<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended February 27, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___________ to
___________
Commission File Number 0-19402
VANS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Delaware 33-0272893
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
15700 Shoemaker Avenue
Santa Fe Springs, California 90670-5515
(Address of Principal Executive Offices) (Zip Code)
(562) 565-8267
(Registrant's Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Formal Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 13,234,901 shares of Common
Stock, $.001 par value, as of April 13, 1999.
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 27, 1999 AND MAY 31, 1998
(unaudited)
<TABLE>
<CAPTION>
FEBRUARY 27, MAY 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash ........................................................................ $ 5,193,280 $ 16,779,528
Accounts receivable, net of allowance for doubtful accounts of $1,549,904
and $1,117,695 at February 27, 1999 and May 31, 1998, respectively ......... 31,373,741 17,253,102
Inventories ................................................................. 37,424,537 29,841,235
Deferred tax assets ......................................................... 5,469,456 5,469,456
Prepaid expenses ............................................................ 6,162,569 4,884,184
------------ ------------
Total current assets ............................................. 85,623,583 74,227,505
Property, plant and equipment, net .......................................... 15,056,316 12,994,043
Property held for lease ..................................................... 4,640,260 4,789,314
Excess of cost over the fair value of net assets acquired, net of accumulated
amortization of $35,378,490 and $34,513,349 at February 27,1999 and
May 31,1998, respectively ................................................... 23,253,125 18,500,327
Other assets ................................................................ 2,904,704 2,826,491
------------ ------------
Total Assets .................................................... $131,477,988 $113,337,680
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current obligation on long-term debt .............. $ 12,545,502 $ 5,514,664
Accounts payable ............................................................ 4,899,430 6,526,595
Accrued payroll and related expenses ........................................ 2,233,066 2,672,047
Accrued interest ............................................................ 428,892 --
Restructuring costs ......................................................... 948,960 5,612,758
Income taxes payable ........................................................ 4,781,738 2,124,680
------------ ------------
Total current liabilities ........................................ 25,837,588 22,450,744
------------ ------------
Deferred tax liabilities .................................................... 1,819,613 1,862,452
Capital lease obligation .................................................... 197,855 135,143
Long term debt, excluding current obligations ............................... 8,576,916 1,874,153
------------ ------------
Total Liabilities ................................................. 36,431,972 26,322,492
------------ ------------
Minority interest ........................................................... 706,208 867,530
Shareholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized, 13,234,901 and
13,290,042 shares issued and outstanding at February 27, 1999 and
May 31, 1998, respectively .................................................. 13,231 13,290
Cumulative foreign translation adjustment ................................... (42,505) (60,159)
Additional paid-in capital .................................................. 102,121,199 101,836,186
Accumulated deficit ......................................................... (7,752,117) (15,641,659)
------------ ------------
Total Shareholders' Equity ............................................. 94,339,808 86,147,658
------------ ------------
Total Liabilities & Shareholders' Equity .................................... $131,477,988 $113,337,680
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
THIRTEEN WEEKS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28,1998
(unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------ ------------
<S> <C> <C>
Net sales ....................................... $45,516,985 $43,511,454
Cost of sales ................................... 26,988,188 25,018,900
----------- -----------
Gross profit .............................. 18,528,797 18,492,554
Operating expenses:
Selling and distribution .................... 11,801,047 8,439,507
Marketing, advertising and promotion ........ 5,187,277 3,888,370
General and administrative .................. 1,619,354 1,825,026
Restructure cost recoveries ................. (393,477) --
Provision for doubtful accounts ............. 167,500 421,875
Amortization of intangibles ................. 337,788 235,288
----------- -----------
Total operating expenses .................. 18,719,489 14,810,066
----------- -----------
Earnings (loss) from operations ........... (190,692) 3,682,488
Interest income ................................. (41,318) (73,342)
Interest and debt expense ....................... 517,199 27,041
Other (income) expense .......................... (1,591,446) 28,633
----------- -----------
Earnings before taxes ..................... 924,873 3,700,156
Income tax expense .............................. 332,954 1,307,494
Minority share of income (loss) ................. (43,793) 68,230
----------- -----------
Net earnings .................................... 635,712 2,324,432
Other comprehensive expense, net of tax:
Foreign currency translation adjustments ..... (29,299) (70,781)
----------- -----------
Comprehensive net earnings ...................... $ 606,413 $ 2,253,651
=========== ===========
Earnings per share information:
Basic:
Weighted average shares ......................... 13,307,388 13,360,489
Net earnings per share .......................... $ 0.05 $ 0.17
=========== ===========
Diluted:
Weighted average shares ......................... 13,653,322 13,873,924
Net earnings per share .......................... $ 0.05 $ 0.17
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
THIRTY-NINE WEEKS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28,1998
(unaudited)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------- -------------
<S> <C> <C>
Net sales ....................................... $156,579,447 $141,669,623
Cost of sales ................................... 90,066,953 83,999,208
------------ ------------
Gross profit .............................. 66,512,494 57,670,415
Operating expenses:
Selling and distribution .................... 32,767,639 25,447,459
Marketing, advertising and promotion ........ 16,098,846 12,648,776
General and administrative .................. 6,279,620 5,314,382
Restructure cost recoveries ................. (393,477) --
Provision for doubtful accounts ............. 395,501 697,926
Amortization of intangibles ................. 948,098 693,150
------------ ------------
Total operating expenses .................. 56,096,227 44,801,693
------------ ------------
Earnings from operations .................. 10,416,267 12,868,722
Interest income ................................. (166,636) (310,773)
Interest and debt expense ....................... 794,789 177,895
Other income .................................... (3,155,559) (1,812,221)
------------ ------------
Earnings before taxes ..................... 12,943,673 14,813,821
Income tax expense .............................. 4,659,722 5,151,743
Minority share of income ........................ 377,407 503,426
------------ ------------
Net Earnings .................................... 7,906,544 9,158,652
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustments ... 11,299 (109,116)
------------ ------------
$ 7,917,843 $ 9,049,536
============ ============
Earnings per share information:
Basic:
Weighted average shares ......................... 13,307,446 13,273,246
Net earnings per share .......................... $ 0.59 $ 0.69
============ ============
Diluted:
Weighted average shares ......................... 13,640,473 13,878,636
Net earnings per share .......................... $ 0.58 $ 0.66
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY NINE WEEKS ENDED FEBRUARY 27,1999 AND FEBRUARY 28,1998
(unaudited)
<TABLE>
<CAPTION>
February 27, February 28,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ............................................................... $ 7,906,544 $ 9,158,653
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization .......................................... 3,705,295 3,318,950
Restructure cost recoveries ............................................ (393,477) --
Net gain on sale of equipment .......................................... (49,358) --
Minority share of income ............................................... 377,407 503,426
Provision for losses on accounts receivable and sales returns .......... 395,501 746,851
Changes in assets and liabilities, net of effects of business acquisition
Accounts receivable .............................................. (14,188,249) (4,005,574)
Inventories ...................................................... (6,566,505) (6,353,435)
Deferred income taxes ............................................ (42,839) 138,127
Prepaid expenses ................................................. (1,153,190) (354,218)
Other assets ..................................................... (301,050) (1,740,083)
Accounts payable ................................................. (3,040,138) (541,621)
Accrued payroll and related expenses ............................. (713,708) 6,226
Restructuring costs .............................................. (4,683,574) --
Income taxes payable ............................................. 2,657,058 (1,156,262)
------------ ------------
Net cash used in operating activities ........................ (16,090,283) (278,960)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ................................. (4,386,106) (3,990,577)
Investments in other companies, net of cash received ...................... (219,900) (2,027,535)
Proceeds from sale of property, plant and equipment ........................ 840,093 --
------------ ------------
Net cash used in investing activities ........................ (3,765,913) (6,018,112)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on short term borrowings ............................... 6,252,492 (55,081)
Payments on capital lease obligations ...................................... (163,374) (40,741)
Proceeds from long term debt ............................................... 5,317,492 1,731,875
Consolidated subsidiary dividends paid to minority shareholders ............ (413,548) (526,106)
Proceeds from issuance of common stock ..................................... 1,219,025 1,031,059
Payment for repurchase of common stock ..................................... (3,959,793) (306,215)
------------ ------------
Net cash provided by financing activities .................... 8,252,294 1,834,791
Effect of exchange rate changes on cash ...................... 17,654 (170,494)
------------ ------------
Net decrease in cash and cash equivalents .................... (11,586,248) (4,632,775)
Cash, beginning of period .................................................. 16,779,528 15,350,175
------------ ------------
Cash, end of period ........................................................ $ 5,193,280 $ 10,717,400
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION - AMOUNTS PAID FOR:
Interest ............................................................... $ 426,058 $ 177,895
Income taxes ........................................................... $ 1,372,398 $ 6,128,837
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in investment in consolidated subsidiary
Fair value of net assets acquired ...................................... $ 121,181 $ --
Stock issued ........................................................... $ 926,342 $ 597,280
Business Acquisition
Common stock issued for business acquisition ............................ $ 1,999,380
Note payable issued for business acquisition ............................ $ 1,483,479
Fair value of net liabilities assumed, excluding cash received .......... $ 1,144,044
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
VANS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements included herein are unaudited
and reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods
presented. The results of operations for the current interim periods are not
necessarily indicative of results to be expected for the current year.
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
2. Inventories are comprised of the following:
<TABLE>
<CAPTION>
FEBRUARY 27, 1999 MAY 31, 1998
----------------- ------------
<S> <C> <C>
Raw materials ................ $ -- $ 646,957
Work-in-process .............. 176,216 378,300
Finished goods ............... 38,117,848 29,453,524
------------ ------------
38,294,064 30,478,781
Less: Valuation allowance .... (869,527) (637,546)
------------ ------------
$ 37,424,537 $ 29,841,235
============ ============
</TABLE>
3. Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share represents net earnings divided by the weighted-average
number of shares outstanding, inclusive of the dilutive impact of common
stock equivalents. During the thirty-nine week periods ended February 27,
1999, and February 28, 1998, the difference between the weighted average
number of shares used in the basic computation compared to that used in the
diluted computation was due to the dilutive impact of options to purchase
common stock.
The reconciliations of basic to diluted weighted average shares are as
follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------- -------------------------------
FEBRUARY 27, FEBRUARY 28, FEBRUARY 27, FEBRUARY 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings ........................ $ 635,712 $ 2,324,432 $ 7,906,544 $ 9,158,652
=========== =========== =========== ===========
Weighted average shares
used in basic computation ...... 13,307,388 13,360,489 13,307,446 13,273,246
Dilutive stock options .............. 345,934 513,435 333,027 605,390
----------- ----------- ----------- -----------
Weighted average shares
used for dilutive
computation .................... 13,653,322 13,873,924 13,640,473 13,878,636
=========== =========== =========== ===========
</TABLE>
4. Income taxes for the interim periods were computed using the effective tax
rate estimated to be applicable for the full fiscal year, which is subject
to ongoing review and evaluation by management.
5. During the fourth quarter of Fiscal 1998 ("Q4 Fiscal 1998"), the Company
restructured its U.S. operations and announced the closure of its last U.S.
manufacturing facility, located in Vista, California (the "Vista Facility").
The closure of the Vista Facility was primarily due to a significant
reduction in orders for footwear produced at such Facility. Additionally,
during Q4 Fiscal 1998, the Company commenced the restructuring of its
European operations by terminating certain distributor relationships and
replacing them with sales agents and a European-based operational structure
designed to directly support such agents.
The closure of the Vista Facility will result in the following benefits to
the Company: (i) decreased cost of goods for product produced at the Vista
Facility versus foreign-sourced product; (ii) the elimination of variances
in the manufacturing cost-per-unit which resulted from increases and
decreases in production levels at the Vista Facility; and (iii) increased
management focus on marketing and distribution rather than Facility
management and cost accounting. The replacement of distributors with sales
agents will enable the Company to recognize the sales and income previously
recognized by the distributors, and the establishment of a Company-owned
European operational structure should enable the Company to more efficiently
coordinate its sales and marketing efforts and control its distribution.
6
<PAGE> 7
In Q4 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 the Vista
Facility and the restructuring of its European operations. The estimated
provision includes approximately $2,949,000 for terminated international
agreements and related costs, $2,184,000 for estimated loss on sale of plant
equipment, $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.
The following table outlines the beginning balance of, and expenditures and
adjustments to, the restructuring accrual during the third quarter of Fiscal
1999 ("Q3 Fiscal 1999"):
<TABLE>
<CAPTION>
NOVEMBER 28, FEBRUARY 27,
European Restructuring: 1998 1999
BALANCE CASH ADJUSTMENTS BALANCE
---------------------------------------------------------------
<S> <C> <C> <C>
Termination of international distributors ........... $ 1,029,000 (80,000) -- $ 949,000
U.S. RESTRUCTURING:
Plant closure costs ................................. 807,000 (414,000) (393,000) --
----------- ---------
$ 1,836,000 $ 949,000
=========== =========
</TABLE>
During Q3 Fiscal 1999, the Company incurred cash expenditures of $80,000
related to the termination of two of the Company's international distributors
in Europe and incurred cash expenditures of $414,000 related to the closure
of the Vista Facility. In addition, the Company recognized $393,000 in
restructure cost recoveries related to the closure of the Vista Facility. The
remaining restructuring cost reserve will be incurred before December 1999 in
the form of cash payments for one of the terminated international
distributors. The cash expenditures will be funded out of operations.
6. 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 was 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 bindings 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) contingent consideration up to $12,000,000 based on
the performance of Switch during the Fiscal year ending May 31, 2001, and due
to be settled on July 20, 2001. The results of Switch are consolidated in the
Company's financial statements.
7. During the second quarter of Fiscal 1999 ("Q2 Fiscal 1999"), the Company
acquired an additional 10% of the common shares of Global Accessories
Limited, an international distributor based in the United Kingdom ("Global")
to bring the Company's total investment in Global to 70%. The purchase price
of $926,000 consisted of the issuance of 106,649 shares of the Company's
common stock. The excess of the cost over the fair value of the net assets
acquired is reflected as "Excess of cost over the fair value of net assets
acquired" in the February 27, 1999, and May 31, 1998, condensed consolidated
balance sheets.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements about the
Company's revenues, earnings, spending, margins, orders, products, plans,
strategies and objectives that involve risk and uncertainties. Forward-looking
statements include any statement that may predict, forecast or imply future
results, and may contain words like "believe," "anticipate," "expect,"
"estimate," "project," or words similar to those. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in footnotes accompanying certain forward-looking statements, as well as those
discussed under the caption "Certain Considerations" on pages 8 to 13 of the
Company's Annual Report on Form 10-K for the year ended May 31, 1998, which is
filed with the Securities and Exchange Commission.
7
<PAGE> 8
OVERVIEW
General
The Company is a leading lifestyle, retail and entertainment-based company
which targets 10 to 24 year-old consumers throughout the sponsorship of core
sports,(TM) such as skateboarding, snowboarding, surfing and wakeboarding, and
through major entertainment events and venues, such as the VANS Triple Crown
Series, the VANS Warped Tour, the VANS World Amateur Skateboarding
Championships, and the world's largest skate park. The Company is the successor
to Van Doren Rubber Company, Inc., a California corporation that was founded in
1966 ("VDRC"). VDRC was acquired by the Company in February 1988 in a series of
related transactions for a total cost (including assumed liabilities) of $74.4
million. VDRC was merged with and into the Company in August 1991 at the time of
the Company's initial public offering.
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 was 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 bindings 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) contingent consideration up to $12,000,000 based on the performance of
Switch during the Fiscal year ending May 31, 2001, and due to be settled on July
20, 2001. The results of Switch are consolidated in the Company's financial
statements.
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. During the
second quarter of Fiscal 1998 ("Q2 Fiscal 1998") and Q2 Fiscal 1999, the Company
acquired another 9% and 10%, respectively, of the Global common shares in
exchange for Common Stock of the Company. The remaining 30% of the Global common
shares are expected to be acquired by the Company over the next three years. The
results of Global are consolidated in the Company's financial statements.
The Company has also established the following foreign subsidiaries: Vans
Latinoamericana (Mexico), S.A. de C.V. ("Vans Latinoamericana"), Vans Argentina
S.A. ("Vans Argentina"), Vans Brazil S.A., ("Vans Brazil"), Vans Uruguay, S.A.
("Vans Uruguay"), and Vans Footwear Ltd., a United Kingdom company ("VFL"). 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.
Recent Restructurings
During Q4 Fiscal 1998, the Company restructured its U.S. operations and
announced the closure of its last U.S. manufacturing facility, located in Vista,
California (the "Vista Facility"). The closure of the Vista Facility was
primarily due to a significant reduction in orders for footwear produced at such
Facility. Additionally, during Q4 Fiscal 1998, the Company commenced the
restructuring of its European operations by terminating certain distributor
relationships and replacing them with sales agents and a European-based
operational structure designed to directly support such agents (the "European
Conversion").
The closure of the Vista Facility has resulted in the following benefits to
the Company: (i) decreased cost of goods for product produced at the Vista
Facility versus foreign-sourced product; (ii) the elimination of variances in
the manufacturing cost-per-unit which resulted from increases and decreases in
production levels at the Vista Facility; and (iii) increased management focus on
marketing and distribution rather than Facility management and cost accounting.
The European Conversion will enable the Company to recognize the sales and
income previously recognized by the distributors, and the establishment of a
Company-owned European operational structure should enable the Company to more
efficiently coordinate its sales and marketing efforts and control its
distribution. The Company has experienced increased selling and distribution
expenses and marketing, advertising, and promotion expenses in connection with
the European Conversion, as discussed below.
The Company incurred an infrequent 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.
The majority of the costs for these restructurings were incurred in the first
nine months of Fiscal 1999, with the exception of final cash payments for one of
the terminated distributors which are payable in December 1999. Such cash
expenditures will be funded out of operations. See "Note 5 to Notes to the
condensed consolidated financial statements." The Vista Facility was closed on
August 6, 1998.
8
<PAGE> 9
RESULTS OF OPERATIONS
THIRTEEN-WEEK PERIOD ENDED FEBRUARY 27, 1999 ("Q3 FISCAL 1999") VERSUS THE
THIRTEEN-WEEK PERIOD ENDED FEBRUARY 28, 1998 ("Q3 FISCAL 1998")
NET SALES
Net sales for Q3 Fiscal 1999 increased 4.6% to $45,517,000, compared to
$43,511,000 for the same period in Fiscal 1998. The sales increase was primarily
driven by increases in sales through the Company's own retail stores and to
international accounts, as discussed below.
Total U.S. sales, including sales through the Company's U.S. retail stores,
increased 1.8% to $32,723,000 for Q3 Fiscal 1999, versus $32,158,000 for the
same period a year ago. Total international sales increased 12.7% to $12,794,000
for Q3 Fiscal 1999, versus $11,353,000 for Q3 Fiscal 1998.
The increase in total U.S. sales primarily resulted from a 39.3% increase in
sales through the Company's U.S. retail stores, partially offset by a 19.6%
decrease in U.S. wholesale sales. The increase in U.S. retail store sales was
driven by a 21.2% increase in comparable store sales (sales at stores open one
year or more). Retail sales included the sale, at low margins, of more than
150,000 pairs of shoes produced at the Vista Facility. Such sales adversely
impacted gross margins for the quarter. See "Gross Profit" below. Domestic
wholesale sales for the quarter were adversely impacted by the ongoing
contraction in the U.S. market for athletic footwear which led to the
cancellation of orders and the inability of the Company to obtain orders from
large retailers. The increase in international sales through the Company's
wholly-owned Hong Kong subsidiary, Vans Far East Limited ("VFEL"), was primarily
due to increased sales in Europe related to the European Conversion. See
"--Recent Restructurings."
GROSS PROFIT
Gross profit was essentially flat at $18,529,000 in Q3 Fiscal 1999 versus
$18,493,000 in the same period of Fiscal 1998. As a percentage of net sales,
gross profit decreased to 40.7% for Q3 Fiscal 1999 from 42.5% for the same
period of Fiscal 1998. The decrease in gross profit as a percentage of net sales
was primarily due to: (i) pricing pressure related to the weak U.S. market for
athletic footwear discussed above, and (ii) the sale at low margins of more than
150,000 pairs of shoes produced at the Vista Facility, most of which were sold
through the Company's retail stores. Such sales were responsible for
approximately $1.0 million of margin erosion during the quarter. The Company
anticipates that there may be additional sales of low-margin
domestically-produced shoes in Q4 Fiscal 1999 which could negatively impact
gross profit in such quarter.
EARNINGS (LOSS) FROM OPERATIONS
The Company had a loss from operations of $191,000 in Q3 Fiscal 1999 versus
earnings from operations of $3,682,000 in the same period of Fiscal 1998.
Operating expenses in Q3 Fiscal 1999 increased 26.4% to $18,719,000 from
$14,810,000 in Q3 Fiscal 1998, primarily due to increases in selling and
distribution expenses and marketing, advertising and promotional expenses, each
as discussed below. As a percentage of net sales, operating expenses increased
to 41.1% from 34.0%, on a period-to-period basis.
Selling and distribution. Selling and distribution expenses increased 39.8%
to $11,801,000 in Q3 Fiscal 1999 from $8,440,000 in Q3 Fiscal 1998, primarily
due to: (i) start-up costs related to the European Conversion; (ii) expansion of
the Company's retail store chain; (iii) the inclusion of Vans Uruguay, VFL and
Switch in the Company's results of operations, which subsidiaries were not
included in the Company's results of operations for Q3 Fiscal 1998 because Vans
Uruguay and VFL had not yet been formed and Switch had not yet been acquired by
the Company; and (iv) activities to support the Company's sales growth.
9
<PAGE> 10
Marketing, advertising and promotion. Marketing, advertising and promotion
expenses increased 33.4% to $5,187,000 in Q3 Fiscal 1999 from $3,888,000 in Q3
Fiscal 1998, primarily due to: (i) promotional events such as the VANS Triple
Crown Series for surfing and snowboarding; (ii) increased co-op advertising to
support U.S. wholesale sales; (iii) increased direct advertising and promotional
expense in Europe resulting from the European Conversion; and (iv) increased
royalty expense related to footwear, snowboard boots and clothing which bear the
licensed names and logos of certain of the Company's athletes.
General and administrative. General and administrative expenses decreased
11.3% to $1,619,000 in Q3 Fiscal 1999, from $1,825,000 in Q3 Fiscal 1998,
primarily due to the termination of the management agreement with a former
significant stockholder of the Company.
Restructure cost recoveries. The Company recognized $393,000 of adjustments
due to the more-efficient-than-expected shutdown of the Vista Facility. See
"--Recent Restructurings" and Note 5 to Notes to condensed consolidated
financial statements.
Provision for doubtful accounts. The amount that was provided for bad debt
expense in Q3 Fiscal 1999 was $167,000 versus $422,000 in Q3 Fiscal 1998, due to
improvements in the management of past due accounts.
Amortization of intangibles. Amortization of intangibles increased 43.6% to
$338,000 in Q3 Fiscal 1999 from $235,000 in Q3 Fiscal 1998, primarily due to the
increase in goodwill related to the Switch Merger and the acquisition of an
additional 10% of Global's common shares. See "--Overview."
INTEREST INCOME
Interest income decreased from $73,000 in Q3 Fiscal 1998 to $41,000 in Q3
Fiscal 1999 primarily due to the increased working capital requirements to
support the Company's sales growth.
INTEREST AND DEBT EXPENSE
Interest expense increased to $517,000 in Q3 Fiscal 1999 from $27,000 in Q3
Fiscal 1998 due to increased borrowings to support increased sales and to
finance purchases of common stock pursuant to the Company's stock repurchase
program. Such program was completed in Q3 Fiscal 1999. See "--Liquidity and
Capital Resources--Borrowings."
OTHER INCOME
Other income increased to $1,591,000 in Q3 Fiscal 1999 from an expense of
$29,000 in the same period of Fiscal 1998, primarily due to royalty income
received from the Company's distributor for Japan, which was zero in Q3 Fiscal
1998.
INCOME TAX EXPENSE
Income tax expense decreased to $333,000 in Q3 Fiscal 1999 from $1,307,000 in
Q3 Fiscal 1998 as a result of the lower earnings discussed under the caption
"--Earnings from operations" above. The effective tax rate increased from 35.3%
in Q3 Fiscal 1998 to 36.0% in Q3 Fiscal 1999 due to the reclassification of
minority interest to a net-of-tax basis in the current year as opposed to a
before-tax basis that was used in the prior fiscal year.
MINORITY SHARE OF INCOME (LOSS)
Minority interest changed to ($44,000) in Q3 Fiscal 1999 from $68,000 in Q3
Fiscal 1998 primarily due to the decreased profitability of the Company's Latin
America subsidiaries and the change in treatment of taxes related to the
minority interest discussed under the caption "--Income Tax Expense." This
decrease was partially offset by the increase in minority interest related to
Global as a result of Global's increased profitability, offset by the decrease
in the minority ownership of Global. See "--Overview."
10
<PAGE> 11
THIRTY-NINE WEEK PERIOD ENDED FEBRUARY 27, 1999 ("FISCAL 1999 NINE MONTHS")
VERSUS THE THIRTY-NINE WEEK PERIOD ENDED FEBRUARY 28, 1998 ("FISCAL 1998 NINE
MONTHS")
NET SALES
Net sales for the Fiscal 1999 Nine Months increased 10.5% to $156,579,000,
compared to $141,670,000 for the same period in Fiscal 1998. The sales increase
was primarily driven by increased sales through the Company's retail and
domestic wholesale sales channels, as discussed below.
Total U.S. sales, including sales through the Company's U.S. retail stores,
increased 19.4% to $117,168,000 for the Fiscal 1999 Nine Months from $98,127,000
for the same period a year ago. Total international sales decreased 9.5% to
$39,411,000 for the Fiscal 1999 Nine Months, as compared to $43,542,000 for the
same period a year ago.
The increase in total U.S. sales resulted from (i) a 13.0% increase in
domestic wholesale sales as the Company increased penetration of existing
accounts, (ii) a 31.2% increase in sales through the Company's U.S. retail
stores, and (iii) an increase in sales of snow-related products including the
addition of sales of Switch(TM) step-in binding systems. The increase in U.S.
retail store sales was driven by sales from a net eight new stores versus a year
ago, and a 13.3% increase in comparable store sales. The decrease in
international sales through VFEL was primarily due to a 61.1% decrease in sales
to Japan.
GROSS PROFIT
Gross profit increased 15.3% to $66,512,000 in the Fiscal 1999 Nine Months
from $57,670,000 in the same period of Fiscal 1998. As a percentage of net
sales, gross profit increased to 42.5% for the Fiscal 1999 Nine Months from
40.7% for the same period of Fiscal 1998. The increase in gross profit was
primarily due to: (i) increased sales through the Company's retail stores; (ii)
a shift in sales mix to higher-margin retail and domestic wholesale business;
and (iii) the benefits of better sourcing prices from factories in Asia. This
increase was partially offset by the lower gross profit experienced by the
Company in Q3 Fiscal 1999. See the caption "--Gross profit" under the discussion
of Q3 Fiscal 1999.
EARNINGS FROM OPERATIONS
Earnings from operations decreased 19.1% to $10,416,000 in the Fiscal 1998
Nine Months from $12,869,000 in the same period of Fiscal 1998. Operating
expenses in the Fiscal 1999 Nine Months increased 25.2% to $56,096,000 from
$44,802,000 in the same period a year ago, primarily due to increases in selling
and distribution expenses and marketing, advertising and promotion expenses,
each as discussed below. As a percentage of sales, operating expenses increased
from 31.6% to 35.8%, on a period-to-period basis.
Selling and distribution. Selling and distribution expenses increased 28.8%
to $32,768,000 in the Fiscal 1999 Nine Months from $25,447,000 in the same
period a year ago, 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 eight new stores; (ii) the inclusion of
operating costs related to certain of the Company's subsidiaries, including
Switch, which were not included for the entire period in the Fiscal 1998 Nine
Months condensed consolidated financial statements; (iii) costs required to
support the Company's U.S. sales growth; and (iv) start-up costs related to the
European Conversion.
Marketing, advertising and promotion. Marketing, advertising and promotion
expenses increased 27.3% to $16,099,000 in the Fiscal 1999 Nine Months from
$12,649,000 in the same period a year ago, primarily due to: (i) higher print
and television advertising expenditures related to the back-to-school selling
season; (ii) increased co-op advertising to support U.S. wholesale sales; (iii)
increased costs associated with the VANS Warped Tour '98 and the establishment
of several events included in the VANS Triple Crown Series; (iv) increased
royalty expense related to footwear, snowboard boots and clothing which bear the
licensed names and logos of certain of the Company's athletes; and (v) increased
direct advertising and promotional expense in Europe resulting from the European
Conversion.
General and administrative. General and administrative expenses increased
18.2% to $6,280,000 in the Fiscal 1999 Nine Months from $5,314,000 in the same
period a year ago, primarily due to: (i) increased labor, recruiting and other
employee-related expenses to support the Company's sales growth; (ii) increased
legal expenses related to the Company's ongoing worldwide efforts to protect
11
<PAGE> 12
and preserve its intellectual property rights; and (iii) increased depreciation
expense associated with new equipment and tenant improvements at the Company's
Santa Fe Springs, California facility (the "Santa Fe Springs Facility").
Restructure cost recoveries. The Company recognized $393,000 of adjustments
due to the more-efficient-than-expected shutdown of the Vista Facility.
Provision for doubtful accounts. The amount that was provided for bad debt
expense in the Fiscal 1999 Nine Months decreased to $396,000 from $698,000 in
the same period a year ago due to improvements in the management of past due
accounts.
Amortization of intangibles. Amortization of intangibles increased 36.8% to
$948,000 in the Fiscal 1999 Nine Months from $693,000 in the Fiscal 1998 Nine
Months, for the same reasons discussed under the caption "Amortization of
intangibles" for Q3 Fiscal 1999.
INTEREST INCOME
Interest income decreased to $167,000 in the Fiscal 1999 Nine Months versus
$311,000 in the Fiscal 1998 Nine Months due to increased working capital
requirements to support the Company's sales growth.
INTEREST AND DEBT EXPENSE
Interest expense increased to $795,000 for the Fiscal 1999 Nine Months from
$178,000 in the same period a year ago for the same reasons discussed under the
caption "--Interest and debt expense" for Q3 Fiscal 1999.
OTHER INCOME
Other income increased 74.2% to $3,156,000 for the Fiscal 1999 Nine Months
from $1,812,000 for the same period a year ago, primarily due to an increase in
royalty income from the Company's distributor for Japan.
INCOME TAX EXPENSE
Income tax expense decreased to $4,660,000 in the Fiscal 1999 Nine Months
from $5,152,000 in the same period in Fiscal 1998 as a result of the lower
earnings discussed above. The effective tax rate increased from 34.8% in the
Fiscal 1998 Nine Months to 36.0% in the Fiscal 1999 Nine Months for the same
reasons discussed under the caption "--Income tax expense" for Q3 Fiscal 1999.
MINORITY SHARE OF INCOME
Minority interest changed to $377,000 for the Fiscal 1999 Nine Months from
$503,000 for the same period a year ago for the same reasons discussed under the
caption "--Minority interest" for Q3 Fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company finances its operations with a combination of cash flows from
operations and borrowings under a bank revolving line of credit. See
"--Borrowings" below.
The Company experienced an outflow of cash from operating activities of
$16,090,000 during the Fiscal 1999 Nine Months, compared to an outflow of
$279,000 for the Fiscal 1998 Nine Months. Cash used by operations for the Fiscal
1999 Nine Months resulted primarily from: (i) an increase in net accounts
receivable to $31,374,000 at February 27, 1999, from $17,253,000 at May 31,
1998, as described below; (ii) an increase in net inventory to $37,425,000 at
February 27, 1999, from $29,841,000 at May 31, 1998, as described below; and
(iii) the decrease in the restructuring cost accrual. Cash outflows from
operations in the Fiscal 1999 Nine Months were partially offset by the Company's
earnings and an increase in taxes payable. Cash used in operating activities in
the Fiscal 1998 Nine Months was primarily the result of increases in inventories
and accounts receivable, partially offset by earnings.
12
<PAGE> 13
The Company had a net cash outflow from investing activities of $3,766,000 in
the Fiscal 1999 Nine Months, compared to a net cash outflow of $6,018,000 in the
Fiscal 1998 Nine Months. The Fiscal 1999 Nine Months outflows were primarily due
to capital expenditures related to new retail store openings, and were partially
offset by $840,000 of proceeds from the sale of assets associated with the
closing of the Vista Facility. Cash used in investing activities for the same
period a year ago was primarily related to new retail store openings, tenant
improvements at the Santa Fe Springs Facility and investments in other
companies.
The Company incurred a net cash inflow from financing activities of
$8,252,000 for the Fiscal 1999 Nine Months, compared to a net cash inflow of
$1,835,000 for the Fiscal 1998 Nine Months, primarily due to short-term
borrowings under the bank revolving line of credit, proceeds from long-term debt
incurred by the Company related to the funding of the Company's stock repurchase
program, long-term debt incurred by the Company's Latin America subsidiaries,
and proceeds from the issuance of common stock. See "--Borrowings" below. The
cash inflow from financing activity was partially offset by the repurchase of
$3,960,000 of common stock pursuant to the Company's stock repurchase program.
Cash provided by financing activities in the Fiscal 1998 Nine Months was related
to proceeds from short-term borrowings under the bank revolving line of credit
discussed below, and proceeds from long-term debt incurred by Vans
Latinoamericana.
Accounts receivable, net of allowance for doubtful accounts, increased from
$17,253,000 at May 31, 1998, to $31,374,000 at February 27, 1999, primarily due
to the increase in net sales the Company experienced in Q3 Fiscal 1999 and the
timing of such sales. Inventories increased to $37,425,000 at February 27, 1999,
from $29,841,000 at May 31, 1998, primarily due to: (i) an increased number of
finished goods held for sale at the Company's retail stores to support increased
sales; (ii) increased apparel inventory to support the Company's apparel
division; (iii) the consolidation of Vans Uruguay in the Company's financial
statements; and (iv) increased inventory held at the Company's distribution
center in Holland (recently established in connection with the European
Conversion) which will be shipped to accounts in Q4 Fiscal 1999.
Borrowings
The Company has a revolving 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 to $25,000,000. 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 $38,500,000. Such increase expired 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 (the "Prime
Rate") established by the Bank from time to time (7.75% as of February 27,
1999), 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 (the
"LIBOR Rate"). 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. As of February 27, 1999, the Company
was in compliance or had obtained waivers of non-compliance with respect to all
of its financial covenants. All amounts under the Revolving Line of Credit are
due and owing on November 1, 1999. At February 27, 1999, the Company had drawn
down $9,035,000 under the Revolving Line of Credit, and had $7,503,000 in open
letters of credit.
The Company formerly maintained a $5,000,000 facility with the Bank to fund
the Company's stock repurchase program which was adopted on February 3, 1998
(the "Stock Repurchase Line"). The stock repurchase program was completed during
Q3 Fiscal 1999 utilizing funds under the Revolving Line of Credit, and the Bank
agreed to convert the Stock Repurchase Line to a $5.0 million term loan (the
"Term Loan") under the Loan Agreement as of February 27, 1999. The Term Loan
will be payable at the rate of $250,000 per quarter commencing June 1, 1999,
with a balloon payment of remaining principal and interest due on February 26,
2001. The Term Loan will bear interest at the Prime Rate or the LIBOR Rate, as
determined by the Company, and will be subject to the other terms and conditions
of the Loan Agreement.
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 February 27, 1999,
$3,081,000 was the aggregate outstanding balance under this facility.
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<PAGE> 14
Current Cash Position
The Company's cash position was $5,193,000 as of February 27, 1999, compared
to $16,780,000 at May 31, 1998. The Company is seeking to increase its credit
facilities to support its expansion plans, including the opening of skate parks
and VANS Triple Crown stores. There can be no assurance that such increased
financing will be obtained. The failure to obtain such increased financing could
affect the timing of some of the Company's expansion plans in the next 12
months. * See "--Capital Resources."
Capital Resources
As of February 27, 1999, the Company's material commitments for capital
expenditures were primarily related to the opening of new retail stores. In the
remainder of Fiscal 1999, the Company plans to open approximately three new
factory outlet retail stores and two VANS Triple Crown full-price stores. The
Company estimates the aggregate cost of all of these new stores to be
approximately $1,000,000.
The Company continues to explore other projects which may involve significant
capital expenditures, including the possible opening of up to five skate parks
and 20-30 VANS Triple Crown full-price stores in the next 24 months, but cannot
currently estimate the aggregate cost of these projects.
The Company intends to utilize cash generated from operations and funds drawn
down under the Revolving Line of Credit and the Term Loan to fulfill its capital
expenditure requirements for the balance of Fiscal 1999.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("FAS") No. 131, "Disclosure about Segments of an
Enterprise and Related Information." FAS No. 131 supersedes previous reporting
requirements for reporting on segments of a business enterprise. FAS No. 131 is
effective for fiscal years beginning after December 15, 1997. As FAS No. 131 is
not required for interim reporting in the year of adoption, the Company plans to
adopt this standard in the preparation of its annual financial statements to be
included in its Fiscal 1999 Form 10-K. As FAS No. 131 only requires additional
disclosures, the Company expects there will be no impact on its financial
position or results of operations from the implementation.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS No. 133 modifies the accounting for
derivative and hedging activities and is effective for fiscal years beginning
after December 15, 1999. Since the Company and its subsidiaries do not presently
invest in derivatives or engage in significant hedging activities FAS No. 133
should not impact the Company's financial position or results of operations.
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 June 1, 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.
- ----------------------------
* NOTE: This is a forward-looking statement. The Company's actual cash
requirements could differ materially. Important factors that could cause the
Company's need for additional capital to change include: (i) the Company's rate
of growth; (ii) the number of new VANS Triple Crown stores the Company decides
to open; (iii) the number of new skate parks the Company decides to open which
must be financed in whole, or in part, by the Company; (iv) the Company's
product mix between footwear and snowboard boots; (v) the Company's ability to
effectively manage its inventory levels; (vi) timing differences in payment for
the Company's foreign-sourced product; (vii) the increased utilization of
letters of credit for purchases of foreign-sourced product; and (viii) timing
differences in payment for product which is sourced from countries which have
longer shipping lead times, such as China.
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<PAGE> 15
In April 1998, The American Institute of Certified Professional Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up activities
and organization costs to be expensed as incurred. Based on information
currently available, the Company does not expect the adoption of SOP 98-5 to
have a significant impact on its financial position or results of operations.
The Company will adopt SOP 98-5 effective June 1, 2000.
Seasonality
Historically, the Company's business has been moderately seasonal, with the
largest percentage of U.S. sales realized in the first Fiscal quarter (June
through August), the so-called "back to school" selling months. As the Company
increases sales to Europe due to the European Conversion, the Company may
recognize more of such sales in the first Fiscal quarter due to seasonal demand
for product in Europe. In addition, because snowboarding is a winter sport,
sales of the Company's snowboard boots, and Switch's Autolock(TM) step-in boot
binding system, have historically been strongest in the first and second Fiscal
quarters. Such sales are now being recognized earlier in the first Fiscal
quarter since industry retailers are demanding earlier shipments of product.
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
General. 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 "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, customers, creditors and financial service
organizations.
State of Readiness. The Company has completed the analysis of its internal IT
systems and has received certifications of Year 2000 compliance from its IT
systems vendors. The Company is in the process of testing such systems to ensure
compliance and expects such testing to be completed by the end of Fiscal 1999.*
The Company is still analyzing its non-IT systems for Year 2000 compliance and
expects to complete substantially all of such analyses by June 1999.* With
respect to third party vendors, customers, creditors and financial services
organizations, the Company has identified over 200 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 70% 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 June 1999, and is updating its list of such third parties
to reflect any required additions thereto.*
Costs; Contingency Plans. Since the Company has not completed the analysis
and data gathering phase of its Year 2000 compliance program, it cannot yet
quantify the aggregate costs that may be required to fix the Year 2000 Issue or
any losses to the Company which might result therefrom. The Company has
determined that its Human Resources and Payroll systems are not currently Year
2000 compliant. The Company estimates it will cost approximately $32,500 to fix
these systems and that such systems will be fixed by June 1999.* The Company has
not incurred any other material costs to date in fixing year 2000 Issues.
- -------------------------------
* These are forward-looking statements regarding the completion date of the
analysis and 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.
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<PAGE> 16
In the event the Company discovers that either internal IT or non-IT systems
or the systems of key third party vendors, customers, 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 party vendors, switch to other
vendors which have Year 2000 compliant systems. The Company intends to develop a
more specific contingency plan upon completion of the analysis and
data-gathering phase of its compliance program.
Risks. The Company presently does not anticipate that a material business
disruption will occur as a result of the Year 2000 Issue. However, to the extent
the Company is unable to resolve the Year 2000 Issue, the Company's business,
financial position and results of operations could be materially adversely
affected.
The Company believes that the greatest potential risk is the failure of its
external business partners or federal, state or local governments to achieve
Year 2000 compliance in a timely manner. Among other things, the company's
footwear manufacturers could be unable to manufacture or deliver materials and
products in a timely manner, and customers may lose the capability to order
products via electronic data interchange (EDI). The Company will develop the
contingency plan discussed above, but there can be no assurance that any such
contingency plan will be sufficient to mitigate the impact of noncompliance by
third parties, and some material adverse effect to the Company may result from
one or more third parties regardless of defensive contingency plans.
The Company's Year 2000 compliance efforts are subject to additional risks,
including, among others: unexpected problems identified in testing results;
delays in system conversion or implementation; the Company's failure to identify
fully all Year 2000 dependencies in its machinery, equipment, systems and in the
systems of its external business partners; and the failure of parts of the
global infrastructure, including national banking systems, power, transportation
facilities, communications and governmental activities, to be fully functional
after 1999.
As the Company's testing and implementation of its business systems and
assessment of its technical systems and departmental applications are underway,
and as responses from many of its external business partners are pending, the
Company cannot fully and accurately quantify the impact of its most reasonably
likely worst case Year 2000 scenario at the present time.
The above Section is a Year 2000 Readiness Disclosure, as defined under the
Year 2000 Information and Readiness Disclosure Act of 1998.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established a fixed conversion rate between their existing sovereign currencies
and the Euro, and adopted the Euro as their common legal currency on that date
(the "Euro Conversion"). Existing currencies are scheduled to remain legal
tender in the participating countries until January 1, 2002. During the
transition period, parties may pay for goods and services using either the Euro
or the existing currency, but retailers are not required to accept the Euro as
payment. Since the Company primarily does business in U.S. dollars, it is
currently not anticipated that the Euro Conversion will have a material adverse
impact on its business or financial condition.* The Company is aware that the
information systems for its three European stores are not currently able to
recognize the Euro Conversion, however, since two of the Company's European
stores are located in the United Kingdom, which is not currently participating
in the Euro Conversion, and the Barcelona, Spain store may continue to accept
the Spanish peseta until 2002, the Company does not expect its current European
store operations to be adversely impacted by the Euro Conversion in the near
future. The Company has confirmed that the information systems utilized by its
European sales agents will recognize the Euro Conversion, but the Company is
still analyzing whether the information systems of its European distributors
will do the same.
- ----------------------------------
* This is a forward-looking statement regarding the currencies in which the
company does business. The Company's actual results regarding the Euro
Conversion could differ materially if the Company begins to accept currencies
other than the U.S. dollar.
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<PAGE> 17
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Executive Officer Changes. Effective as of January 20, 1999, Ralph Serna was
no longer a Vice President of the Company. Effective as of March 15, 1999,
Joseph Giles was appointed Vice President and Chief Information Officer of the
Company. Effective as of March 10, 1999, Neal R. Lyons was appointed President
of the Company's Retail Division.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
<TABLE>
<S> <C>
10.1 Employment Agreement, dated March 15, 1999, by and between the
Registrant and Joseph Giles*
10.2 Employment Agreement, dated April 1, 1999, by and between the
Registrant and Kyle B. Wescoat*
10.3 Employment Agreement, dated January 21, 1999, by and between
the Registrant and Robert H. Camarena*
10.4 Fourth Amendment to Amended and Restated Loan and Security
Agreement, dated as of February 26, 1999, by and between the
Registrant and Bank of the West*
27 Financial Data Schedule*
----------------
* Previously filed.
</TABLE>
(b) Reports on 8-K.
The Company did not file any Reports on Form 8-K during Q3 Fiscal 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
VANS, INC.
(Registrant)
Date: August 19, 1999 By: /s/ Craig E. Gosselin
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CRAIG E. GOSSELIN
Vice President and
General Counsel
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EXHIBIT INDEX
<TABLE>
<CAPTION>
DOCUMENT PAGE NO.
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<S> <C> <C>
10.1 Employment Agreement, dated March 15, 1999, by and between
the Registrant and Joseph Giles*
10.2 Employment Agreement, dated April 1, 1999, by and between
the Registrant and Kyle B. Wescoat*
10.3 Employment Agreement, dated January 21, 1999, by and
between the Registrant and Robert H. Camarena*
10.4 Fourth Amendment to Amended and Restated Loan and Security Agreement,
dated as of February 26, 1999, by and between the Registrant and Bank
of the West*
27 Financial Data Schedule*
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* Previously filed.
</TABLE>
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