive income
is the total of net earnings and all other non-owner changes in equity. Except
for net earnings and foreign currency translation adjustments, the Company does
not have any transactions and other economic events that qualify as
comprehensive income as defined under SFAS No. 130.
In 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 introduces a new model for
segment reporting called the "management approach." The management approach is
based on the manner in which management organizes segments within a company for
making operating decisions and assessing performance. The management approach
replaces the notion of industry and geographic segments. SFAS Nos. 130 and 131
are effective for the Company as of June 1, 1998. The Company believes the
adoption of SFAS Nos. 130 and 131 will not significantly affect the Company's
financial statement presentation.
30
<PAGE> 34
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for fiscal years beginning
after December 15, 1999. The Company has not yet determined the impact of
adopting this new standard on the consolidated financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company will adopt SOP
98-1 effective in 1999. The adoption of SOP 98-1 will require the Company to
modify its method of accounting for software. Based on information currently
available, the Company does not expect the adoption of SOP 98-1 to have a
significant impact on its financial position or results of operations.
Reclassifications. Certain amounts in the fiscal 1996 and 1997 consolidated
financial statements have been reclassified to conform to the fiscal 1998
presentation.
3. RESTRUCTURING COSTS
In the fourth quarter of fiscal 1998, the Company provided $8,212,238
($6,048,950 after tax, or $0.45 per share) for restructuring related to the
closure of its Vista, California manufacturing facility (the "Vista Facility")
and the restructuring of its European distributor system. The estimated
provision includes approximately $2,949,000 for terminated international
distributor agreements and related costs, $2,184,000 for estimated loss on sale
of plant equipment (see Note 5), $1,433,000 in terminated raw material
contracts, $893,000 for involuntary termination benefits for approximately 300
employees, and $753,000 for costs to close the plant and prepare the site for a
new tenant. As of May 31, 1998, $6,412,758 remained in the restructuring
reserve.
4. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $ 646,957 $ 1,743,660
Work-in-process 378,300 32,796
Finished goods 28,815,978 23,322,239
----------- -----------
$29,841,235 $25,098,695
=========== ===========
</TABLE>
Inventories at May 31, 1998 and 1997 are reduced by $637,546 and $744,686,
respectively, to reflect the lower of cost or market valuation allowances.
In the fourth quarter of fiscal 1998, the Company took the last steps to
complete its repositioning as a market-driven Company by announcing the closure
of the Vista Facility, and as a result, wrote-down its domestic finished goods
inventory and its raw material inventory by approximately $9,400,000. This
write-down is not included in the valuation allowance at May 31, 1998 as it was
recorded directly against the inventory.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Machinery and equipment ................. $ 2,692,859 $ 5,323,677
Store fixtures and equipment ............ 2,994,827 1,967,975
Automobiles and trucks .................. 1,025,556 989,054
Computers, office furniture and equipment 6,956,026 6,726,849
Leasehold improvements .................. 7,996,503 8,284,493
------------ ------------
Less accumulated depreciation and
amortization ............................ (8,671,728) (9,945,596)
------------ ------------
$ 12,994,043 $ 13,346,452
============ ============
</TABLE>
31
<PAGE> 35
As of May 31, 1998 and 1997, the property held for lease related to the
closed Orange, California manufacturing facility had a net book value of
$4,789,314 and $4,953,522, respectively (see note 9). These amounts are net of
$4,257,532 and $4,090,133, respectively, of accumulated depreciation. The amount
of future rental income under noncancellable leases for this property is
$2,039,200.
Included in machinery and equipment and automobiles and trucks at May 31,
1998 and 1997 are $554,379 of assets held under capital leases. At May 31, 1998
and 1997, accumulated amortization of assets held under capital leases totaled
$294,777 and $207,276, respectively (see note 9).
Depreciation expense totaled $3,371,946, $2,596,357 and $2,398,729 for the
years ended May 31, 1998, 1997 and 1996, respectively.
6. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
The Company has a bank line of credit that was established in November 1996,
which permits the Company to borrow amounts up to $25.0 million (the "Line of
Credit"). Effective as of May 31, 1998, in order to assist the Company with
seasonal needs for cash, the Line of Credit was increased to $38.5 million. Such
increase expires on December 31, 1998. The Line of Credit is unsecured, however,
if certain events of default occur by the Company under the loan agreement
establishing the Line of Credit, the Bank may obtain a security interest in the
Company's accounts receivable and inventory. Interest is payable at the bank's
prime rate plus a percentage which varies depending on the Company's ratio of
debt to earnings before interest, taxes, depreciation, and amortization (the
"Debt to EBITDA Ratio"). There were no outstanding borrowings under the secured
line of credit at May 31, 1998; however, the Company had $15,203,544 in open
letters of credit, reducing the available borrowings to $23,296,456. Under the
agreement establishing the secured line of credit, the Company must maintain
certain financial covenants and is prohibited from paying dividends or making
any other distribution without the bank's consent. As of May 31, 1998, the
Company was in compliance with all such covenants. The line expires on November
1, 1999.
7. DEBT
Long-term debt at May 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Triple Crown of Surfing Note Payable $ 50,000 $ --
12% note payable to Tavistock, due
April 1999 ...................... 1,934,229 467,198
Capitalized lease obligations with
interest at 9.6% (see note 9) .. 263,879 340,147
---------- ----------
$2,248,108 $ 807,345
Less: Current portion ............. 238,812 326,146
---------- ----------
$2,009,296 $ 481,199
========== ==========
</TABLE>
The Company's foreign owned subsidiaries, Vans Latinoamericana and Vans
Argentina, maintain a two year 12% note payable to Tavistock Holdings A.G., a
49.99% owner of such companies. The loan by Tavistock is in accordance with the
shareholders' agreement requiring Tavistock to provide operating capital as
needed in the form of a loan to Vans Latinoamericana and Vans Argentina.
Interest for the first six months was waived. The loan is secured by the assets
of Vans Latinoamericana and Vans Argentina.
32
<PAGE> 36
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
U.S. Federal $ 3,280,477 $ 4,021,966 $ 787,327
State ...... 945,271 1,165,505 180,332
Foreign .... 507,795 303,302 --
----------- ----------- -----------
4,733,543 5,490,773 967,659
----------- ----------- -----------
Deferred:
U.S. Federal (4,151,909) 393,413 878,624
State ...... (1,091,701) 111,994 252,574
----------- ----------- -----------
(5,243,610) 505,407 1,131,198
----------- ----------- -----------
$ (510,067) $ 5,996,180 $ 2,098,857
=========== =========== ===========
</TABLE>
Total income tax expense (benefit) differed from amounts computed by
applying the U.S. Federal statutory tax rate of 35% to earnings (loss) before
income taxes, as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)... $ (904,460) $ 5,857,234 $ 1,783,927
Compensation under stock option plans ...... (18,953) (94,936) (4,353)
Amortization of intangible assets .......... 318,311 284,247 264,263
State franchise taxes, net of Federal
benefit .................................. (77,823) 821,368 276,333
Benefit from nontaxable FSC income ......... -- -- (31,960)
Increase (decrease) in valuation
allowance ................................ -- 107,454 (350,000)
Other ...................................... 129,783 7,227 160,647
Tax effect of foreign operations ........... 43,075 (986,414) --
----------- ----------- -----------
$ (510,067) $ 5,996,180 $ 2,098,857
=========== =========== ===========
</TABLE>
The components of net deferred taxes as of May 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable ......................... $ -- $ 524,343
Inventories ................................. 787,868 600,584
Restructuring costs ......................... 5,513,553 1,205,432
Intangibles ................................. -- 67,537
Accrued expenses ............................ 654,283 541,753
Compensation under stock option
plans ..................................... 36,325 162,090
Tax credits and other ....................... 444,043 154,715
----------- -----------
carryforwards
7,436,072 3,256,454
Valuation allowance ......................... (3,256,454) (3,256,454)
----------- -----------
Total deferred tax assets ................... 4,179,618 --
----------- -----------
Deferred tax liabilities:
Accounts receivable ......................... 61,940 --
Property, plant and equipment ............... 196,710 1,285,538
Intangibles ................................. 113,691 225,556
Unremitted earnings of foreign subsidiaries ... 200,273 125,511
----------- -----------
Total deferred tax liabilities .............. 572,614 1,636,605
----------- -----------
Net deferred tax asset (liabilities) ........ $ 3,607,004 $(1,636,605)
=========== ===========
</TABLE>
The Internal Revenue Service ("IRS") is conducting an examination of the
Company's Federal income tax return for the year ended May 31, 1995. The Company
believes, but cannot assure, the ultimate resolution of the examination will not
result in a material impact on the Company's financial position, results of
operations or liquidity.
33
<PAGE> 37
The balance of the valuation allowance against deferred tax assets was
increased by $107,454 during the year ended May 31, 1997. 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 net deferred tax assets as of
May 31, 1998.
9. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is involved as both plaintiff and defendant in
various claims and legal actions arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's financial position, results of
operations or liquidity.
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, 1998 are as follows:
<TABLE>
<S> <C>
1999......................................... $ 163,874
2000......................................... 120,780
2001......................................... 2,456
----------
Total minimum obligations.................... 287,110
Less: amounts representing interest......... (23,231)
-----------
Present value of net minimum obligations..... 263,879
Less current portion......................... 128,734
----------
Long-term obligations at May 31, 1998 (see
note 7) ..................................... $ 135,145
==========
</TABLE>
The current portion of capital lease obligations is included in accounts
payable in the accompanying balance sheets at May 31, 1998 and 1997.
Operating Leases. Substantially all of the Company's retail stores, the
distribution facility and the Vista 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, 1998:
<TABLE>
<S> <C>
1999 ................. $ 5,229,862
2000 ................. 4,605,411
2001 ................. 3,962,973
2002 ................. 3,341,677
2003 ................. 2,589,131
Thereafter ........... 4,688,458
------------
24,417,512
Less: Sublease income (850,500)
------------
$ 23,567,012
============
</TABLE>
Sublease income represents expected future income from the sublease of the
Company's former City of Industry, California distribution facility to another
distribution company.
The Company's Orange, California facility is leased to two unrelated third
parties under separate lease agreements. The first party, CAPCO, leases
approximately 71,400 square feet under a gross lease for a period of 5 years
commencing November 1, 1996. Base rent of $20,000 is payable monthly. The second
party, Orange Engineering, leases approximately 76,000 square feet under a
triple net lease for a period of 5 years commencing April 1, 1997. Base rent of
$24,000 is payable monthly.
Future minimum lease payments receivable under noncancelable operating
leasing arrangements as of May 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 535,000
2000 558,520
2001 576,280
2002 369,400
----------
Net minimum future lease receipts $2,039,200
==========
</TABLE>
The Company also leases certain other equipment on a month-to-month basis.
Total rent expense incurred for the years ended May 31, 1998, 1997 and 1996
under all operating leases was approximately $4,897,409, $5,830,000 and
$5,068,000, respectively.
34
<PAGE> 38
Included in rent expense for each of the years ended May 31, 1998, 1997 and
1996 is $36,000 for the rent of a retail store from The Group, a California
general partnership whose partners are former shareholders of the Company's
predecessor. The Company also incurred rent expense of $17,900 for the three
years ended May 31, 1998, 1997 and 1996, respectively, for the lease of two
retail stores owned by members of the immediate family of one of the founders of
the Company's predecessor.
Deferred Compensation Plan. The Company has established a deferred
compensation plan for the benefit of Walter E. Schoenfeld, the Company's
Chairman and former Chief Executive Officer, and his spouse. Under the plan, the
Company has established a trust which will hold and disperse assets pursuant to
the terms of the plan. The Company will, for a period of five years, deposit
$200,000 per year with the trustee of the trust. The trust funds will be
invested by the trustee in accordance with instructions given by the Company.
Commencing in 2001 the trustee will pay Mr. Schoenfeld $100,000 per year from
the trust funds. Such payments will continue for the remainder of Mr.
Schoenfeld's life and then will be paid to his spouse, if she survives him.
During fiscal 1998 and fiscal 1997 $188,699 and $175,152, respectively, was
recorded as compensation expense. At May 31, 1998 and 1997 the balance in
deferred compensation was $363,851 and $175,152.
Employment, Management and Consulting Agreements. At May 31, 1998, the
Company had employment agreements with 14 officers that range from 1-3 years in
duration and provide for minimum compensation levels. The minimum salaries
payable subsequent to May 31, 1998 through the duration of these agreements is
$3,131,167. For the years ended May 31, 1998, 1997 and 1996, the Company
incurred approximately $2,352,940, $1,927,000 and $1,555,000, 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.
The Company has entered into a management agreement, as amended, with a
company owned by a former significant stockholder of the Company. The agreement
provides for a management fee aggregating $350,000 annually. Payments under this
agreement are made monthly. The Company incurred management fee expenses of
$350,000, $350,000 and $175,000 for the years ended May 31, 1998, 1997, and
1996, respectively. One-half of the Company's obligation under this agreement
for the year ended May 31, 1996 was waived. The agreement terminated on May 31,
1998.
License Agreements. The Company has commitments to pay minimum guaranteed
royalties under license agreements for certain athletes aggregating
approximately $491,828, at May 31, 1998. These agreements range from 1-3 years
in duration and are payable through July 31, 2001. Approximately $544,000,
$550,000 and $276,000 were paid under license agreements during the years ended
May 31, 1998, 1997 and 1996, respectively.
Foreign Currency Contracts. Global enters into foreign currency contracts
from time to time to hedge against currency fluctuations for purchase of U.S.
dollars. At May 31, 1998 and 1997 the amount in foreign currency contracts
approximated pound sterling600,000 and pound sterling546,000, respectively. At
May 31, 1998, the remaining time until the settlement dates ranged from 1 to 7
months. Vans currently owns 60% of Global.
Third Party Manufacturing. One manufacturer accounted for approximately 21%
of all third-party shoes manufactured for the Company during the year ended May
31, 1997, and no manufacturer accounted for more than 10% of third-party shoes
manufactured for the Company during fiscal 1998 and 1996.
10. STOCK OPTIONS
STOCK COMPENSATION PLANS
The Compensation Committee of the Board of Directors determined in April
1998 that the exercise prices of many stock options previously granted to
employees of the Company were at such high levels compared to existing market
value that the incentive and retention powers of the options had been negated to
a certain extent. Accordingly, on April 6, 1998, the Committee approved the
amendment of the exercise prices of all employee options to lower them to $9.25,
the closing sales price of the Common Stock on that date. All employees of the
Company, including each current executive officer, were eligible to receive such
option repricings. The repricing of the stock options has been reflected below
in the pro forma net earnings and per share calculation and the related
Black-Scholes calculation.
At May 31, 1998, the Company has three stock-based compensation plans, which
are described in greater detail below. The Company applies APB Opinion No. 25
("APB 25") and related Interpretations in accounting for its plans. Under the
provisions of APB 25, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's three
35
<PAGE> 39
stock-based compensation plans been determined consistent with SFAS Statement
No. 123, the Company's net earnings (loss) and earnings (loss) per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
MAY 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net earnings (loss).... $ (3,425) $ 10,207 $ 3,072
Pro forma earnings (loss) per share
Basic ........................... $ (0.26) $ 0.79 $ 0.31
Diluted ......................... $ (0.26) $ 0.74 $ 0.29
</TABLE>
The pro forma net earnings (loss) and per share amounts reflect only options
granted from June 1, 1995 through May 31, 1998. Therefore, the full impact of
calculating compensation, cost for stock options under SFAS No. 123 is not
reflected in the pro forma amounts presented above because compensation cost is
reflected over the options' vesting period of four to six years and compensation
cost for options granted prior to January 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in Fiscal 1998, 1997 and 1996, respectively:
expected volatility of 53% for all three years; risk-free interest rates ranging
from 5.43 to 6.06 for Fiscal 1998 from 5.82 to 6.62 for Fiscal 1997 and 5.46 to
7.42 for Fiscal 1996; assumed dividend yield of zero for all three years; and
expected lives of four and six years.
Vanstastic Plan. In July 1997, the Board of Directors of the Company adopted
the Vanstastic Employee Stock Option Plan (the "Vanstastic Plan"). Options
granted under the Vanstastic Plan may be either incentive stock options or
non-statutory options. The Company will grant all full-time employees, and
part-time employees working more than 1,400 hours per fiscal year stock options
annually based on a formula. A total of 400,000 shares are available under the
Vanstastic Plan and the Plan expires in July 2007. Stock options granted under
the plan have a maximum term of ten years and vest over a five year period. 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. As of
May 31, 1998 no options had been exercised or were exercisable under the
Vanstastic Plan.
1991 Plan. Under the 1991 Long-Term Incentive Plan the Company may grant to
key employees incentive stock options, and to directors and consultants
non-qualified stock options to purchase up to 2,000,000 shares of the Company's
common stock until November 2001. Stock options granted under the plan are
exercisable in varying amounts over the ten year 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 five 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.
A summary of the status of the Company's Vanstastic Plan as of May 31, 1998
and its 1991 Long-Term Incentive Plan as of May 31, 1998, 1997 and 1996 and
changes during the years then ended are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
FIXED OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
- ----------------------------- ----- -------------- ------ -------------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of 1,185 $8.88 1,212 $6.16 1,334 $6.26
year
Granted...................... 243 10.03 465 12.38 426 7.11
Exercised.................... (178) 5.68 (324) 5.90 (271) 5.78
Forfeited.................... (144) 8.76 (168) 5.25 (287) 8.01
----- ----- -----
Outstanding at end of year... 1,106 8.49 1,185 8.88 1,212 6.16
Options exercisable at year-end 594 424 366
Weighted average fair value of $9.53 $6.23 $3.61
options granted during the year
</TABLE>
The following table summarizes information about fixed stock options
outstanding at May 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------- ------------------------------------
OPTIONS WEIGHTED AVG. OPTIONS
RANGE OF EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVG. EXERCISABLE AT WEIGHTED AVG.
PRICES MAY 31, 1998 CONTRACTUAL LIFE EXERCISE PRICE MAY 31, 1998 EXERCISE PRICE
------------------ -------------- ------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$6.00 to $11.25 167,767 4.88 $ 6.91 167,767 $ 6.92
$4.50 to $6.88 172,655 6.68 $ 5.21 165,055 $ 5.21
$4.25 to $12.75 164,095 7.42 $ 8.01 127,968 $ 7.86
$11.00 to $19.12 411,167 8.56 $ 9.89 134,389 $12.53
$8.53 to $17.00 190,238 9.39 $10.22 -- --
---------- -------
$4.25 to $19.12 1,105,917 7.68 $ 8.49 594,179 $ 7.91
========== =======
</TABLE>
36
<PAGE> 40
Non-Qualified Plans. Under separate non-qualified stock option agreements,
the Company has granted options to purchase 853,176 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, 1998, 801,036 options had been exercised, and 57,140 options were
exercisable under these agreements.
In addition to the above 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. During the year ended May 31, 1998, 500 shares
had been sold and at May 31, 1998, stock awards representing 13,273 shares
remained restricted.
11. 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. In December 1996, the Board of Directors
unanimously agreed to extend the Rights Plan to February 22, 2007, and change
the price of each Right to $65.00.
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 of 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, 1998 (the "Series A
Preferred Stock"), at a price of $65.00 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, 2007 (the "Scheduled Expiration Date"), unless prior
thereto the Distribution Date occurs, 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
first ratified and approved by the Company's stockholders at the 1994 annual
meeting of stockholders and was re-ratified and re-approved by the stockholders
at the 1997 annual meeting of stockholders.
12. EXPORT SALES
Sales to foreign unaffiliated customers, by major country, were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Japan............. $ 13,798,229 $ 11,704,000 $ 6,188,000
France............ 5,921,611 5,154,000 2,895,000
United Kingdom.... 6,863,251 3,957,000 2,725,000
Germany........... 3,956,612 5,446,000 6,706,000
Canada............ 1,585,036 1,941,000 1,979,000
Panama............ 1,817,800 1,397,000 964,000
Mexico............ 2,939,781 385,000 394,000
Other............. 13,130,076 14,310,000 4,494,000
------------ ------------ ------------
$ 50,012,396 $ 44,294,000 $ 26,345,000
============ ============ ============
</TABLE>
37
<PAGE> 41
13. SUBSEQUENT EVENTS
On July 21, 1998, the Company acquired all of the outstanding capital stock
of Switch Manufacturing, a California corporation ("Switch"), through the merger
(the "Merger") of Switch with and into a wholly-owned subsidiary of the Company.
The Merger was accounted for under the purchase method of accounting and,
accordingly, the purchase price will be allocated to the net assets acquired
based on their values. Switch is the manufacturer of the Autolock(TM) step-in
boot binding system, one of the leading step-in snowboard boot binding systems
in the world. The Merger consideration paid by the Company consisted of: (i)
133,292 shares of the Company's Common Stock; (ii) $2,000,000 principal amount
of unsecured, non-interest bearing promissory notes due and payable on July 20,
2001; and (iii) $12,000,000 principal amount of unsecured, non-interest bearing
promissory notes which are subject to potential downward adjustment based on the
performance of Switch during the fiscal year ending May 31, 2001, and are also
due and payable on July 20, 2001. The results of Switch subsequent to the
acquisition will be consolidated in the Company's financial statements.
38
<PAGE> 42
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each year in the three-year period ended May
31, 1998, in conformity with generally accepted accounting principles.
[SIGNATURE]
KPMG Peat Marwick LLP
Orange County, California
July 20, 1998
39
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the captions "Proposal 1 - Election of Directors," Information Relating to
Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" on pages 3, 7, and 16 of the Proxy Statement for the Company's 1998
Annual Meeting of Stockholders, which will be filed with the Commission within
120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the caption "Executive Compensation and Other Information" on page 9 of the
Proxy Statement for the Company's 1998 Annual Meeting of Stockholders, which
will be filed with the Commission within 120 days after the end of the fiscal
year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
the caption "Security Ownership of Management and Certain Beneficial Owners" on
page 2 of the Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders, which will be filed with the Commission within 120 days after the
end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the disclosure under the caption "Certain Transactions" on page 16 of the Proxy
Statement for the Company's 1998 Annual Meeting of Stockholders, which will be
filed with the Commission within 120 days after the end of the fiscal year
covered by this Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Company's Financial Statements, and the Notes thereto, listed in the
Index to Financial Information located at page F-1 of this Report, are set forth
in Item 8 of this Report.
(2) Financial Statement Schedules
The Financial Statement Schedule and the report of independent auditors
thereon are set forth at pages F-2 and F-3 of this Report.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(8) 2.1 Agreement of Merger between the Registrant and Van Doren
Rubber, dated July 31, 1991
(2) 2.1 Certificate of Ownership and Merger (Delaware) of Van Doren
Rubber into the Registrant, dated August 19, 1991
(2) 2.2 Certificate of Ownership (California) of the Registrant and Van
Doren Rubber, dated August 19, 1991
</TABLE>
40
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(26) 2.3 Agreement and Plan of Merger, dated July 10, 1998, between the
Registrant
and Switch Manufacturing
(2) 3.1 Restated Certificate of Incorporation of the Registrant, dated
August 30, 1991
(2) 3.1.1 Certificate of Retirement of Class A and Class B Preferred
Stock
of the Registrant, dated August 29, 1991
(2) 3.2 Restated By-laws of the Registrant
(6) 3.2.1 Amendment No. 1 of Restated By-laws of the Registrant
(6) 3.2.2 Amendment No. 2 of Restated By-laws of the Registrant
(8) 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
(8) 4.2 Specimen Stock Certificate
(7) 4.3 Rights Agreement, dated as of February 22, 1994, by and between
the Registrant and Chemical Trust Company of California, as
(21) 4.3.1 Amendment No. 1 to Rights Agreement, dated as of December 18,
1996, by and between the Registrant and ChaseMellon
Shareholder Services, successor to Chemical Trust Company of California
as Rights Agent
(6) 10.1 Management Services Agreement, dated as of February 16, 1988,
by and between Van Doren Rubber Company, Inc., the Registrant's
predecessor ("Van Doren Rubber"), and McCown De Leeuw & Co.
(6) 10.1.1 Amendment to Management Services Agreement, dated as of July 11, 1991, by
and between Van Doren Rubber and MDC Management Company
("MDC Management Agreement")
(11) 10.1.2 Amendment No. 2 to the MDC Management Agreement
(6) 10.2 MDV Holdings, Inc. (now known as Vans, Inc.) Incentive Stock
Option Plan
(6) 10.2.1 Amendment No. 1 to MDV Holdings, Inc. Incentive Stock Option
Plan dated June 28, 1991
(2) 10.3 Standard Industrial Lease-Net, dated as of May 27, 1992,
by and between the Registrant and Golden West Vista
Associates (the "Vista Lease")
(9) 10.3.1 Amendment No. 1 to the Vista Lease
(9) 10.3.2 Letter Agreement modifying Amendment No. 1 to the Vista Lease
(25) 10.4 Employment Agreement, dated as of March 10, 1997, by and
between the Registrant and Craig E. Gosselin, superseding his
Employment Agreement, dated July 1, 1992
(6) 10.5 1991 Long-Term Incentive Plan
(2) 10.5.1 Amendment No. 1 to 1991 Long-Term Incentive Plan
(2) 10.5.2 Amendment No. 2 to 1991 Long-Term Incentive Plan
(9) 10.5.3 Amendment No. 3 to the 1991 Long-Term Incentive Plan
(11) 10.5.4 Amendment No. 4 to the 1991 Long-Term Incentive Plan
(11) 10.5.5 Amendment No. 5 to the 1991 Long-Term Incentive Plan
(18) 10.5.6 Amendment No. 6 to the 1991 Long-Term Incentive Plan
(6) 10.6 Software License Agreement, dated March 31, 1993, by and
between the Registrant and J.D. Edwards Software, Inc., and Addenda
thereto
</TABLE>
41
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(6) 10.7 License Agreement for Software Products, dated July 29, 1993,
by and between the Island Pacific Systems Corporation and the
Registrant
(6) 10.8 Software License Agreement, dated as of May 27, 1993, by and
between the Registrant and STR, Inc.
(9) 10.9 Incentive Stock Option Agreement, dated as of September 22,
1993, by and between the Registrant and Walter E. Schoenfeld,
covering 30,000 shares
(9) 10.10 Incentive Stock Option Agreement, dated as of September 22,
1993, by and between the Registrant and Walter E. Schoenfeld,
covering 100,000 shares
(10) 10.11 Agency Agreement, dated as of June 15, 1994, by and between the
Registrant and Sung Won International (the "Sung Won Agency
Agreement")
(1) 10.11.1 First Amendment to the Sung Won Agency Agreement, dated
October 24, 1996
(25) 10.12 Employment Agreement, dated as of March 10, 1997, by and
between the Registrant and Sari K. Ratsula, superseding her Employment
Agreement, dated June 15, 1994
(25) 10.13 Employment Agreement, dated as of March 10, 1997, by and
between the Registrant and Steven J. Van Doren, superseding his
Employment Agreement, dated June 15, 1994
(24) 10.14 Amended and Restated Loan and Security Agreement, dated October 31,
1997, by and between the Company and Bank of the West (the "Bank of the
West Loan Agreement")
(23) 10.14.1 First Amendment to the Bank of the West Loan Agreement, dated
February 3, 1998
(1) 10.14.2 Second Amendment No. 2 to the Bank of the West Loan Agreement,
dated as of May 31, 1998
(1) 10.14.3 Third Amendment to the Bank of the West Loan Agreement, dated
as of May 31, 1998
(11) 10.15 Employment Agreement, dated as of May 25, 1995, by and between
the Registrant and Gary L. Dunlap
(12) 10.16 Employment Agreement, dated as of September 1, 1995, by and
between the Registrant and Gary H. Schoenfeld
(25) 10.16.1 Amendment No. 1 to the Employment Agreement of Gary H.
Schoenfeld
(12) 10.17 Incentive Stock Option, dated as of September 1, 1995, by and
between the Registrant and Gary H. Schoenfeld
(13) 10.18 Employment Agreement dated as of December 1, 1995, by and
between Walter E. Schoenfeld and the Registrant
(19) 10.18.1 Amendment No. 1 to the Employment Agreement of Walter E.
Schoenfeld
(1) 10.18.2 Amendment No. 2 to the Employment Agreement of Walter E.
Schoenfeld, dated May 18, 1998
(13) 10.19 Incentive Stock Option Agreement, dated as of May 11, 1995, by
and between Walter E. Schoenfeld and the Registrant
(13) 10.20 Amendment to Incentive Stock Option of Walter E. Schoenfeld,
dated as of January 8, 1996
(16) 10.21 Employment Agreement, dated as of February 14, 1996, by and
between Kyle B. Wescoat and the Registrant
(19) 10.22 Employment Agreement, dated as of January 22, 1996, by and
between Robert H. Camarena and the Registrant
(16) 10.23 Employment Agreement, dated July 1, 1996, by and between the
Registrant and Charles C. Kupfer
</TABLE>
42
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(16) 10.24 Standard Industrial/Commercial Single Tenant Lease - Gross,
dated August 15, 1996, by and between the Registrant and CAPCO, Inc.
(16) 10.25 Standard Industrial/Commercial Single Tenant Lease - Net, dated
July 22, 1996, by and between the Registrant and Orange
Engineering & Machine, Inc.
(16) 10.26 Trust Under Vans, Inc. Deferred Compensation Plan, dated as of
June 3, 1996
(16) 10.26.1 Amendment to Trust Under Vans, Inc. Deferred Compensation Plan
(16) 10.27 Deferred Compensation Agreement for Walter Schoenfeld, dated as
of June 1, 1996
(25) 10.28 Standard Industrial Sublease, dated March 25, 1997, by and between the
Registrant and Frank Zamarripa Inc.
(17) 10.29 Lease between Wohl Venture One, LLC, a Delaware limited
liability company, and the Registrant
(17) 10.30 Construction Agreement between Wohl Venture One, LLC, a
Delaware limited liability company, and the Registrant
(18) 10.31 Employment Agreement, dated December 4, 1996, by and between
the Registrant and Jay E. Wilson
(18) 10.32 Employment Agreement, dated December 17, 1996, by and between
the Registrant and Casey G. Waid
(19) 10.33 Tour Title Sponsorship Agreement, dated January 1, 1997, by
and between the Registrant and C.C.R.L., LLC, a California
limited liability company
(1) 10.33.1 Tour Title Sponsorship Agreement, dated as of January 1, 1998, by and
between the Registrant and C.C.R.L., LLC, a California limited
liability company
(19) 10.34 Amended and Restated Operating Agreement, dated January 1,
1997, by and among the Registrant, Gendler, Codikow & Carroll,
Kevin Lyman Production Services and Creative Artists Agency
(the "Operating Agreement")
(19) 10.35 Side Letter to the Operating Agreement
(19) 10.36 Employment Agreement, dated February 1, 1997, by and between
the Registrant and John Walker
(20) 10.37 Share Sale and Purchase Option Agreement, dated November 20, 1996, by
and among the Registrant and the shareholders of Global Accessories
Limited
(25) 10.38 Employment Agreement, dated July 22, 1997, by and between the
Registrant and Ralph Serna
(25) 10.39 Investor Rights Agreement, dated July 8, 1997, by and between
the Registrant and The Zone Network, Inc.
(25) 10.40 Purchase and Sale Agreement, dated August 18, 1997, by and between the
Registrant and Triple Crown, Inc.
(25) 10.41 Letter of Intent, dated August 4, 1997, by and between the
Registrant and Board Wild LLC
(1) 10.41.1 Member Admission Agreement, dated April 1, 1998, re Board
Wild LLC
(23) 10.42 Employment Agreement, dated as of February 3, 1998, by and
between the Registrant and Michael C. Jonte
(24) 10.43 Employment Agreement, dated as of October 29, 1997, by and
between the Registrant and Scott A. Brabson
(1) 22 List of Subsidiaries
23.1 Report on Schedule and Consent of Independent Auditors is set
forth at page F-2 of this report
(1) 27 Financial Data Schedule
</TABLE>
43
<PAGE> 47
- ----------
(1) Filed herewith.
(2) 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
(3) Filed as an exhibit to Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1992, and incorporated
herein by this reference
(4) [intentionally omitted]
(5) [intentionally omitted]
(6) 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
(7) Filed as an exhibit to the Registrant's Form 8-A Registration Statement
(SEC File No. 0-19402), and incorporated herein by this reference
(8) Filed as an exhibit to the Registrant's Form 8-K, dated February 15,
1994, and incorporated herein by this reference
(9) Filed as an exhibit to the Registrant's Form 10-K for the year ended
May 31, 1994, and incorporated herein by this reference
(10) Filed as an exhibit to Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1994, and incorporated
herein by this reference
(11) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1995
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 25, 1995, and incorporated herein by this
reference
(13) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 24, 1996, and incorporated herein by this
reference
(14) [intentionally omitted]
(15) [intentionally omitted]
(16) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1996, and incorporated herein by this reference.
(17) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended August 31, 1996, and incorporated herein by this
reference.
(18) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 30, 1996, and incorporated herein by this
reference.
(19) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended March 1, 1997, and incorporated herein by this
reference.
(20) Filed as an exhibit to the Registrant's Form 8-K, dated November 20,
1996, and incorporated herein by this reference.
(21) Filed as an exhibit to the Registrant's Form 8-K, dated December 17,
1996, and incorporated herein by this reference.
(22) Filed as an exhibit to Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1996, and incorporated
herein by this reference.
(23) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 28, 1998.
(24) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 29, 1997.
(25) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1997.
(26) Filed as an exhibit to the Registrant's Form 8-K, dated July 21, 1998.
44
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VANS, INC.
(Registrant)
/s/ Gary H. Schoenfeld
--------------------------------------
By: Gary H. Schoenfeld
Date: August 31, 1998 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
on the dates indicated.
<TABLE>
<S> <C>
/s/ Gary H. Schoenfeld Date: August 31, 1998
- --------------------------------------------------
Gary H. Schoenfeld
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Walter E. Schoenfeld Date: August 31, 1998
- --------------------------------------------------
Walter E. Schoenfeld
Chairman of the Board and Director
/s/ Kyle B. Wescoat Date: August 31, 1998
- --------------------------------------------------
Kyle B. Wescoat
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ George E. McCown Date: August 31, 1998
- --------------------------------------------------
George E. McCown
Director
/s/ Philip H. Schaff, Jr. Date: August 31, 1998
- --------------------------------------------------
Philip H. Schaff, Jr.
Director
/s/ Wilbur J. Fix Date: August 31, 1998
- --------------------------------------------------
Wilbur J. Fix
Director
/s/ James R. Sulat Date: August 31, 1998
- --------------------------------------------------
James R. Sulat
Director
/s/ Kathleen M. Gardarian Date: August 31, 1998
- --------------------------------------------------
Kathleen M. Gardarian
Director
/s/ Lisa M. Douglas Date: August 31, 1998
- --------------------------------------------------
Lisa M. Douglas
Director
/s/ Gerald Grinstein Date: August 31, 1998
- --------------------------------------------------
Gerald Grinstein
Director
</TABLE>
45
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
NO. EXHIBIT DESCRIPTION PAGE
----------- ------------------- ----
<S> <C> <C>
(8) 2.1 Agreement of Merger between the Registrant and Van Doren
Rubber, dated July 31, 1991
(2) 2.1 Certificate of Ownership and Merger (Delaware) of Van Doren
Rubber into the Registrant, dated August 19, 1991
(2) 2.2 Certificate of Ownership (California) of the Registrant and Van
Doren Rubber, dated August 19, 1991
(26) 2.3 Agreement and Plan of Merger, dated July 10, 1998, between the
Registrant and Switch Manufacturing
(2) 3.1 Restated Certificate of Incorporation of the Registrant, dated
August 30, 1991
(2) 3.1.1 Certificate of Retirement of Class A and Class B Preferred
Stock of the Registrant, dated August 29, 1991
(2) 3.2 Restated By-laws of the Registrant
(6) 3.2.1 Amendment No. 1 of Restated By-laws of the Registrant
(6) 3.2.2 Amendment No. 2 of Restated By-laws of the Registrant
(8) 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
(8) 4.2 Specimen Stock Certificate
(7) 4.3 Rights Agreement, dated as of February 22, 1994, by and between
the Registrant and Chemical Trust Company of California, as
(21) 4.3.1 Amendment No. 1 to Rights Agreement, dated as of December 18,
1996, by and between the Registrant and ChaseMellon
Shareholder Services, successor to Chemical Trust Company of California
as Rights Agent
(6) 10.1 Management Services Agreement, dated as of February 16, 1988,
by and between Van Doren Rubber Company, Inc., the Registrant's
predecessor ("Van Doren Rubber"), and McCown De Leeuw & Co.
(6) 10.1.1 Amendment to Management Services Agreement, dated as of July 11, 1991, by
and between Van Doren Rubber and MDC Management Company
("MDC Management Agreement")
(11) 10.1.2 Amendment No. 2 to the MDC Management Agreement
(6) 10.2 MDV Holdings, Inc. (now known as Vans, Inc.) Incentive Stock
Option Plan
(6) 10.2.1 Amendment No. 1 to MDV Holdings, Inc. Incentive Stock Option
Plan dated June 28, 1991
(2) 10.3 Standard Industrial Lease-Net, dated as of May 27, 1992,
by and between the Registrant and Golden West Vista
Associates (the "Vista Lease")
(9) 10.3.1 Amendment No. 1 to the Vista Lease
(9) 10.3.2 Letter Agreement modifying Amendment No. 1 to the Vista Lease
(25) 10.4 Employment Agreement, dated as of March 10, 1997, by and
between the Registrant and Craig E. Gosselin, superseding his
Employment Agreement, dated July 1, 1992
(6) 10.5 1991 Long-Term Incentive Plan
(2) 10.5.1 Amendment No. 1 to 1991 Long-Term Incentive Plan
</TABLE>
E-1
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT NO.
NO. EXHIBIT DESCRIPTION PAGE
----------- ------------------- ----
<S> <C> <C>
(2) 10.5.2 Amendment No. 2 to 1991 Long-Term Incentive Plan
(9) 10.5.3 Amendment No. 3 to the 1991 Long-Term Incentive Plan
(11) 10.5.4 Amendment No. 4 to the 1991 Long-Term Incentive Plan
(11) 10.5.5 Amendment No. 5 to the 1991 Long-Term Incentive Plan
(18) 10.5.6 Amendment No. 6 to the 1991 Long-Term Incentive Plan
(6) 10.6 Software License Agreement, dated March 31, 1993, by and
between the Registrant and J.D. Edwards Software, Inc., and Addenda
thereto
(6) 10.7 License Agreement for Software Products, dated July 29, 1993,
by and between the Island Pacific Systems Corporation and the
Registrant
(6) 10.8 Software License Agreement, dated as of May 27, 1993, by and
between the Registrant and STR, Inc.
(9) 10.9 Incentive Stock Option Agreement, dated as of September 22,
1993, by and between the Registrant and Walter E. Schoenfeld,
covering 30,000 shares
(9) 10.10 Incentive Stock Option Agreement, dated as of September 22,
1993, by and between the Registrant and Walter E. Schoenfeld,
covering 100,000 shares
(10) 10.11 Agency Agreement, dated as of June 15, 1994, by and between the
Registrant and Sung Won International (the "Sung Won Agency
Agreement")
(1) 10.11.1 First Amendment to the Sung Won Agency Agreement, dated
October 24, 1996
(25) 10.12 Employment Agreement, dated as of March 10, 1997, by and
between the Registrant and Sari K. Ratsula, superseding her Employment
Agreement, dated June 15, 1994
(25) 10.13 Employment Agreement, dated as of March 10, 1997, by and
between the Registrant and Steven J. Van Doren, superseding his
Employment Agreement, dated June 15, 1994
(24) 10.14 Amended and Restated Loan and Security Agreement, dated October 31,
1997, by and between the Company and Bank of the West (the "Bank of the
West Loan Agreement")
(23) 10.14.1 First Amendment to the Bank of the West Loan Agreement, dated
February 3, 1998
(1) 10.14.2 Second Amendment No. 2 to the Bank of the West Loan Agreement,
dated as of May 31, 1998
(1) 10.14.3 Third Amendment to the Bank of the West Loan Agreement, dated
as of May 31, 1998
(11) 10.15 Employment Agreement, dated as of May 25, 1995, by and between
the Registrant and Gary L. Dunlap
(12) 10.16 Employment Agreement, dated as of September 1, 1995, by and
between the Registrant and Gary H. Schoenfeld
(25) 10.16.1 Amendment No. 1 to the Employment Agreement of Gary H.
Schoenfeld
(12) 10.17 Incentive Stock Option, dated as of September 1, 1995, by and
between the Registrant and Gary H. Schoenfeld
(13) 10.18 Employment Agreement dated as of December 1, 1995, by and
between Walter E. Schoenfeld and the Registrant
(19) 10.18.1 Amendment No. 1 to the Employment Agreement of Walter E.
Schoenfeld
(1) 10.18.2 Amendment No. 2 to the Employment Agreement of Walter E.
Schoenfeld, dated May 18, 1998
</TABLE>
E-2
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT NO.
NO. EXHIBIT DESCRIPTION PAGE
----------- ------------------- ----
<S> <C> <C>
(13) 10.19 Incentive Stock Option Agreement, dated as of May 11, 1995, by
and between Walter E. Schoenfeld and the Registrant
(13) 10.20 Amendment to Incentive Stock Option of Walter E. Schoenfeld,
dated as of January 8, 1996
(16) 10.21 Employment Agreement, dated as of February 14, 1996, by and
between Kyle B. Wescoat and the Registrant
(19) 10.22 Employment Agreement, dated as of January 22, 1996, by and
between Robert H. Camarena and the Registrant
(16) 10.23 Employment Agreement, dated July 1, 1996, by and between the
Registrant and Charles C. Kupfer
(16) 10.24 Standard Industrial/Commercial Single Tenant Lease - Gross,
dated August 15, 1996, by and between the Registrant and CAPCO, Inc.
(16) 10.25 Standard Industrial/Commercial Single Tenant Lease - Net, dated
July 22, 1996, by and between the Registrant and Orange
Engineering & Machine, Inc.
(16) 10.26 Trust Under Vans, Inc. Deferred Compensation Plan, dated as of
June 3, 1996
(16) 10.26.1 Amendment to Trust Under Vans, Inc. Deferred Compensation Plan
(16) 10.27 Deferred Compensation Agreement for Walter Schoenfeld, dated as
of June 1, 1996
(25) 10.28 Standard Industrial Sublease, dated March 25, 1997, by and between the
Registrant and Frank Zamarripa Inc.
(17) 10.29 Lease between Wohl Venture One, LLC, a Delaware limited
liability company, and the Registrant
(17) 10.30 Construction Agreement between Wohl Venture One, LLC, a
Delaware limited liability company, and the Registrant
(18) 10.31 Employment Agreement, dated December 4, 1996, by and between
the Registrant and Jay E. Wilson
(18) 10.32 Employment Agreement, dated December 17, 1996, by and between
the Registrant and Casey G. Waid
(19) 10.33 Tour Title Sponsorship Agreement, dated January 1, 1997, by
and between the Registrant and C.C.R.L., LLC, a California
limited liability company
(1) 10.33.1 Tour Title Sponsorship Agreement, dated as of January 1, 1998, by and
between the Registrant and C.C.R.L., LLC, a California limited
liability company
(19) 10.34 Amended and Restated Operating Agreement, dated January 1,
1997, by and among the Registrant, Gendler, Codikow & Carroll,
Kevin Lyman Production Services and Creative Artists Agency
(the "Operating Agreement")
(19) 10.35 Side Letter to the Operating Agreement
(19) 10.36 Employment Agreement, dated February 1, 1997, by and between
the Registrant and John Walker
(20) 10.37 Share Sale and Purchase Option Agreement, dated November 20, 1996, by
and among the Registrant and the shareholders of Global Accessories
Limited
(25) 10.38 Employment Agreement, dated July 22, 1997, by and between the
Registrant and Ralph Serna
(25) 10.39 Investor Rights Agreement, dated July 8, 1997, by and between
the Registrant and The Zone Network, Inc.
(25) 10.40 Purchase and Sale Agreement, dated August 18, 1997, by and between the
Registrant and Triple Crown, Inc.
</TABLE>
E-3
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NO.
NO. EXHIBIT DESCRIPTION PAGE
----------- ------------------- ----
<S> <C> <C>
(25) 10.41 Letter of Intent, dated August 4, 1997, by and between the
Registrant and Board Wild LLC
(1) 10.41.1 Member Admission Agreement, dated April 1, 1998, re Board
Wild LLC
(23) 10.42 Employment Agreement, dated as of February 3, 1998, by and
between the Registrant and Michael C. Jonte
(24) 10.43 Employment Agreement, dated as of October 29, 1997, by and
between the Registrant and Scott A. Brabson
(1) 22 List of Subsidiaries
23.1 Report on Schedule and Consent of Independent Auditors is set
forth at page F-2 of this report
(1) 27 Financial Data Schedule
</TABLE>
- ----------
(1) Filed herewith.
(2) 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
(3) Filed as an exhibit to Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1992, and incorporated
herein by this reference
(4) [intentionally omitted]
(5) [intentionally omitted]
(6) 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
(7) Filed as an exhibit to the Registrant's Form 8-A Registration Statement
(SEC File No. 0-19402), and incorporated herein by this reference
(8) Filed as an exhibit to the Registrant's Form 8-K, dated February 15,
1994, and incorporated herein by this reference
(9) Filed as an exhibit to the Registrant's Form 10-K for the year ended
May 31, 1994, and incorporated herein by this reference
(10) Filed as an exhibit to Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1994, and incorporated
herein by this reference
(11) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1995
(12) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 25, 1995, and incorporated herein by this
reference
(13) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 24, 1996, and incorporated herein by this
reference
(14) [intentionally omitted]
(15) [intentionally omitted]
(16) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1996, and incorporated herein by this reference.
(17) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended August 31, 1996, and incorporated herein by this
reference.
(18) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 30, 1996, and incorporated herein by this
reference.
(19) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended March 1, 1997, and incorporated herein by this
reference.
(20) Filed as an exhibit to the Registrant's Form 8-K, dated November 20,
1996, and incorporated herein by this reference.
(21) Filed as an exhibit to the Registrant's Form 8-K, dated December 17,
1996, and incorporated herein by this reference.
(22) Filed as an exhibit to Amendment No. 1 to the Registrant's Annual
Report on Form 10-K for the year ended May 31, 1996, and incorporated
herein by this reference.
(23) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 28, 1998.
(24) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 29, 1997.
(25) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1997.
(26) Filed as an exhibit to the Registrant's Form 8-K, dated July 21, 1998.
E-4
<PAGE> 53
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page
-----
<S> <C>
Consolidated Balance Sheets as of May 31, 1998 and
1997 24
Consolidated Statements of Operations 25
for the Years Ended May 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity 26
for the Years Ended May 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows 27
for the Years Ended May 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 28
Independent Auditors' Report 39
The Report on Schedule and Consent of F-2
Independent Auditors
Schedule II - Valuation and Qualifying Accounts and F-3
Reserves
</TABLE>
All other schedules are omitted because they are not required, are not
applicable, or the information is included the Consolidated Financial Statements
or notes thereto.
F-1
<PAGE> 54
THE REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Vans, Inc.:
The audits referred to in our report dated July 20, 1998, included the
related financial statement schedule as of May 31, 1998, and for each of the
years in the three-year period ended May 31, 1998, incorporated by reference in
the registration statements on Forms S-3 and S-8 of Vans, Inc. 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 incorporation by reference in the registration statements on
Forms S-3 and S-8 of Vans, Inc. of our report dated July 20, 1998, relating to
the consolidated balance sheets of Vans, Inc. and subsidiaries as of May 31,
1998 and 1997, 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, 1998, and the related schedule, which report appears in the
May 31, 1998 annual report on Form 10-K of Vans, Inc.
KPMG Peat Marwick LLP
Orange County, California
August 31, 1998
F-2
<PAGE> 55
SCHEDULE II
Valuation and Qualifying Accounts and Reserves
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGE TO COST BALANCE AT
PERIOD AND EXPENSES OTHER END OF PERIOD
------------ -------------- ----------- ----------
<S> <C> <C> <C> <C>
Year end May 31, 1996:
Allowance for
doubtful accounts ......................... $ 812,631 $ 762,295 $ (427,582)(a) $1,147,344
Lower of cost or market
valuation allowance ....................... $ 600,000 $ 0 $ 0 $ 600,000
Year end May 31, 1997:
Allowance for doubtful accounts ........... $1,147,344 $ 710,611 $ (458,366)(a)(b) $1,399,589
Lower of cost or market valuation allowance $ 600,000 $ 0 $ 144,686(b) $ 744,686
Year end May 31, 1998:
Allowance for doubtful accounts ........... $1,399,589 $ 697,926 $ (979,820)(a) $1,117,695
Lower of cost or market valuation allowance $ 744,686 $ 0 $ (107,140) $ 637,546
</TABLE>
- --------------------
(a) Charge-off of uncollectible accounts receivable.
(b) Represents reserves established in connection with the acquisition of
consolidated subsidiaries.
F-3
<PAGE> 1
EXHIBIT 10.11.1
FIRST AMENDMENT TO
AGENCY AGREEMENT
THIS FIRST AMENDMENT TO AGENCY AGREEMENT ("Amendment" herein) is entered
into as of October 24, 1996 by and between VANS, INC., a Delaware corporation
("Vans"), and SUNG WON INTERNATIONAL CO. LTD. ("Sung Won"), with respect to the
following facts:
A. Vans and Sung Won previously entered into that certain Agency
Agreement dated as of November 1, 1994 (the "Agreement"); and
B. Vans and Sung Won wish to amend the Agreement in certain respects.
NOW, THEREFORE, the parties hereto agree as follows:
1. Term. Section 3 of the Agreement is hereby amended to extend the term
of the Agreement to October 31, 1998.
2. Exclusivity. Section 1.2 of the Agreement is hereby amended to make
Sung Won a non-exclusive agent of Vans in the Republic of South Korea.
3. Commissions. Sung Won has accepted a check in the amount of $250,000
in full and final payment of all accrued but unpaid commissions and sample
charges due and owing to it pursuant to the Agreement through October 31, 1996,
and hereby releases Vans from any other claim for compensation through October
31, 1996.
4. Other Terms. Except as expressly modified herein all of the terms and
conditions of the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of October 24, 1996.
VANS: SUNG WON:
Vans, Inc. Sung Won International Co. Ltd.
By:/s/ Walter E. Schoenfeld By:/s/ N.K. Sung
------------------------------- -------------------------------
Walter E. Schoenfeld N.K. Sung
Chairman and President
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.14.2
SECOND AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY
AGREEMENT (the "Amendment"), is made as of May 31, 1998, by and between VANS,
INC. ("Borrower"), and BANK OF THE WEST ("Bank"), and is entered into with
respect to the Amended and Restated Loan and Security Agreement, dated as of
October 31, 1997, by and between Borrower and Bank, as amended by the First
Amendment to Amended and Restated Loan and Security Agreement, dated as of
February 3, 1998, by and between Borrower and Bank (the "Agreement").
RECITALS
WHEREAS, Borrower has requested that Bank amend the definition of
Consolidated Net Income to exclude from the computation thereof with respect to
any fiscal period ending on May 31, 1998, all non-recurring restructuring
charges incurred by Borrower during such fiscal period; and
WHEREAS, Bank is willing to agree to the request, on the terms set forth
herein, provided that Borrower waives all causes of action that it may have
against Bank, as provided herein;
NOW, THEREFORE, IT IS AGREED THAT:
1. Definitions. Unless otherwise indicated, words and terms which
are defined in the Agreement shall have the same meaning where used herein.
2. Amendment. The definition of "Consolidated Net Income" in
Section 1.1 of the Agreement is amended to read as follows:
"Consolidated Net Income" means, for any period, the net income (or
deficit) of Borrower and the Subsidiaries for such period (taken as a cumulative
whole) after deducting, without duplication, operating expenses, provisions for
all taxes and reserves (including reserves for deferred income taxes) and all
other proper deductions, all determined in accordance with GAAP on a
consolidated basis, after eliminating all inter-company items in accordance with
GAAP and after deducting portions of income properly attributable to outside
minority interests, if any, in the stock and surplus of any Subsidiary;
provided, however, that there shall be excluded from Consolidated Net Income:
(i) the income (or deficit) of any Person, other than a Subsidiary, in which
Borrower or any Subsidiary has an ownership interest, except to the extent that
any such income has been actually received by Borrower or such Subsidiary in the
form of cash dividends or similar distributions, (ii) any aggregate net gain or
losses during such period arising from the sale, exchange or other disposition
of capital assets (such term to include all fixed assets, whether
1
<PAGE> 2
tangible or intangible, and all securities), (iii) any portion of the net income
of a Subsidiary which is unavailable (whether by law, agreement or otherwise)
for the payment of dividends to Borrower or another Subsidiary, (iv) the income
(or deficit) of any other Person accrued prior to the date it becomes a
Subsidiary or is merged or consolidated with a Subsidiary, (v) any write up
(less any non-cash write down) of any asset, other than Inventory adjustments
made in accordance with GAAP, (vi) any net gain from the collection of the
proceeds of life insurance policies, (vii) any gain or loss, or the
extinguishment under GAAP of any Indebtedness of Borrower or any Subsidiary
arising from the acquisition of any securities of Borrower or any Subsidiary,
(viii) any deferred credit representing the excess of equity in any Subsidiary
at the date of acquisition over the cost of the Investment in such Subsidiary,
(ix) in the case of any merger or consolidation of Borrower into another Person,
other than a Subsidiary, any earnings of such Person prior to the consummation
of such merger or consolidation, (x) any portion of the net earnings of Borrower
or any Subsidiary which cannot be freely converted into United States dollars,
(xi) any portion of net earnings (or loss) of Borrower or any Subsidiary which
results from foreign currency translation as determined in accordance with GAAP,
and (xii) to the extent that it is not otherwise excluded from the computation
of Consolidated Net Income under this proviso, all non-recurring restructuring
charges (including asset impairment writedowns, inventory writedowns and all
other restructuring costs) incurred by Borrower and its Subsidiaries during the
fiscal quarter ending on May 31, 1998, to the extent that they do not exceed
Eighteen Million Dollars ($18,000,000) in the aggregate.
3. Conditions Precedent. This Amendment shall not take effect
unless and until all of the following conditions precedent are satisfied:
(a) Execution and Delivery. It is executed by Borrower and
accepted and executed by Bank; and
(b) No Event of Default. No Event of Default or Potential Default
shall exist and the execution, delivery and performance of this Amendment by the
parties hereto shall not cause an Event of Default or a Potential Default to
occur.
Upon the satisfaction of the preceding conditions precedent, the Agreement shall
be deemed amended in accordance with this Amendment as of May 31, 1998.
4. Continued Validity of Agreement. Except as amended by this
Amendment, the Agreement shall continue in full force and effect as originally
constituted and is ratified and affirmed by the parties hereto.
5. Authorization. Each party represents to the other that the
individual executing this Amendment on its behalf is the duly appointed
signatory of such party to this Amendment and that such individual is authorized
to execute this Amendment by or on behalf of such party and to take all action
required by the terms of this Amendment.
2
<PAGE> 3
6. Amendment Expenses. All expenses, including, but not limited to,
reasonable attorneys' fees, incurred by Bank in the preparation and
implementation of this Amendment constitute Bank Expenses and as such are
payable by Borrower.
7. Waiver of Claims.
(a) Borrower hereby releases and forever discharges Bank and
Bank's directors, officers, employees and agents, from all actions, and causes
of action, judgments, executions, suits, debts, claims, demands, liabilities,
counterclaims and offsets of every character, known or unknown, direct and/or
indirect, at law or in equity, of whatever kind or nature which have arisen or
accrued through the date of this Amendment and in any way directly or indirectly
arising out of or in any way connected with the Loan Documents and the Revolving
Facility through such date.
(b) Borrower hereby waives all rights which it may have under the
provisions of California Civil Code Section 1542, which reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
8. Captions. Section headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Amendment.
9. No Novation. This Amendment is not intended to be, and shall not
be construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Agreement shall remain in full force and effect.
10. Construction of Amendment. Neither this Amendment nor any
uncertainty or ambiguity herein shall be construed or resolved against Bank on
the basis that this Amendment was drafted by Bank. On the contrary, this
Amendment has been negotiated and reviewed by both parties and shall be
construed and interpreted according to the ordinary meaning of the words used so
as to fairly accomplish the purposes and intentions of the parties hereto.
11. Severability. Each provision of this Amendment shall be
severable from every other provision of this Amendment for the purpose of
determining the legal enforceability of any specific provision.
12. Entire Agreement. This Amendment constitutes the entire
agreement between Borrower and Bank with respect to the subject matter hereof
and supersedes all prior and
3
<PAGE> 4
contemporaneous negotiations, communications, discussions and agreements
concerning such subject matter. Borrower acknowledges and agrees that Bank has
not made any representation, warranty or covenant in connection with this
Amendment.
13. Counterparts. This Amendment may be executed in any number of
counterparts, and by Bank and Borrower in separate counterparts, each of which
shall be an original, but all of which shall together constitute one and the
same agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first set forth above.
VANS, INC.
By: [SIG]
---------------------------------
Title: Vice President & Gen. Counsel
------------------------------
BANK OF THE WEST
By: /s/ DAN MCCARTNEY
---------------------------------
Dan McCartney
4
<PAGE> 1
EXHIBIT 10.14.3
THIRD AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(the "Amendment"), is made as of May 31, 1998, by and between VANS, INC.
("Borrower"), and BANK OF THE WEST ("Bank"), and is entered into with respect to
the Amended and Restated Loan and Security Agreement, dated as of October 31,
1997, by and between Borrower and Bank, as amended by the First Amendment to
Amended and Restated Loan and Security Agreement, dated as of February 3, 1998,
by and between Borrower and Bank and the Second Amendment to Amended and
Restated Loan and Security Agreement, dated as of May 31, 1998, by and between
Borrower and Bank (the "Agreement").
RECITALS
WHEREAS, Borrower has requested that Bank (i) amend certain of the
financial covenants in the Agreement with respect to the fiscal quarters ending
August 31, 1998, and November 30, 1998 and (ii) provide a seasonal increase in
the Revolving Facility, all as provided herein; and
WHEREAS, Bank is willing to agree to the requests, on the terms set
forth herein, provided that Borrower waives all causes of action that it may
have against Bank, as provided herein and pays an accommodation fee, as provided
herein, and Borrower is willing to waive such causes of action and to pay such
accommodation fee in return for the requested amendments;
NOW, THEREFORE, IT IS AGREED THAT:
1. Definitions. Unless otherwise indicated, words and terms which
are defined in the Agreement shall have the same meaning where used herein.
2. Amendments. The Agreement is amended as follows:
(a) The definitions of "Committed Line" and "Revolver Committed
Line" in Section 1.1 are amended to read as follows:
"Committed Line" means (i) Forty-Three Million Five Hundred
Thousand Dollars ($43,500,000) during the period commencing on
May 31, 1998, and terminating on December 31, 1998, and (ii)
Thirty Million Dollars ($30,000,000) after December 31, 1998.
"Revolver Committed Line" means (i) Thirty-Eight Million Five
Hundred Thousand Dollars ($38,500,000) during the period
commencing on May 31, 1998, and terminating on December 31,
1998, and (ii) Twenty-Five Million Dollars ($25,000,000) after
December 31, 1998.
1
<PAGE> 2
(b) Section 7.6 is amended to read as follows:
7.6 Current Ratio. Permit the ratio of Consolidated
Current Assets to Consolidated Current Liabilities to be less than (i) 2.15 to
1.00 as of the last day of the fiscal quarter of Borrower ending August 31,
1998, and (ii) 2.50 to 1.00 as of the last day of any fiscal quarter of Borrower
ending after August 31, 1998.
(c) Section 7.7 is amended to read as follows:
7.7 Quick Ratio. Permit the ratio of Consolidated Quick
Assets to Consolidated Current Liabilities to be less than (i) 1.25 to 1.00 on
the last day of the fiscal quarter of Borrower ending on August 31, 1998, and
(ii) 1.50 to 1.00 on the last day of any fiscal quarter of Borrower ending after
August 31, 1998.
(d) Section 7.11 is amended to read as follows:
7.11 Leverage Ratio. Permit the ratio of Total Liabilities
to Adjusted Consolidated Tangible Net Worth to be more than (i) .65 to 1.00 on
the last day of the fiscal quarter of Borrower ending August 31, 1998, (ii) .60
to 1.00 on the last day of the fiscal quarter of Borrower ending November 30,
1998, and (iii) .50 to 1.00 on the last day of any fiscal quarter of Borrower
ending after November 30, 1998.
2. Conditions Precedent. This Amendment shall not take effect
unless and until all of the following conditions precedent are satisfied:
(a) Execution and Delivery. It is executed by Borrower and
accepted and executed by Bank;
(b) No Event of Default. No Event of Default or Potential Default
shall exist and the execution, delivery and performance of this Amendment by the
parties hereto shall not cause an Event of Default or a Potential Default to
occur; and
(c) Accommodation Fee. Borrower shall have paid Bank an
accommodation fee of Thirteen Thousand Five Hundred Dollars ($13,500)(the
"Accommodation Fee"). The Accommodation Fee shall be fully earned by Bank upon
the execution and delivery of this Amendment and shall not be applied to any of
the Bank Expenses.
Upon the satisfaction of the preceding conditions precedent, the Agreement shall
be deemed amended in accordance with this Amendment as of the date hereof.
3. Continued Validity of Agreement. Except as amended by this
Amendment, the Agreement shall continue in full force and effect as originally
constituted and is ratified and affirmed by the parties hereto.
4. Authorization. Each party represents to the other that the
individual executing this Amendment on its behalf is the duly appointed
signatory of such party to this Amendment
2
<PAGE> 3
and that such individual is authorized to execute this Amendment by or on behalf
of such party and to take all action required by the terms of this Amendment.
5. Amendment Expenses. All expenses, including, but not limited to,
reasonable attorneys' fees, incurred by Bank in the preparation and
implementation of this Amendment constitute Bank Expenses and as such are
payable by Borrower.
6. Waiver of Claims.
(a) Borrower hereby releases and forever discharges Bank and
Bank's directors, officers, employees and agents, from all actions, and causes
of action, judgments, executions, suits, debts, claims, demands, liabilities,
counterclaims and offsets of every character, known or unknown, direct and/or
indirect, at law or in equity, of whatever kind or nature which have arisen or
accrued through the date of this Amendment and in any way directly or indirectly
arising out of or in any way connected with the Loan Documents and the Revolving
Facility through such date.
(b) Borrower hereby waives all rights which it may have under the
provisions of California Civil Code Section 1542, which reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his settlement with
the debtor.
7. Captions. Section headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Amendment.
8. No Novation. This Amendment is not intended to be, and shall not
be construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Agreement shall remain in full force and effect.
9. Construction of Amendment. Neither this Amendment nor any
uncertainty or ambiguity herein shall be construed or resolved against Bank on
the basis that this Amendment was drafted by Bank. On the contrary, this
Amendment has been negotiated and reviewed by both parties and shall be
construed and interpreted according to the ordinary meaning of the words used so
as to fairly accomplish the purposes and intentions of the parties hereto.
10. Severability. Each provision of this Amendment shall be
severable from every other provision of this Amendment for the purpose of
determining the legal enforceability of any specific provision.
11. Entire Agreement. This Amendment constitutes the entire
agreement between Borrower and Bank with respect to the subject matter hereof
and supersedes all prior and contemporaneous negotiations, communications,
discussions and agreements concerning such
3
<PAGE> 4
subject matter. Borrower acknowledges and agrees that Bank has not made any
representation, warranty or covenant in connection with this Amendment.
12. Counterparts. This Amendment may be executed in any number of
counterparts, and by Bank and Borrower in separate counterparts, each of which
shall be an original, but all of which shall together constitute one and the
same agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first set forth above.
VANS, INC.
By: [SIG]
-------------------------------
Title: VP/CFO
-------------------------------
BANK OF THE WEST
By: /s/ DAN MCCARTNEY
-------------------------------
Dan McCartney
4
<PAGE> 1
EXHIBIT 10.18.2
AMENDMENT NO. 2
TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT ("Amendment" herein) is
entered into as of May 18, 1998, by and between Walter E. Schoenfeld ("Mr.
Schoenfeld") and Vans, Inc., a Delaware corporation ("Vans"), with respect to
the following facts:
A. Vans and Mr. Schoenfeld previously entered into an Employment
Agreement, dated December 1, 1995 (the "Employment Agreement"),
which revised and replaced a Consulting Agreement between the
parties;
B. The Employment Agreement was amended as of February 13, 1997;
and
C. The parties wish to further amend the Employment Agreement in
accordance with the action taken by the Board of Directors of
the Company on May 18, 1998.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 3 of the Employment Agreement. The term of the
Employment Agreement is hereby extended to May 31, 2000.
2. Other Provisions of the Employment Agreement. Except as
specifically modified or amended herein, all remaining
provisions of the Employment Agreement, as amended, shall remain
in full force and effect.
3. Miscellaneous. This Amendment shall be governed by California
law and may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
MR. SCHOENFELD: VANS:
Vans, Inc., a Delaware corporation
/s/ Walter E. Schoenfeld By:/s/ Craig E. Gosselin
- ------------------------------- -------------------------------
Walter E. Schoenfeld
Title: Vice President and General Counsel
------------------------------------
<PAGE> 1
EXHIBIT 10.33.1
TOUR TITLE SPONSORSHIP AGREEMENT
This agreement ("Agreement"), dated as of January 1, 1998, is entered into by
and between Vans, Inc., 15700 Shoemaker Avenue, Santa Fe Springs, California
90670- 5569, Attn: Craig E. Gosselin, Esq. ("Sponsor"), and C.C.R.L., LLC, c/o
Codikow, Carroll & Guido, LLP, 9113 Sunset Boulevard, Los Angeles, California
90069, Attn: David Codikow, Esq. ("Company"), and concerns Sponsor's title
sponsorship of the musical touring festival known (during the Term and
throughout the Territory) as "The Vans Warped Tour" (the "Tour").
1. Territory: The territory of this Agreement shall be the United
States, Canada, Europe, Australia, New Zealand, and Japan ("Territory").
2. Term: The term of this Agreement ("Term") shall commence as of
the date hereof, and shall continue for the duration of two Tour Cycles. For the
purposes hereof, a "Tour Cycle" shall mean all of the concert dates in the
United States and Canada (together, the "North American Leg"), in Europe (the
"European Leg"), and in Japan, Australia and New Zealand [including any dates in
Hawaii as part of such leg] (the "Australian Leg") of the Vans Warped Tour '98
or '99 (as applicable). As of the date of this Agreement, the "1998 Tour Cycle"
or "1998 Tour" shall mean that Tour commencing with a North American Leg in late
June or early July of 1998, continuing through the immediately following
European Leg, and concluding with the last concert of the ensuing Australian Leg
of such Tour (likely in late January 1999). As of the date of this Agreement,
the "1999 Tour Cycle" or "1999 Tour" shall mean that Tour commencing with a
North American Leg in late June or early July of 1999, continuing through the
immediately following European Leg, and concluding with the last concert of the
ensuing Australian Leg of such Tour (likely in late January 2000). Company shall
use its best reasonable efforts to conduct Tour concerts in Japan in 1998 or
1999. However, nothing contained herein shall obligate Company to conduct Tour
concerts in Japan in 1998 or 1999, if such Tour concerts are, in Company's good
faith business judgment, likely to result in a financial loss to Company.
3. Sponsorship Fee: In respect of each of the 1998 and 1999 Tours,
Sponsor shall pay a sponsorship fee of One Million Five Hundred Thousand Dollars
($1,500,000.00)(the "Fee"). The Fee shall be paid in installments during 1998
and 1999, respectively, as follows:
(i) $150,000.00 on or before March 1st (or upon full execution of
this Agreement with respect to the 1998 Tour);
1
<PAGE> 2
(ii) $150,000.00 on or before April 1st (or upon full execution of
this Agreement with respect to the 1998 Tour);
(iii) $150,000.00 on or before May 1st;
(iv) $200,000.00 on or before June 1st;
(v) $200,000.00 on or before July 1st;
(vi) $200,000.00 on or before August 1st;
(vii) $300,000.00 on or before September 15th; and
(viii) $150,000.00 on or before December 1st.
4. European Leg Obligations: Sponsor shall be solely responsible
for all costs associated with providing a vertical skate ramp (the "Europe
Ramp") at each Tour venue on the European Leg of each of the 1998 and 1999
Tours, which Europe Ramp shall be of the same size, dimensions, and quality as
the vertical ramp provided by Company for the European Leg of the 1997 Tour.
Without limiting the generality of the foregoing, Sponsor shall be responsible
for all costs associated with the Europe Ramp, including but not limited to all
costs incurred in renting or purchasing, transporting, assembling,
disassembling, maintaining, repairing, insuring and storing the Europe Ramp.
Company shall, in reasonable consultation with Sponsor, make all necessary
arrangements for the Europe Ramp, and Sponsor shall reimburse Company for all
reasonable costs incurred by it in good faith in connection with the Europe Ramp
within thirty (30) days of receipt of Company's (or Company-approved vendor's)
invoice(s) concerning same.
5. Nonexclusivity: Sponsor acknowledges and agrees that Sponsor is
not the sole or exclusive sponsor of the Tour or any particular Tour event, and
that Company shall be entitled to permit other persons or entities to act as
sponsors of the Tour and/or any particular Tour event, or to refrain therefrom,
in its sole discretion. Notwithstanding the foregoing, (i) Sponsor shall at all
times during the Term be the official and exclusive title Sponsor of the 1998
and 1999 Tours, and (ii) no other manufacturer or distributor of footwear or
snowboard boots shall be a sponsor of the 1998 or 1999 Tour without Sponsor's
approval, which may be given or withheld in Sponsor's sole discretion.
6. Control of Tour: Sponsor and Company acknowledge and agree that
there exist certain difficulties in determining when the creative and production
elements of the Tour should take precedence over Sponsor's promotional and
marketing activities in connection with the Tour. Accordingly, the parties
acknowledge that Company's decisions and actions as to the creative and
production elements of the Tour shall take precedence over any promotional or
other activities of Sponsor hereunder so long as: (i) those decisions and
actions are in good faith and primarily for the purpose of enhancing and
protecting the opportunities for the audience to enjoy the performances and
exhibitions, (ii) such decisions and actions do not have a material adverse
impact
2
<PAGE> 3
on Sponsor or Sponsor's rights hereunder, and (iii) provided that authorized
representatives of Sponsor are present at the applicable venue and are available
for consultation, Company shall consult with Sponsor as to such decisions and
actions. Subject to the foregoing, Sponsor and its representatives agree to
comply fully with Company's reasonable instructions and Company shall have sole
and exclusive control over the concert performances, athletic exhibitions,
Competitions (defined below) and all other aspects of the Tour. Company agrees
to exercise reasonable efforts in making whatever arrangements are necessary to
protect the creative aspects of the Tour while fulfilling the spirit and the
goals of this Agreement with respect to Sponsor. In that connection, Sponsor
shall no later than two (2) weeks before commencement of each Tour, consult with
Company regarding the number, size, placement and other aspects of any signs,
posters, banners or other visual items in order to minimize any conflict which
may arise and coordinate the use of Sponsor's materials with those of other
sponsors of such Tour. Sponsor agrees that in the event of any disagreement,
Company's reasonable, good faith decision shall control.
7. Company's Use of Sponsor's Materials: Company is hereby granted
a limited, non-exclusive license to use the "Vans" name and logo (collectively,
the "Name") in connection with: (a) the advertising and promotion of the 1998
and 1999 Tours, (b) any and all merchandise created and sold or otherwise
distributed by Company in connection with the 1998 and 1999 Tours, (c) any
phonorecords and/or audiovisual works relating to or concerning the 1998 and
1999 Tours, including (without limitation) those featuring musical, athletic,
and/or other performances or footage from such Tours, and (d) any and all news
items, press releases or other information in any media relating to the 1998 and
1999 Tours. Except as expressly set forth herein, Company has no rights or
obligations whatsoever with respect to the use of the Name. Company acknowledges
that the Name is a registered trademark of Sponsor and that Sponsor is retaining
all rights in the Name except as set forth in this Agreement. Company shall
execute and deliver all documents requested by Sponsor which evidence Sponsor's
rights in and to the Name, and hereby assigns to Sponsor all rights it may
acquire in and to the Name except those specifically granted herein. Company
will cause to appear on all materials associated with the Tour on which the Name
appears such legends, markings and notices as Sponsor may reasonably request in
writing in order to preserve and protect Sponsor's rights in and to the Name.
The license granted hereunder shall expire upon the termination of this
Agreement, provided, however, with respect to any permissible use of the Name
during the Term which is incidentally embodied in photographs, video tapes,
and/or other media which are exploited after the Term, the license granted
hereunder shall be perpetual.
8. Sponsor's Promotional Entitlement: Provided Sponsor has
fulfilled all of its material obligations hereunder (specifically including
payment of the Fee by no later than three (3) business days after written demand
therefore) and is not in breach
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of this Agreement, Sponsor shall be entitled to the following during the Term
and throughout the Territory in respect of the 1998 and 1999 Tours:
(a) Company shall refer to the 1998 and 1999 Tours in all press
releases, advertising and promotions as "The Vans Warped Tour '98" and "The Vans
Warped Tour '99" (as applicable), including (without limitation) in all
television and radio advertisements, posters, flyers, and newspaper and magazine
advertisements, and shall instruct and require all applicable third parties to
do the same.
(b) Sponsor shall have the right to identify itself as the
exclusive title sponsor of the 1998 and 1999 Tours in all of its national,
regional, and local advertising (print, television, radio, and internet), on its
website, corporate reports to shareholders or otherwise, and in its filings
under the Securities Act of 1933 and Securities and Exchange Act of 1934.
(c) Company shall provide to Sponsor ground space, approximately
20' by 20' in size, for an enclosed tent at each concert location of the Tour
(the "Tent"). Sponsor may conduct sampling, take surveys, display product, hang
banners and sell Sponsor Merchandise (defined below) inside the Tent. Sponsor
shall be solely responsible for the creation, set up, break down, operation and
management of the Tent, and for all costs associated with the Tent and any
activities conducted therein. Company shall, at no charge to Sponsor, arrange
for internal transportation and lodging of four (4) people to staff Sponsor's
Tent at each venue of the Tour, it being acknowledged and agreed that Sponsor
shall be responsible for the transportation costs incurred in transporting such
staff personnel to and from the first and last (as appropriate) concert venues
of each Leg of the Tours. Company shall have no liability whatsoever for any
loss or damage to the Tent, or to any materials, products and/or merchandise
which Sponsor distributes, sells, and/or exhibits in the Tent or otherwise at
concert venues during the Tour.
(d) Subject to local restrictions at each concert location, if
any, signage containing a mutually approved design, but at the very least
indicating Sponsor's official, exclusive title sponsorship of the 1998 or 1999
Tour (as applicable), shall be displayed throughout the venue at each concert.
Sponsor shall also be entitled to receive more favorable treatment than any
other sponsor of the given Tour as to placement of signage bearing the Name, and
shall receive approximately 80% of all signage space available to Company at
each venue for such signage. Any signage placed "on stage," with the mutual
approval of Company, Sponsor, and the artists appearing on such stage, shall be
placed in such a way that it will not interfere with the artistic concepts of
the performances nor in any way which will interfere with the sight lines of the
audience. All costs incurred in connection with the creation of any signage
bearing solely the Name shall be borne solely by Sponsor, it being acknowledged
and agreed that all costs incurred in connection with the creation of any
signage bearing the Name along with the name and/or logo of the Tours shall be
borne solely by Company. Sponsor shall deliver
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all signage it desires to display on the Tour no later than ten (10) days prior
to the commencement of each of the 1998 and 1999 Tours, to the locations
designated by Company.
(e) Company and its designees and licensees shall include the
Name on all items of event merchandise (i.e., T-shirts, sweatshirts, hats and
other wearing apparel, posters, stickers, and programs) created for the 1998 and
1999 Tours and sold by or on behalf of Company at Tour venues. The parties
acknowledge that all monies to be derived from the sale, distribution and
exploitation of such merchandise shall be solely the property of Company and its
designees and licensees.
(f) Sponsor may sell up to eight (8) items of merchandise
embodying the Name ("Sponsor Merchandise") at Tour venues throughout the
Territory, which merchandise may not embody the name or logo of Company or the
Tour. The price of each item of Sponsor Merchandise shall be designated by
Sponsor. Sponsor shall be solely responsible for any and all costs and expenses
relating to the creation, shipping, transportation, and vending of Sponsor
Merchandise. Without limiting the generality of the preceding sentence, Sponsor
shall be solely responsible for any and all "hall," "vendor," and other fees or
amounts charged by any promoters or venue operators in connection with the sale
of merchandise, and shall be obligated to pay the same fees as those paid by the
artists performing on the Tour in respect of their own merchandise sales.
Sponsor shall not endeavor in any way to negotiate or barter for lower "hall" or
"vendor" fees than those imposed upon Company and the artists performing on the
Tour. Sponsor acknowledges that Company does not carry insurance for, nor shall
Company have any liability whatsoever for any loss of or damage to Sponsor
Merchandise.
(g) If Company publishes a program for distribution at concert
venues during the 1998 and/or 1999 Tours, the Name shall appear on the front
cover of such program, and Sponsor shall additionally receive, at no charge, a
full-page, color advertisement in such program. The copy and artwork for such
advertisement shall be provided by Sponsor. All other costs in connection with
the creation, layout, and placement of such advertisement shall be borne by
Company.
(h) Company shall provide ground space for no more than two (2)
10' by 10' booths at each Tour venue for use by up to two (2) retail stores who
are customers of Sponsor, as designated by Sponsor (the "Retail Stores").
Company shall also provide each such Retail Store with ten (10) tickets and five
(5) backstage passes for the applicable concert. Each Retail Store shall be
solely responsible for the creation, set up, break down, operation and
management of its booth, and for all costs associated with such booth and any
activities conducted therein. No Retail Store shall have the right to sell or
otherwise distribute any: (i) wearing apparel or product on which appears the
name of Company and/or the name or logo of the Tour or any artwork, trademarks
or service marks associated therewith, (ii) hats or shirts of any kind, or (iii)
any other merchandise or materials which might conflict with Company's
commitments to other
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sponsors of the Tour. Company shall have no liability whatsoever for any loss or
damage to any Retail Store booth or any materials, products and/or merchandise
distributed and/or exhibited therein, or any injury suffered by any personnel
staffing a booth on behalf of a Retail Store.
(i) If Sponsor decides to sponsor any so-called "VIP receptions"
during any Tour (i.e., a party or other function attended by persons invited by
Sponsor and Tour performers), Company shall use reasonable efforts to invite a
reasonable number of Tour performers designated by Sponsor to attend such
receptions. In connection with the foregoing, (i) all costs in connection with
any such reception shall be borne solely by Sponsor, and (ii) in no event shall
the failure or refusal by any Tour performer to attend any such reception(s) be
deemed a breach hereof by Company. In connection with the foregoing, Company
shall use reasonable efforts to provide to Sponsor an appropriate location at
which such reception(s) may take place.
(j) Sponsor shall sponsor street and vertical ramp amateur
skateboarding competitions (the "Competitions") at a minimum of twenty (20)
selected venues in the United States and Canada, and a minimum of four (4)
venues in Europe during each of the respective Tours. Company shall, at its sole
cost, handle all aspects of the formation, coordination and operation of such
Competitions at the applicable Tour sites and at designated preliminary contest
sites, including (without limitation) providing appropriate personnel,
organizing preliminary competitions to obtain skaters, operating each
Competition, obtaining all required permits, licenses and releases, and
providing all skate courses and other material as necessary for the completion
of each Competition.
(k) Company shall use reasonable efforts to obtain, in respect of
each of the 1998 and 1999 Tours, television coverage by MTV, ESPN, Much Music,
PBS and local television news affiliates in all markets where the Tour is
conducted.
(l) Company shall obtain the following or comparable advertising
exposure in respect of each of the 1998 and 1999 Tours:
(i) Full page ads in TransWorld's SKATEboarding,
SNOWboarding and Warp magazines;
(ii) Purchase of no less than a combined minimum of
Fourteen Thousand Dollars ($14,000.00) worth of radio airtime and print
advertising in each of the markets in which the Tour is conducted; and
(iii) Distribution of posters regarding the Tour to skate
and snowboard shops, skate parks, action sport retailers and record stores in
each market in which the Tour is conducted.
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(m) Company shall provide Sponsor with eighty (80) complimentary
general admission tickets for each concert, twenty-five (25) of which shall be
accompanied by backstage or VIP passes. Sponsor shall have the right to utilize
all or part of the aforementioned tickets in connection with its sponsorship
activities, including give-aways, contests, tie-ins, retailer give-aways and
employee give-aways. Sponsor shall not sell or barter any such complimentary
admission tickets or passes under any circumstances. Any tickets in excess of
this complimentary allotment may be purchased by Sponsor at face value on an "as
available" basis.
(n) (i) Sponsor is hereby granted a limited, non-exclusive
license to use the name and logo of the Tour for the purposes of creating and
marketing (through Sponsor's customary wholesale and retail channels, only) a
line of wearing apparel embodying the name and/or logo of the Tour ("1998 Hat
and Clothing Line"). Each item in the 1998 Hat and Clothing Line shall be
subject to Company's approval, which approval shall not be unreasonably
withheld, conditioned or delayed. Sponsor, at its sole expense, shall be
responsible for obtaining any necessary rights from third parties with respect
to the 1998 Hat and Clothing Line (including, without limitation, copyright,
patent, and name and likeness clearances), and shall indemnify, defend and hold
Company harmless from any claims, damages, or loss whatsoever in connection with
or related to the creation, manufacture, and/or distribution of the 1998 Hat and
Clothing Line.
(ii) Sponsor shall pay Company an amount equal to fifty
percent (50%) of the "net proceeds" (i.e., gross receipts received by Sponsor,
less all costs incurred directly by Sponsor for manufacturing, shipping, and
third-party distribution or sales agent fees, if any) generated in respect of
the sale of the 1998 Hat and Clothing Line. Sponsor shall send statements to
Company as to monies payable hereunder on a quarterly basis, commencing as of
June 1, 1998, accompanied by any amounts due, within thirty (30) days after the
conclusion of each calendar quarter (i.e., no later than April 30th for the
quarter ending March 31st, July 30th for the quarter ending June 30th, October
30th for the quarter ending September 30th, and January 30th for the quarter
ending December 31st). Company may at its own expense, and not more than once
every six (6) months and only once with respect to a given statement rendered
hereunder, audit Sponsor's books and records for the purpose of determining the
accuracy of statements and payments to Company pursuant to this paragraph. Any
such audit shall be conducted on Company's behalf by an independent Certified
Public Accountant or other designated representative upon at least thirty (30)
days written notice, during regular business hours at the regular place of
business where Sponsor's books and records are maintained.
(o) Subject to Company's approval in each instance of use, which
approval shall not be unreasonably withheld or delayed, Sponsor is hereby
granted a limited, non-exclusive license to use the name and logo of the Tour on
the packaging of a promotional give-a-way item ("Promo Item") to be created,
manufactured, and
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distributed by Sponsor in connection with each of the 1998 and 1999 Tours,
provided that (i) such use does not conflict with any of Company's existing or
contemplated contractual obligations to third parties, (ii) Sponsor, at its sole
expense, shall be responsible for obtaining any necessary rights from third
parties with respect to a given Promo Item (including, without limitation,
copyright, patent, and name and likeness clearances), and shall indemnify,
defend and hold Company harmless from any claims, damages, or loss whatsoever in
connection with or related to the creation, manufacture, and/or distribution of
such Promo Items, and (C) such use is otherwise not misleading, improper or
violative of the rights of any third party. Company shall not be entitled to any
royalties or other compensation resulting from the creation, sale or
distribution by Sponsor of any Promo Item.
(p) Space and time permitting, Sponsor shall be allowed to have
qualified representatives ("Sponsor Skaters") perform skateboard demonstrations
on the Tour's vert ramp and street course at various Tour venues. The
scheduling, frequency, location, and duration of any such demonstrations by
Sponsors Skaters shall be within the reasonable discretion of Company. Company
shall have the right to terminate any demonstration by any Sponsor Skater and/or
forbid any future demonstrations by such Sponsor Skater if, in its sole, good
faith judgment, Company determines that such Sponsor Skater does not possess the
expertise to safely and competently perform on the vert ramp or street course
(as applicable), or if such Sponsor Skater does not abide by the code of conduct
applicable to all of the athletes performing on the Tour. Sponsor acknowledges
that Company shall have no liability whatsoever for any injuries sustained or
caused by Sponsor Skaters, and that Sponsor shall be solely responsible for any
and all injuries to persons (including Sponsor Skaters) or loss or damage to
property arising out of or in any way related to the acts and/or omissions of
Sponsor Skaters. Sponsor shall also be solely responsible for the
transportation, room and board required by Sponsor Skaters during the Tour. All
Sponsor Skaters must sign a release of liability in favor Company prior to
performing their first skateboard demonstration on the Tour.
9. Company's Name and Logo: Except as expressly provided herein, it
is acknowledged and agreed that all rights in and to Company's name and logo and
the name and logo of the Tour (excluding the Name), as well as all artwork,
trademarks, service marks and goodwill associated therewith, shall be owned and
controlled exclusively by Company, and Sponsor shall have no right, title or
interest therein or thereto.
10. Cancellation of the Tour: If for any reason, either of the 1998
or 1999 Tours are canceled after such Tour has begun to the effect that less
than ninety percent (90%) of the scheduled concerts for such Tour(s) is
performed, Sponsor's sole remedies shall be to:
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(a) Terminate this Agreement immediately without further
responsibility for the payment of any yet unpaid Fees or payments hereunder; and
(b) Receive a refund of that percentage of any Fee paid by
Sponsor in respect of the cancelled Tour as the number of concerts remaining in
such cancelled Tour, if any, at the time of cancellation bears to ninety percent
(90%) of the total number of concerts previously confirmed for such Tour.
11. Sub-Sponsorships: Vans may offer sponsorship rights ("Vans Sub-
Sponsorships") to up to two (2) sponsors in connection with each of the 1998 and
1998 Tours ("Vans Sub-Sponsors"), on the following terms and conditions:
(a) All Vans Sub-Sponsors must be companies which are in keeping
with the non-corporate, "lifestyle" sensibility of the Tour, as reasonably
determined by Company.
(b) Each Sub-Sponsor shall be entitled to sponsorship rights
comparable to those granted by Company to its significant "second tier"
sponsors, including, but not specifically limited to, a standard 10'x10' booth,
fifteen (15) general admission tickets for each concert, reasonable signage at
Tour venues, the Sub- Sponsor's right to tag its own radio and television
advertising, and the inclusion of the Vans Sub-Sponsor's name and logo in press
materials, advertisements, and posters (created after grant of the applicable
Vans Sub-Sponsorship) where the names and/or logos of other non-title sponsors
appear. No Vans Sub-Sponsor may sell products or services at Tour venues,
without the written consent of Company, which shall not be unreasonably
withheld, conditioned, or delayed.
(c) No Vans Sub-Sponsor shall receive a "presented by," "in
association with," or other distinctive credit.
(d) No Vans Sub-Sponsorship shall be granted to any company for
the promotion of any alcohol, tobacco, or personal hygiene product, or any
recording, television or film company.
(e) Sponsor may not grant "exclusive" rights or rights to any
Tour attraction (whether existing or proposed) to a Vans Sub-Sponsor without the
written consent of Company, which shall not be unreasonably withheld or delayed.
(f) As between Sponsor and Company, Sponsor shall be solely
responsible for all costs incurred in connection with any Vans Sub-Sponsorship.
Company shall not be obligated to incur any costs whatsoever in connection with
the Vans Sub-Sponsorships, and Sponsor shall defend, indemnify, and hold Company
harmless from and against any claims, damages, or losses (including reasonable
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attorneys' fees and costs) arising out of or related to any Vans
Sub-Sponsorship, except to the extent any such claim, damage, or loss is
occasioned by the acts or omissions of Company and/or its agents.
(g) Company may not solicit or grant Vans Sub-Sponsorships to any
company or organization which currently sponsors or has in the past sponsored
the Tour, and may not grant any Vans Sub-Sponsorship rights which interfere with
exclusivity commitments which Company has made previously in respect of Tour
sponsorship.
(h) Sponsor shall immediately notify Company in writing of its
grant of each Vans Sub-Sponsorship.
12. Warranties/Representations/Indemnity/Insurance:
(a) Each party represents and warrants that it has the right,
power and authority to enter into this Agreement, to grant the rights granted
herein, and to perform the duties and obligations described herein. Each party
further represents and warrants that each shall not take any action which might
prevent the exercise by the other party hereto of the rights granted to such
other party nor shall either take any steps which may encumber the rights
granted to the other. Each party further represents and warrants that there are
no actions, suits, proceedings or investigations pending or (to the best of
their knowledge) threatened against or affecting such party before any tribunal
or investigative body which could adversely impact such party's performance
under this Agreement, and that each has been duly formed and is adequately
capitalized to perform its obligations hereunder.
(b) Company hereby agrees to indemnify, defend and hold Sponsor,
its officers, directors, agents, representatives, shareholders and employees
harmless from and against any and all claims, suits, expenses, damages or other
liabilities (including reasonable attorney's fees and court costs), arising out
of: (i) the breach by Company of any of the representations and warranties made
by Company in this Agreement or the failure by Company to fulfill any of its
covenants set forth herein; (ii) subject to paragraph 11(c) below, any personal
injury or property damage arising out of or in connection with an individual's
attendance at any concert on the Tour; (iii) any liability for any expenses
associated with the Tours except as provided herein; (iv) any misuse of the
Name; and (v) any liability of any kind related to merchandise, products or
services offered or supplied by Company. Company, at all times during
the Term of this Agreement shall obtain and maintain at its sole expense,
commencing upon commencement of each Tour, general and public liability
insurance naming Sponsor as an additional insured party in the amount of at
least Five Million Dollars ($5,000,000.00) for personal injury, Five Million
Dollars ($5,000,000.00) for property damage, and Five Million Dollars
($5,000,000.00) for infringement claims relating to Company's acts relating to
intellectual property rights. Company shall also at all times maintain adequate
worker's
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compensation insurance as required in each jurisdiction in which the Tours are
performed. Such insurance shall be non-cancelable during the Term hereof.
Company shall provide Sponsor with copies of each of the above-described
policies, all of which shall be issued from qualified insurance carriers
currently rated "A minus" or better by A.M. Best Company. Such policies may not
be modified without the consent of Sponsor, which may be withheld in its sole
and absolute discretion.
(c) Sponsor hereby agrees to indemnify, defend and hold Company,
all Tour performers, all promoter(s) and all other sponsors of each Tour and
their respective officers, directors, members, agents, partners,
representatives, shareholders and employees harmless from and against any and
all claims, suits, expenses, damages or other liabilities (including reasonable
attorney's fees and court costs), arising out of: (i) the breach by Sponsor of
any of the covenants, representations or warranties made by Sponsor in this
Agreement, (ii) the use by Company of any materials supplied or created by
Sponsor (including, without limitation, any signage, names, trademarks, trade
names or logos), (iii) any action of any kind (including, without limitation,
any action for personal injury or property damage) in respect of any material,
product or service offered or supplied by Sponsor, except the Competitions, but
specifically including any personal injury or property damage sustained or
caused by Sponsor Skaters, and (iv) any claim or action of any kind (including,
without limitation, any action for personal injury or property damage) in
respect of the activities by or on behalf of Sponsor described in Section 7,
above, or any activities by or on behalf of any Vans Sub-Sponsor. Sponsor, at
all times during the Term of this Agreement, shall obtain and maintain at its
sole expense, commencing upon commencement of each Tour, general and public
liability insurance naming Company and its members as an additional insured
parties in the amount of at least Three Million Dollars ($3,000,000.00) for
personal injury, Three Million Dollars ($3,000,000.00) for property damage, and
Three Million Dollars ($3,000,000.00) for infringement claims relating to
Sponsor's acts relating to intellectual property rights. Sponsor shall also at
all times maintain adequate worker's compensation insurance as required in each
jurisdiction in which the Tours are performed and persons employed by Sponsor
provide services or otherwise appear on behalf of Sponsor. Such insurance shall
be non-cancelable during the Term hereof. Sponsor shall provide Company with
copies of each of the above-described policies, all of which shall be issued
from qualified insurance carriers currently rated "A minus" or better by A.M.
Best Company. Such policies may not be modified without the consent of Company,
which may be withheld in its sole and absolute discretion.
13. Permits and Licenses:
Company acknowledges and agrees that Company shall be fully
responsible for and shall acquire or cause local concert promoters to so
acquire, at its sole cost and expense, all licenses, permits, authorizations and
insurance which may be required under federal, state or local law or regulations
in order to legally conduct each
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concert of the Tours, the Competitions (if applicable), and any other activities
by or on behalf of Company contemplated hereunder.
14. Subsequent Tours; Non-Competition:
(a) If Company determines to produce a "Warped Tour" subsequent
to the 1999 Tour (the "Next Tour"), Company shall for a reasonable time (not to
exceed thirty (30) days from the date the Next Tour is publicly announced)
negotiate in good faith solely with Sponsor with respect to the terms and
conditions by which Sponsor may be the title Sponsor and exclusive footwear
Sponsor for the Next Tour. If Company and Sponsor are unable to reach agreement
on such terms and conditions after such good faith negotiations and thereafter
Company desires to enter into an agreement with a third party for title
sponsorship or exclusive footwear sponsorship, as the case may be, for the Next
Tour, Company shall notify Sponsor of all material terms and conditions offered
by such third party, and Sponsor shall have five (5) business days after receipt
thereof to notify Company of its election to enter into an agreement on those
terms and conditions offered by such third party. If Sponsor is not the title
sponsor and/or exclusive footwear sponsor (as the case may be) of the Next Tour,
Company shall have no further obligation on any succeeding Next Tour to
negotiate with Sponsor with respect to title sponsorship and/or exclusive
footwear sponsorship, as the case may be. Sponsor may, however, make an offer to
sponsor a succeeding Next Tour, and if Company so desires, Company may negotiate
with Sponsor concerning the title and/or exclusive footwear sponsorship of any
such succeeding Next Tour.
(b) If Company determines to produce the Next Tour, Company shall
for a reasonable time (not to exceed thirty (30) days from the date the Next
Tour is publicly announced) negotiate solely with Sponsor with respect to the
terms and conditions under which Sponsor may be the exclusive wearing apparel
sponsor for the Next Tour. If Sponsor is not the exclusive wearing apparel
sponsor of the Next Tour, Company shall have no further obligation on any
succeeding Next Tour to negotiate with Sponsor with respect to an exclusive
wearing apparel sponsorship. Sponsor may, however, make an offer to so sponsor a
succeeding Next Tour, and if Company so desires, Company may negotiate with
Sponsor concerning an exclusive wearing apparel sponsorship of any such
succeeding Next Tour.
(c) Sponsor shall not at any time, so long as Company or its
successors produce the Next Tour, operate, underwrite or produce, in whole or in
substantial part, directly or indirectly, any newly organized musical tour
substantially similar to the Tour (a "New Competing Tour") provided, however,
that the foregoing shall not prevent Sponsor from (i) sponsoring a New Competing
Tour, or (ii) sponsoring, underwriting or producing a musical tour existing as
of the date hereof (e.g., Lollapalooza, H.O.R.D.E., and the like) ("Existing
Tour"). Notwithstanding the foregoing, Sponsor shall not be the title sponsor of
any New Competing Tour or any Existing Tour for the lesser of: (i) two
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years after it has ceased to be the title sponsor of a Next Tour, or ii) such
period of time as Company or its successors continue to produce such Next Tours.
Additionally, Sponsor shall not be the title sponsor of any New Competing Tour
or any Existing Tour, at any time it is the title sponsor of the Tour or any
Next Tour.
15. Miscellaneous:
(a) Notices by either party to the other shall be given by
registered or certified mail, return receipt requested, to the respective
addresses set forth on page 1, above.
(b) This Agreement shall be construed under the laws of the State
of California. The courts of the State of California located in the county of
Los Angeles shall have exclusive jurisdiction over any and all claims,
controversies, disputes and disagreements arising out of this Agreement or the
breach thereof, and the parties hereto submit to the personal jurisdiction of
such courts. If any term, provision, covenant or condition of this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder hereof shall remain in full force and effect.
(c) Neither party shall be liable for any failure of or delay in
the performance of their respective obligations under this Agreement to the
extent such failure or delay is due to circumstances beyond its reasonable
control including (without limitation) fires, floods, wars, civil disturbances,
sabotage, accidents, insurrections, blockades, embargoes, storms, explosions,
labor disputes, acts of any governmental, and/or any other acts of God or a
public enemy, nor shall any such failure or delay give either party the right to
terminate this Agreement. Each party shall use its best efforts to minimize the
duration and consequence of any failure of or delay in performance resulting
from a force majeure.
(d) No breach by either party hereof shall be deemed material
unless the other party shall give written notice of such purported breach to the
breaching party and the breaching party has not cured such breach within thirty
(30) days after receipt of such written notice; provided, however, that
Sponsor's failure to pay any portion of the Fee within three (3) days of written
demand therefor, shall be deemed a material breach of this Agreement by Sponsor
and, without limiting any other remedy available to it in the event of such
breach, Company shall be entitled to suspend further performance of any of its
obligations to Sponsor hereunder until such time as the Fee is paid.
(e) This Agreement shall not be deemed to create any joint
venture, partnership or agency between the parties hereto. It is understood that
each party to this Agreement shall be independent of the other and that neither
party shall have the right or authority to bind the other party.
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(f) This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their successors and assigns. Nothing contained in
this Agreement shall be construed to be for the benefit of or enforceable by any
third party, including (without limitation) any creditor of either party.
(g) This Agreement constitutes the complete agreement between the
parties hereto on the subject matter hereof, and supersedes all prior or
contemporaneous agreements between the parties, whether oral or written,
including (without limitation) that certain Tour Title Sponsorship Agreement,
dated as of January 1997, between Sponsor and Company. This Agreement may not be
modified or amended except by a written instrument duly executed by the party to
be charged. The failure of either party to enforce any of said party's rights
under this Agreement shall not be deemed a continuing waiver and said party may,
within such time as provided by applicable law, enforce any and all such rights.
(h) Except as specifically set forth herein, Sponsor shall not
have the right to assign, sell, lease, license or sublicense, in whole or in
part, any of its rights or obligations hereunder including (without limitation)
Sponsor's right to post signage and hang banners at Tour venues, and Sponsor's
right to ground space for the Tent.
(i) This Agreement may be executed in counterparts with the same
effect as if the parties executing such counterparts all have executed one
counterpart as of the day and year first written above.
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
C.C.R.L., LLC, a California VANS, INC., a Delaware corporation
Limited Liability Company
By: Creative Artists Agency, LLC
By: [SIG] By: [SIG]
------------------------------- -------------------------------
An authorized signatory An authorized signatory
14
<PAGE> 1
EXHIBIT 10.41.1
MEMBER ADMISSION AGREEMENT
Purchaser's Name: Vans, Inc.
Issuer: Board Wild LLC, an Oregon limited liability company
Units: Voting Units of Issuer
Dated: April 1, 1998
In consideration of (1) the agreement of Board Wild, LLC, an Oregon
limited liability company (the "Company") to admit the above-named purchaser
(the "Investor") as a member of the Company; and (2) the agreement of the
Company to provide to the Investor the benefits described on the attached
Exhibit A, the Investor hereby subscribes for 250 Units of the Company's voting
ownership interests (the "Units"), which the Company represents and warrants
equals twenty percent (20%) of the outstanding Units.
The Company acknowledges that the Investor has provided valuable
contributions to the Company, including a $215,500 equity contribution pursuant
to a letter agreement dated August 4, 1997 (the "Letter Agreement") and a
$150,000 loan pursuant to a promissory note dated as of the date of this
Agreement. The Company acknowledges that the past equity contribution and the
contemporaneous loan constitute adequate consideration and full payment for the
Units to be issued pursuant to this Agreement. In connection with this
subscription, investor acknowledges and represents to the Company as follows:
1. I have both knowledge and experience in financial and
business matters, and have available legal and financial
advisors who are capable of evaluating the merits and
risks of my purchase of the Units. I am aware that the
purchase of the Units involves a high degree of risk, and
I have sufficient economic resources to bear the economic
risk of the complete loss of my investment in the Units. I
am aware of the business affairs of Issuer, and its
financial condition, and have acquired sufficient
information about the Issuer to reach an informed and
knowledgeable decision to acquire the Units. I am
purchasing the Units for my own account for investment
purposes only and not with a view to, or for the resale in
connection with, any "distribution" thereof for purposes
of the Securities Act of 1933, as amended (the "Act").
2. I acknowledge and agree that this is an extremely
speculative investment, and that I could lose my entire
investment in the Units. I also acknowledge that I have
received and carefully reviewed the Company's Operating
Page 1
<PAGE> 2
Agreement (dated May 31, 1996) that will govern the
operations of the Company.
3. I understand that the Units have not been registered,
under the Securities Act or under the securities laws of
any state. I further understand that the Units have been
issued to Investor in reliance upon exemptions from such
laws, which depend, among other things, upon the bona fide
nature of my investment intent and the accuracy of the
representations that I make in this Agreement.
4. I understand that the Units must be held indefinitely
unless subsequently registered under the Securities Act
and any applicable state law, or unless an exemption from
registration is otherwise available. In addition, I
understand that the certificates representing the Units
will be imprinted with a legend which prohibits transfer
of the Units unless the transfer is in accordance with the
terms of the Securities Act and with the terms of the
Company's Operating Agreement.
5. I further understand that at the time I wish to sell the
Units, if ever, there may be no public or private market
in which to make a sale, there may be no valuation
criteria available, and I will not have the right to
require the Company to register the Units, all of which
may severely limit my ability to sell my Units for what I
would consider to be a fair price.
6. You have made available to me, to my counsel and advisors,
all documents that were requested relating to my purchase
of the Units and to the business and future affairs of the
Company, and you have and the officers and directors of
Company have provided answers to all questions that I have
asked of you concerning the offering and my investment in
the Units. I understand and acknowledge that this Member
Admission Agreement, and Exhibit A hereto, replaces and
supersedes the Letter Agreement, and that the terms of the
Letter Agreement shall have no further force or effect.
7. I acknowledge that certain of the information furnished to
me by the Company is confidential and not public, and
agree that all such information will be kept in confidence
by me and neither used to my personal benefit nor
disclosed to any third party for any reason except with
your prior consent.
Page 2
<PAGE> 3
8. I understand that as a member of the Company, I will be
entitled to appoint one manager to the Company's board of
managers. However, I also understand that members owning a
majority of Units in the Company control the voting power
of the managers. Therefore, if I do not control a majority
of Units, I will not exercise majority voting control over
the business and affairs of the Company, nor will I have
control over other items related to my investment in the
Company, including possible dilution.
9. I understand that the Company is represented by legal
counsel and that this Agreement and all other documents
related to the Company that have been presented to me have
been prepared with the assistance of the Company's legal
counsel, who do not and cannot represent me or my interest
in this transaction.
10. I HAVE RECEIVED, READ AND UNDERSTAND THE COMPANY'S
OPERATING AGREEMENT, DATED MAY 31, 1996, AND UNDERSTAND
THAT BY EXECUTING THIS MEMBER ADMISSION AGREEMENT, I WILL
BECOME A PARTY TO AND BE BOUND BY ALL TERMS AND CONDITIONS
OF THE OPERATING AGREEMENT.
IN WITNESS WHEREOF, the Company and the Investor have executed this
Agreement to be effective as of the date first written above.
BOARD WILD, LLC, AN OREGON
LIMITED LIABILITY COMPANY
R. DOUGLAS ALLEN
-------------------------------------------
By: R. Douglas Allen, Manager
<TABLE>
<CAPTION>
INVESTOR # OF UNITS LOAN AMOUNT EQUITY
- -------- ---------- ----------- ------
<S> <C> <C> <C>
VANS, INC.
- ----------------------
By: 250 $150,000 $215,500
</TABLE>
Page 3
<PAGE> 4
EXHIBIT A
TO MEMBER ADMISSION AGREEMENT
FOR VANS, INC.
As additional consideration for the agreement of Vans, Inc. to
subscribe for 250 Units of the Company's Units, the Company hereby grants to
Vans, Inc. ("Vans") the following additional benefits:
1. A non-exclusive worldwide license to utilize all footage (16mm,
Bet SP and Digital) that the Company owns the rights to for use in any
advertising and/or promotional projects conducted by or for Vans excluding the
production of a television program similar to Board Wild. Editing and/or
duplicating costs of preparing said footage for Vans will be billed at cost.
2. A permanent sponsorship for the Company's "Board Wild" domestic
television series that currently airs on the FOX Sports Network. Vans' rights as
a permanent sponsor shall include, but will not be limited to: presenting
billboards in every domestic episode; product and athlete features; and
30-second ad spots at a 15% discount below the lowest rate paid by any
advertiser committed to at least 26 Board Wild episodes.
3. The right to obtain deeply discounted or even free 30-second spots
in the domestic episodes of the Board Wild series. In addition, the Company
shall provide Vans an opportunity to obtain a larger percentage of the Company's
Net Revenue based on Vans' ability to assist with the Company's ongoing
sponsorship needs. In that regard:
3.1 Vans' domestic rate for procuring 30-second ad spots shall
be decreased by 33% if Vans can obtain one sponsor for the
Board Wild program in, at or above Vans' current level of
participation (not less than $5,000 per episode for a
minimum of 26 episodes).
3.2 Vans' domestic rate for procuring 30-second ad spots shall
be decreased an additional 33% if Vans can obtain a second
sponsor in, at or above Vans' current level of
participation.
3.3 Vans' domestic rate for procuring a 30-second ad spot
shall be free if Vans can obtain a third sponsor in, at or
above Vans' current level of participation.
3.4 If Vans procures the aforementioned three sponsors,
additional sponsorship participation generated by Vans
will entitle Vans to a larger percentage of
Page 4
<PAGE> 5
the Company's Net Revenues. For each $20,000 worth of
sponsorship procured by Vans beyond the aforementioned
three sponsors, Vans will receive an additional .30% of
the Company's Net Revenues during the fiscal year when
said sponsorship was generated. For purposes of this
Agreement, "Net Revenues" means all revenues collected by
the Company less the following; (a) all expenses incurred
by Board Wild in producing, distributing and advertising
the Board Wild Series, any subsequent series, and any
related retail products, (ii) a management fee of fifteen
thousand dollars ($15,000.00) per month commencing July 1,
1996, payable to International Sports Productions, Inc.
for its management of Board Wild and the assistance it
provides in marketing, sales, distribution and accounting
for all Board Wild products, and (iii) all taxes, fees,
licenses, royalties and other liabilities arising from
Board Wild's business.
4. The right of first refusal to procure advertising space (i.e.
billboards and commercials) in each country where the Board Wild program is
syndicated.
5. A $150,000 credit toward international advertising and/or
advertising on videos produced by the Company in conjunction with an advertising
discount of 20% off the lowest ad rates procured by the Company on all
international in-show advertising. Said credit may be used at any time, but may
not exceed $20,000 within any one quarter.
6. Free billboards in all international episodes that are bartered.
In addition, the Company shall make every reasonable attempt to procure free
billboards for Vans within international episodes that are purchased as long as
the billboard procurement does not adversely affect the purchase price for the
episodes. Vans agrees to pay for the additional editing costs to place the Vans
billboard at the front and back of international episodes (it takes
approximately 30 minutes to lay a Vans billboard into the front and back of a
show; said costs will not exceed $75/episode/country and may be deducted as part
of the $150,000 Vans credit discussed in #8 herein).
7. Free advertising in each of the North American board sport guide
books distributed by the Company (i.e. a Vans full-page print ad will be
included in each such guide book the Company retails nationally and/or
internationally).
8. The right to appoint one (1) manager of the Company.
Page 5
<PAGE> 1
Exhibit 22
List of Subsidiaries
1. Vans Far East Limited, a Hong Kong company
2. Vans Footwear Limited, a United Kingdom company
3. Vans Holland B.V., a Dutch corporation
4. Vans Latinoamericana (Mexico), S.A. de C.V., a Mexican corporation
5. Vans Brazil S.A., a Brazilian corporation
6. Vans Uruguay S.A., a Uruguay corporation
7. Vans Latin America, Inc., a Bahamas corporation
8. Vans Footwear International, Inc., a California corporation
9. Vans International, Inc., a Virgin Islands corporation
10. Vans Argentina S.A., an Argentina corporation
11. Global Accessories Limited, a United Kingdom company
12. Switch Manufacturing, a California corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 16,779,528
<SECURITIES> 0
<RECEIVABLES> 17,253,102
<ALLOWANCES> 1,117,695
<INVENTORY> 29,841,235
<CURRENT-ASSETS> 74,227,505
<PP&E> 12,994,043
<DEPRECIATION> 0
<TOTAL-ASSETS> 113,337,680
<CURRENT-LIABILITIES> 22,450,744
<BONDS> 0
0
0
<COMMON> 13,289
<OTHER-SE> 86,147,658
<TOTAL-LIABILITY-AND-EQUITY> 113,337,680
<SALES> 174,497,304
<TOTAL-REVENUES> 174,497,304
<CGS> 112,197,573
<TOTAL-COSTS> 112,197,573
<OTHER-EXPENSES> 67,262,089
<LOSS-PROVISION> 697,926
<INTEREST-EXPENSE> (262,181)
<INCOME-PRETAX> (2,584,171)
<INCOME-TAX> (510,067)
<INCOME-CONTINUING> (2,677,351)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,677,351)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
