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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(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, 1999, 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, 90670
Santa Fe Springs, California (Zip Code)
(Address of principal executive offices)
(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)
Common Stock Purchase Rights
(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 closing sales price of the
Common Stock, as reported on the NASDAQ Stock Market on August 25, 1999), was
$151,666,000.
The number of shares of registrant's Common Stock outstanding at August 25,
1999, was 13,498,220.
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Documents Incorporated By Reference:
Portions of registrant's definitive Proxy Statement for its 1999 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, 1999
TABLE OF CONTENTS
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PART I
Item 1. Business............................. 1
Item 2. Properties........................... 14
Item 3. Legal Proceedings.................... 15
Item 4. Submission of Matters to a Vote
of Security Holders.................. 15
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters.............................. 15
Item 6. Selected Financial Data.............. 16
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations............ 17
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk........ 26
Item 8. Financial Statements and
Supplementary Data................... 27
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure................. 46
Part III
Item 10. Directors and Executive Officers
of the Registrant.................... 46
Item 11. Executive Compensation............... 46
Item 12. Security Ownership of Certain
Beneficial Owners and Management..... 46
Item 13. Certain Relationships and Related
Transactions......................... 46
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K... 46
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ITEM 1. BUSINESS
GENERAL
Vans, Inc. (the "Company") is a leading lifestyle, retail and
entertainment-based company which targets 10-24 year-old consumers through the
sponsorship of Core Sports,(TM) which consist of alternative and enthusiast
sports 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,(TM) the VANS World Amateur Skateboarding
Championships, and the world's largest skateparks. The Company was founded in
1966 in Southern California as a domestic manufacturer of vulcanized canvas
shoes. The Company is incorporated in Delaware.
MARKETING AND PROMOTION
The Company markets the VANS brand through the sponsorship of Core
Sports(TM) and entertainment events, print and television advertising and Core
Sport(TM) 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, skateparks and factory outlets, further promote the VANS brand.
CORE SPORTS(TM) AND ENTERTAINMENT EVENT SPONSORSHIPS
The Company's marketing and promotion strategy includes the ownership
and sponsorship of Core Sports(TM) and entertainment events. The Company owns
and/or sponsors numerous events collectively known as the "VANS Triple Crown
Series." These events feature top athletes competing in sanctioned contests at
venues around the world. Currently, the VANS Triple Crown Series is comprised of
the VANS Triple Crown of Skateboarding(TM) (owned by the Company); the VANS
Triple Crown of Surfing(R) (owned by the Company); the VANS Triple Crown of
Snowboarding(R) (owned by the Company); the VANS Triple Crown of Wakeboarding(R)
(events owned by World Sports and Marketing; Series name owned by the Company);
the VANS Triple Crown of Freestyle Motocross(TM) (events owned by Pace Motor
Sports; Series name owned by the Company); and the VANS Triple Crown of
Supercross(TM) (events owned by Pace Motor Sports; Series name co-owned by the
Company and Pace Motor Sports).
The Company also sponsors other Core Sports(TM) contests, events and
leagues, such as the VANS All-Girls Skate Jam, the Mt. Baker Banked Slalom, the
National Bike League and the American Bike League, and owns the High Cascade
Snowboard Camp,(TM) the leading summer snowboarding camp in the world ("HCSC").
HCSC is located at the base of Mount Hood, Oregon and capitalizes on the fact
that no other location in North America offers snow conditions year-round.
Participants in the seven and ten day camp sessions enjoy state-of-the-art
snowboarding facilities on the mountain and receive instruction from top
snowboard coaches. When not snowboarding, campers use HCSC's skateboard
facilities and have the opportunity to go wakeboarding and mountain biking. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - General."
The Company is also the exclusive title sponsor, and a part-owner, of
the "VANS Warped Tour.(TM)" This traveling music/sports tour visits top young
adult markets throughout the world. The 1998 Tour visited 33 U.S. and Canadian
markets and 33 cities in Europe and Australia, and appeared before approximately
1 million people. The Tour is an affordable daytime lifestyle, music and sports
festival for teenagers and young adults, with skateboarding, and 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
World Amateur Skateboarding Championships. The Tour is promoted through local
radio, print, poster and flyer distribution, supplemented by national promotion
via television, print and the Internet. The 1999 Tour is traveling to 30 cities
in North America and 30 cities in Europe, Australia and Hawaii.
The Company has combined the VANS Triple Crown Series and the VANS
Warped Tour(TM) as a package and sold sub-sponsorships to key advertisers, such
as Casio/G-Shock, Pepsi/ Mountain Dew, and Rolling Stone Magazine. The Company
has also reached a worldwide agreement with ESPN Networks to televise all events
comprising the VANS Triple Crown Series on ESPN, espn2 and ESPN's international
affiliates.
The Company also owns a minority interest in Board Wild LLC ("BW"),
producer of the syndicated "Board Wild" television series, a program which
features Core Sports(TM) 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.
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ATHLETE ENDORSEMENTS
The Company sponsors over 200 of the world's top male and female
athletes in numerous Core Sports(TM) including skateboarding, snowboarding,
surfing, wakeboarding, street luge, motocross, 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 Core Sports(TM) 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, EPSN, 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, ESPN Magazine, Option, Maxim,
and Bikini. In addition, the Company selectively advertises in widely
circulated fashion and lifestyle magazines, such as Teen People 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.
THE INTERNET
Vans.com. 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.
E-Commerce. In June 1999, Vans.com LLC, a Delaware limited liability
company wholly-owned by the Company, began to offer VANS footwear for sale over
the Internet. This online store displays high quality digital images of footwear
in both medium-and large-size photographs with front and alternate views of the
product. Shoppers can shop 24 hours a day, seven days a week. Purchases can be
made with credit cards, and orders generally are shipped within three business
days via UPS. Customers generally receive their orders three to five business
days after shipment. Vans.com LLC intends to expand its product offerings over
the Internet during Fiscal 2000.
MountainZone.com. Seeking to further capitalize on the opportunities
presented by the World Wide Web, during Fiscal 1997, the Company acquired a
minority interest in The ZoneNetwork.com, Inc., a Seattle-based company ("Zone")
which publishes "The Mountain Zone," a Website focusing on mountain-related
events, including snowboarding and mountain biking. Zone also provides the
Company with the opportunity to market the VANS brand and VANS products on The
Mountain Zone website.
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.
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 Core
Sports,(TM) 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.
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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 Core Sports(TM) 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, from $129 to $219 for
strap-in snowboard boots, and $159 to $275 for step-in snowboard boots. The
Company's clothing and accessories lines offer knit shirts, T-shirts, hats,
pants, shorts and snowboard outerwear, bags and backpacks.
The Company's footwear line is segmented into the following categories:
High Performance Series. This line includes the most technical
skateboarding shoes which are sold in independent skate and surf shops.
Performance Unlimited Series. This line includes technical,
performance-oriented skateboarding and biking shoes which are mainly sold in
athletic footwear and fashion/lifestyle stores. The Company has also expanded
this line to include outdoor biking and hiking-influenced trekking shoes and
snow-influenced after snowboarding boots ("S.U.B. Boots").
Prelims Series. 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.
MEN'S FOOTWEAR
High Performance Series , Performance Unlimited Series and Signature
Skate Shoes. Throughout its 33-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. The
patented Impulse Technology(R) helps to prevent heel bruising (one of the main
injuries in skateboarding), and lengthens the life of heel cushioning. During
Fiscal 1999, Impulse Technology(R) was upgraded to utilize improved cushioning
and shock absorption material to provide more support for skateboarding, and the
technology was expanded into a line of Impulse Technology(R) insoles.
The Company also offers Signature Skate Series shoes, and works with
some of the world's top skaters, such as Steve Caballero, Salman Agah, Omar
Hassan, John Cardiel 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 shoes are the Revert,(TM) Mingus II,(TM) Monk II,(TM) and
Slum.(TM) Performance Unlimited Series shoes include the Tabloid,(TM) X-One,(TM)
King,(TM) and Tidown,(TM) and the Signature Skate Series shoes include the Cab
5,(TM) Omar Hassan II and Santos.(TM)
During Fiscal 1999, the Company expanded its men's line to include
outdoor biking and hiking-influenced trekking shoes that are designed to wear on
and off the mountain. The S.U.B. boot line includes the Low Standard(TM) and the
Daniel Franck signature boot. The Company's trekking shoes include the Trek
Skool,(TM) Link,(TM) and Platinum.(TM)
Prelims Series 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 shoes are the
Inner,(TM) Quann,(TM) and Swizzle.(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,
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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 II,(TM) Entourage,(TM) Glitz,(TM) Instinct,(TM) and
Vitamin.(TM)
CHILDREN'S FOOTWEAR
The Company offers a variety of boys' and youth's casual footwear that
follow the direction of the men's Performance Unlimited and Prelims Series, as
well as Classics. These shoes include the Santos,(TM) Cab5,(TM) Tabloid(TM)
and Inner(TM). During Fiscal 1999, the Company expanded its children's line to
include young girls shoes which follow the direction of the women's line,
including the Cara Beth II,(TM) Encourage,(TM) and Best.(TM)
SNOWBOARD BOOTS; STEP-IN BINDINGS
For the 1999/2000 snowboard season, the Company has divided its
snowboard boot line into two categories: (i) conventional strap-on boots, and
(ii) step-in boots which are designed to be compatible with the Switch
Autlock(R) step-in binding system (see below). The Company's boots are endorsed
by several world-class snowboarders, including Jamie Lynn, Circe Wallce, Daniel
Franck (winner of a Silver Medal at the 1998 Winter Olympics), and Axel
Pauporte.
In July 1998, the Company acquired Switch Manufacturing ("Switch"),
maker of the Switch Autolock(R) step-in snowboard boot binding system, one of
the leading step-in systems in the world (the "Autolock(R) System"). The
Company, through Switch, licenses certain proprietary technology to boot
manufacturers such as Northwave, Raichle and Heelside for use on their snowboard
boots. Switch then sells compatible Autolock(R) Systems to dealers for resale
with such boots. The Company's Switch-compatible boots are its most technically
advanced and feature Crosslink(TM) technology, a three-position in-step strap
which is integrated to be a lateral flexing adjustable forward lean system.
Certain Switch-compatible boots, known as "X-Type" boots, also feature an
external high-back binding.
In March 1999, Switch entered into a three-year agreement with Nike USA,
Inc. whereby Nike agreed to exclusively utilize Switch's proprietary technology
in connection with its new line of snowboard boots during the term of the
agreement. The Company has also reached agreements with leading snowboard boot
brands such as Northwave, Heelside, Drake and DC Shoes for future expanded use
of Switch technology in their products.
APPAREL
The Company's apparel division designs and produces lifestyle,
skateboard and snowboarding apparel. The lifestyle line includes T-shirts, Polo
shirts, woven shirts, fleece, walkshorts and pants which focus on the skateboard
culture. The TRIPLE CROWN OF SURFING(R) line includes boardshorts, T-shirts,
woven and knit shirts and is based on the Company's Triple Crown of Surfing
Series. This line is sold primarily to specialty surf shops as well as through
the Company's own retail stores.
The snowboard line includes technical outerwear, jackets and pants,
sweaters, polyester fleece, T-shirts, hats, gloves and accessories. The line is
endorsed by several professional snowboarders, including Daniel Franck and Jimmy
Halopoff, and is primarily sold to snowboard specialty and sporting goods
stores.
In March 1999, the Company and Pacific Sunwear of California, Inc. ("Pac
Sun") formed Van Pac, LLC, a Delaware limited liability company ("Van Pac"). Van
Pac is 51% owned by the Company and 49% owned by Pac Sun. Pursuant to the terms
of the Van Pac Limited Liability Company Agreement, Van Pac will sell certain
apparel and accessories to the Company and Pac Sun for distribution through
their respective stores. Pac Sun provides product development, design, sourcing,
quality control and inventory planning to Van Pac, and the Company contributes
design services and has licensed the VANS and TRIPLE CROWN(TM) trademarks and
logos to Van Pac for use on the licensed products in the United States. Van Pac
commenced sales in June 1999.
SUNGLASSES
In April 1999, the Company and Sunglass Hut International, Inc.
("Sunglass Hut") formed VASH, LLC, a Delaware limited liability company
("VASH"). VASH is 51% owned by the Company and 49% owned by Sunglass Hut.
Pursuant to the terms of the VASH Limited Liability Company Agreement, VASH will
sell sunglasses to the Company for distribution through its stores and to its
wholesale customers and to Sunglass Hut for distribution through its stores.
Sunglass Hut provides design, product development, sourcing, quality control and
inventory planning to VASH, and the Company has licensed the VANS and TRIPLE
CROWN(TM)
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trademarks and logos to VASH for use on the licensed products throughout the
world, except Japan. The Company anticipates that VASH will commence sales in
2000.
SALES AND DISTRIBUTION
The Company has two primary distribution channels for its products: (i)
sales through Company-operated retail and factory outlet stores; and (ii)
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 subsidiary which contracts
with distributors and also sells through sales agents.
RETAIL SALES
General. The Company operates 117 retail stores (as of August 25, 1999).
The Company's retail stores are divided into four store groups: conventional
mall and freestanding stores; VANS Triple Crown(TM) stores (see below); 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 1999, the Company continued
its strategy of expanding its retail stores beyond Southern California, opening
stores in six new states outside California. The Company now operates stores in
25 states. The Company also opened two additional outlet stores in the United
Kingdom, and one outlet store in Spain and Austria.
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 55 factory outlets (as of August 25, 1999). The
Company opened 11 factory outlets during Fiscal 1999. 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 did not close any stores in Fiscal 1999.
Skateparks. In November 1998, the Company opened the world's largest
skatepark at The Block, a Mills Corporation shopping and entertainment center
located in Orange, California (the "Orange Skate Park"). The Orange Skate Park
is a 46,000 square foot enclosed facility and features vertical ramps,
mini-ramps, an extensive street course, two empty swimming pools suitable for
skating, and a peewee course. Since its opening, more than 100,000 participants
have utilized the Orange Skate Park. The success of this park lead to the
Company's decision to open additional enclosed-space parks. In that regard, in
July 1999, the Company opened a second park in Bakersfield, California which is
approximately 59,000 square feet. The Company has also signed leases or reached
agreements to open the following parks:
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LOCATION APPROXIMATE SIZE (SQ. FT) EXPECTED OPENING DATE
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Ontario, California(1) 60,000 Fall 1999
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Milpitas, California(2) 58,000 Spring 2000
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Orlando, Florida(3) 50,000 Fall 2000
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Arlington, Virginia(4) 55,000 Spring 2000
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Toronto, Canada(4) 50,000 2001
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(1) Construction of park to be substantially financed by landlord; includes
15,000 square foot BMX dirt bicycle course.
(2) Existing structure; park course to be financed by landlord.
(3) Construction of structure to be financed by landlord; park course
financed by the Company.
(4) Construction of park to be financed by landlord.
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Triple Crown Stores. In the fourth quarter of Fiscal 1999, the Company
opened its first two "VANS Triple Crown(TM)" stores, one in the San Francisco
Bay area, and one in the Chicago area. Each VANS Triple Crown(TM) store
emphasizes and promotes the various Triple Crown Core Sports(TM) the Company
sponsors through sectioned-off portions of the store which feature a particular
sport. For example, the skateboarding section contains a mini skate ramp for
skaters to use, and the Company sells skateboards, helmets, knee and elbow pads
and VANS skate shoes in that section. The snowboarding section features a faux
snow-covered mountain which is cool to the touch, and the Company sells VANS
snowboard boots, Switch Autolock(R) Systems, snowboards, helmets, snow goggles
and snow accessories in that section. Similarly themed areas are also provided
for surfing and wakeboarding. VANS Triple Crown(TM) stores are approximately
3,500 to 4,500 square feet and are located in prominent full-priced malls. Since
the end of Fiscal 1999, the Company has opened VANS Triple Crown(TM) stores in
Norfolk, Virginia, Murray, Utah, King of Prussia, Pennsylvania, and Miami,
Florida. The Company currently intends to open up to five additional VANS Triple
Crown(TM) stores in Fiscal 2000.
DOMESTIC SALES
The Company sells its products through approximately 3,000 active
accounts, including Journeys, Pacific Sunwear, Foot Action, Venator Group, Inc.
(which includes Foot Locker, Kids Foot Locker, Lady Foot Locker, and Champs
Sporting Goods), Mervyns, Kohls, Kids R Us 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 and segmenting 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 90
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 19% of the
shares of Global in Fiscal 1998 and 1999 and will acquire the remaining 30% of
the common shares of Global in 1999, 2000 and 2001. 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, 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 sales
agency agreements, the agents are paid a commission on sales and are responsible
for all sales efforts in a particular territory. VFEL, in turn, provides all
operational functions associated with such sales efforts including distribution
through a third party distribution center in Holland which contracts with Vans
Holland BV, a wholly-owned subsidiary of the Company. See "--Certain
Considerations International Business Operations; Foreign Currency
Fluctuations," and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Restructurings."
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Financial information about the Company's export sales through VFEL is
included in Note 12 of Notes to the Company's Consolidated Financial Statements.
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, shipments of product to European countries are made through a
distribution facility located in Holland, which is 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 all of its footwear and snowboard boots from VFEL,
which sources such product from independent manufacturers in South Korea, China,
Macao, the Philippines, Spain and Mexico. 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 70% of the Company's apparel is sourced off-shore in
countries such as China, Korea, Israel and India. The Company's apparel division
works directly with the foreign factories to source and develop all fabrics,
trims and styles for the line.
LICENSING
The Company has licensed certain of its trademarks for footwear,
snowboard boots, apparel and accessory products where the Company believed such
arrangements would promote the VANS brand name and image consistent with the
Company's overall marketing and promotion plan.
Currently, the Company has license agreements with six third party
foreign licensees. The foreign licensees have the exclusive right to manufacture
and sell certain products under the Company's trademarks in Japan, South Africa,
New Zealand, Malaysia and Singapore. The licenses provide for a royalty payment
to the Company, establish minimum annual royalty amounts, and cover such
products as footwear, caps, sports bags, snowboards, apparel, and sunglasses.
The licenses have varying expiration dates. The Company also licenses certain of
its trademarks to two limited liability companies it jointly owns with Pacific
Sunwear of California, Inc. and Sunglass Hut International, Inc. See "Product
Design and Development - Apparel and Sunglasses."
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 33-year heritage of the VANS brand, and the brand's
authenticity with its core customers and the athletes who participate in the
Core Sports(TM) 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, K2 Inc., 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. Shoes,
Globe, 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 33-year heritage of the VANS brand, and
the brand's authenticity with its core customers and the athletes who
participate in the Core Sports(TM) sponsored by the Company.
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Snowboard 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 K2 Inc. 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. In the step-in binding segment of the industry, the Company,
through Switch, competes on the basis of the quality and technical aspects of
the Autolock System, and the strength of the Switch(TM) and Autolock(R) brand
names. The Company is aware that several large, well-known companies are
developing step-in systems which may create significant competition for the
Autolock(R) System.
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 25, 1999, the Company's backlog of orders for delivery in
the second and third quarters of Fiscal 2000 was approximately $27.1 million, as
compared to approximately $20.9 million as of August 25, 1998. 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.
In addition, the Company has historically shipped less than all orders
in its backlog and a large portion of its products towards the end of the
quarter to meet seasonal peaks for the back to school, holiday and spring
selling seasons. 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 third party 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, the striped designs
known as the "Old Skool,(TM)" "Knu Skool,(TM)" and "Fairlane", and the patent it
holds for its Impulse Technology(R) 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, Central 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 and patents 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 13, 1999, the Company had 1,040 employees. The Company
considers its employee relations to be satisfactory. The Company has never
suffered a material interruption of business caused by labor disputes.
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CERTAIN CONSIDERATIONS
Current and prospective investors in the Company's Common Stock should
consider carefully the following factors regarding the Company's business. This
report, in addition to historical information, contains forward-looking
statements including, but not limited to, statements regarding the Company's
plans to open new skateparks, increase the number and type of retail locations
and styles of footwear, the maintenance of customer accounts and expansion of
business with such accounts, the successful implementation of the Company's
strategies, future growth and growth rates and future increase in net sales,
expenses, capital expenditures and net earnings. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "may," "will,"
"intends," "estimates" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve risks and
uncertainties, and the Company's actual results could differ materially from the
results discussed in the forward-looking statements. Important factors that
could cause or contribute to such differences include those discussed below, as
well as those discussed elsewhere in the text and footnotes of this report.
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.
In response to consumer demand, the Company also uses certain
specialized fabrics in its footwear and apparel. The failure of footwear or
apparel 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.
CORE SPORTS(TM)
A significant part of the Company's strategy focuses on the promotion
and support of Core Sports.(TM) See "Marketing and Promotion - Core Sports(TM)
and Entertainment Event Sponsorships." Many Core Sports(TM) are relatively new,
are followed by significantly fewer fans than more traditional sports, such as
football, baseball and basketball, and receive significantly less media exposure
than such sports. Although participation in, and viewership of, many Core
Sports(TM) is currently growing at a relatively high rate, there can be no
assurance that it will continue to do so. If a material number of key Core
Sports lose popularity or fail to grow or attract media coverage at acceptable
rates, the Company may have to change its strategy with respect to such sports
which could have a material adverse effect on the Company's business, financial
condition 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 33-year heritage of the VANS brand, and the brand's
authenticity with its core customers and the athletes who participate in the
Core Sports(TM) sponsored by the Company. Many of the Company's competitors,
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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, K2
Inc., 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. Shoes, Globe, 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 33-year heritage of the VANS brand, and the brand's
authenticity with its core customers and the athletes who participate in the
Core Sports(TM) sponsored by the Company
Snowboard 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 K2 Inc., 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. In the step-in binding segment of the
industry, the Company, through Switch, competes on the basis of the quality and
technical aspects of the Autolock(R) System, and the strength of the Switch and
Autolock(R) brand names. The Company is aware that several large, well-known
companies have developed and marketed step-in systems which create significant
competition for the Autolock(R) System.
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
All of the Company's shoes and snowboard boots are manufactured by
independent suppliers located in South Korea, the People's Republic of China,
Macao, the Republic of the Philippines, Spain and Mexico. 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, 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 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
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no assurance that such factors will not materially adversely affect VFEL's and
the Company's business, financial condition and results 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. Recently, in the course of an
audit, U.S. Customs reclassified a substantial number of styles of the Company's
footwear as unisex, thereby increasing the duty rate on such styles by 1.5%. The
Company is protesting such reclassifications, but no assurance can be given as
to the outcome of this matter.
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.
DEPENDENCE ON KEY CUSTOMERS
During Fiscal 1999, the Company's net sales to its top 10 customers
accounted for approximately 21.0 % of total net sales. Although the Company has
long-term relationships with many of its customers, none of its customers has
any contractual obligations to purchase the Company's products. There can be no
assurance that the Company will be able to retain its existing major customers.
In addition, the retail industry, and footwear retailers in particular, have
periodically experienced consolidation, contractions and closings and any future
consolidation, contractions or closings may result in loss of customers or
uncollectability of accounts receivables of any major customer in excess of
amounts reserved for by the Company. For example, in late 1998, the Venator
Group announced the closure of its Kinney and Footquarters shoe stores and, in
early 1999, Edison Brothers closed its Wild Pair shoe stores. The loss of major
customers could have a significant adverse effect on the Company's business and
results of operations, particularly for the quarterly period in which the loss
occurs.
NEW RETAIL CONCEPTS AND JOINT VENTURES
During Fiscal 1999, the Company introduced two new retail concepts:
skateparks and VANS Triple Crown(TM) stores. See "--Retail Sales, Skateparks and
Triple Crown Stores." The Company also entered into joint venture-type
relationships with Pacific Sunwear of California, Inc. and Sunglass Hut
International, Inc. which involve the licensing of certain of the Company's
trademarks to the ventures. See --"Business--Product Design and
Development, Apparel and Sunglasses." The new retail concepts require the
expenditure of a significant amount of capital resources (see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources"), and the joint ventures require
significant management time and energy to ensure their success. If either of the
Company's new retail concepts do not prove to be successful there could be a
material adverse effect on the Company's business and results of operations. If
either of the joint ventures is not successful, the image of the trademarks
licensed by the Company to the venture could be adversely affected. See
""--Brand Strength; Changes in Fashion Trends."
ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that anticipated cash flow from operations,
available borrowings under the Company's new credit facility, and cash on hand
will be sufficient to provide the Company with the liquidity necessary to fund
its anticipated working capital and capital requirements through Fiscal 2000.
However, in connection with its growth strategy, the Company will incur
significant working capital requirements and capital expenditures. The Company's
future capital requirements will depend on many factors including, but not
limited to, the number of skateparks and VANS Triple Crown(TM) stores it opens,
levels at which the Company maintains inventory, the market acceptance of the
Company's products, the levels of promotion and advertising required to promote
its products, and the extent to which the Company invests in new product design
and improvements to its existing product design. To the extent that available
funds are insufficient to fund the Company's future activities, the Company may
need to raise additional funds through public or private financing. No assurance
can be given that additional financing will be available or that, if available,
it can be obtained on terms favorable to the Company. Failure to obtain such
financing could delay or prevent the Company's planned expansion, which could
adversely affect the Company's business, financial condition and results of
operations. In addition, if additional capital is raised through the sale of
additional equity or convertible securities, dilution to the Company's
stockholders could occur.
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MANAGEMENT GROWTH
The Company intends to pursue its growth strategy through the opening of
new skateparks and retail stores, expanded marketing and promotion efforts, more
frequent introductions of products, broader lines of casual and performance
footwear and snowboard boots, as well as apparel and other accessories, and
increased international market penetration. To the extent the Company is
successful in increasing sales of its products, a significant strain may be
placed on its financial, management and other resources. The Company's future
performance will depend in part on its ability to manage change in 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 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 U.S. sales, and all revenues
generated from the High Cascade Snowboard Camp,(TM) realized in the first fiscal
quarter (June through August), the "back to school" months. As the Company
increases sales to Europe due to the conversion of its European operations, 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 Autolock(R)
System, have historically been strongest in the first and second Fiscal
quarters. Such sales are now being recognized earlier in the first quarter since
industry retailers are demanding earlier shipments of products. 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 towards
the end of the quarter to meet seasonal peaks for the back to school, holiday
and spring selling seasons. 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 or the occurrence of events that adversely affect the economy in
general. In addition, a significant portion of the Company's revenues continues
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 conducts 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, during Fiscal 1999, the Company
restructured its operations in Europe by eliminating certain distributor
relationships and replacing them with sales agent relationships. In connection
with this strategy, the Company established an operational structure in Europe
to support the activities of the sales agents. See "--Sales and Distribution -
International Sales" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of
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Operations - Recent Restructurings." 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 may be exposed to
transaction gains and losses that could result from changes in foreign currency
exchange rates.
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(R) 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 Core Sports(TM) 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 AND PERSONAL INJURY LIABILITY
The Company's snowboard boots, and the Switch Autolock(R) System, are
often used in relatively high-risk recreational settings. Additionally,
participants at the Company's skateparks and High Cascade Snowboard Camp(TM)
("HCSC") also engage in high-risk activities such as skateboarding,
snowboarding, in-line skating and BMX riding. Consequently, the Company is
exposed to the risk of product liability or personal injury claims in the event
that a user of its boots is injured in connection with such use or a participant
of the skateparks or HCSC is injured while using the parks' facilities. In many
cases, skatepark and HCSC participants and users of the Company's boots and the
Autolock(R) System may engage in imprudent or even reckless behavior, 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,
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or that the insurer will not disclaim coverage as to any future claim. The
successful assertion of one or more large claims against the Company that exceed
available insurance coverage, or changes in the Company's insurance policies,
including premium increases or the imposition of large deductible or
co-insurance requirements, could have a material adverse effect on the Company's
financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has fluctuated substantially since
the Company's initial public offering in August 1991. There can be no assurance
that the market price of the Common Stock will not continue to fluctuate
significantly. Future announcements concerning the Company or its competitors,
quarterly variations in operating results, the introduction of new products or
changes in product pricing policies by the Company or its competitors, weather
patterns that may be perceived to affect the demand for the Company's products,
changes in earnings estimates by analysts or changes in accounting policies,
among other factors, could cause the market price of the Common Stock to
fluctuate substantially. In addition, stock markets have experienced extreme
price and volume volatility in recent years. This volatility has had a
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, customers, 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 area.
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 $72,000. Such rent is subject to
adjustment according to the C.P.I. Index throughout the term of the lease.
Retail Stores and Skateparks. Of the Company's 117 retail stores (as of
August 25, 1999), one is 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. The Company leases
its two existing skateparks pursuant to long-term leases, and has executed
leases or reached agreements to open and operate five additional skateparks. See
Item 1. "Business - Retail Sales, Skateparks."
14
<PAGE> 18
Lease of the Orange Facility. The Company leases its former Orange,
California, manufacturing facility (the "Orange Facility") to two companies, one
of whom currently pays the Company rent of $21,000 per month, and one of whom
currently pays the Company rent of $24,000 per month. 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 on February 27,
2000, and the Company has not exercised its option to extend the lease.
The Company believes that its operating facilities are adequate for its
current needs, but the Company continues to seek profitable skatepark and 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(R) 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(R) 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 its acquisition of Switch.
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 listed on The Nasdaq Stock 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
Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
(IN DOLLARS)
<S> <C> <C>
FISCAL YEAR ENDED MAY 31, 1999:
1st Quarter ........................... 11 3/4 6 3/8
2nd Quarter ........................... 9 3/4 5 1/4
3rd Quarter ........................... 7 13/16 5 1/16
4th Quarter ........................... 11 1/2 6 1/16
</TABLE>
<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
</TABLE>
15
<PAGE> 19
On August 25, 1999, the last reported sales price on The Nasdaq Stock
Market for the Company's Common Stock was $11.50 per share. As of August 25,
1999, there were 255 holders of record of the Common Stock.
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 new credit facility prohibit the payment of such dividends without
the consent of its lenders. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................ $ 205,127 $ 174,497 $ 159,391 $ 117,407 $ 88,056
Net earnings (loss) ...................... $ 8,725 $ (2,677)(1) $ 10,437 $ 3,148 $(37,135)(2)
Earnings (loss) Per Share Information:
Basic:
Net earnings (loss) per
share before extraordinary item ........ $ 0.66 $ (0.20)(1) $ 0.81 $ 0.42 $ (3.86)(2)
Weighted average common shares
and equivalents(3) ..................... 13,289 13,284 12,963 9,747 9,611
Diluted:
Net earnings (loss) per share before
extraordinary item ..................... $ 0.64 $ (0.20)(1) $ 0.76 $ 0.40 $ (3.86)(2)
Weighted average common shares
and equivalents(3) ..................... 13,667 13,284 13,805 10,406 9,611
BALANCE SHEET DATA:
Total assets ............................. $ 130,538 $ 116,150 $ 105,824 $ 90,461 $73,066
Long-term debt ........................... $ 8,712 $ 1,874 $ 481 $ 344 $22,416
Stockholders' equity ..................... $ 95,151 $ 86,148 $ 88,282 $ 72,728 $20,264
</TABLE>
- ----------
(1) Reflects: (i) $8.2 million of restructuring costs associated with the
closure of the Company's Vista, California, manufacturing 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.
16
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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 Item 1. "Business--Certain Considerations."
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 fair values. Switch is the manufacturer of the Autolock(R) step-in boot
binding system (the "Switch Autolock 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 financial performance of Switch during the fiscal year
ending May 31, 2001, and are also due and payable on July 20, 2001. The
operating results of Switch were consolidated in the Company's financial
statements from the date of acquisition.
On July 29, 1999, the Company acquired all of the outstanding capital
stock of High Cascade Snowboard Camp, Inc., an Oregon corporation ("High
Cascade"), and its sister company, Snozone Boarding and Video, Inc., an Oregon
corporation, through mergers of the two companies with and into a wholly-owned
subsidiary of the Company. High Cascade, located at the base of Mount Hood in
Oregon, is the leading summer snowboarding camp in the world. The consideration
exchanged by the Company primarily consisted of the issuance of 236,066 shares
of the Company's Common Stock. The results of the two companies will be
consolidated in the Company's financial statements starting with the period
beginning June 1, 1999.
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 Fiscal 1998
and 1999, the Company acquired another 19% of the Global common shares in
exchange for Common Stock of the Company. The remaining 30% of the Global common
shares will be acquired by the Company in 1999, 2000 and 2001. 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.
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
17
<PAGE> 21
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 3 to Notes to the
Company's Consolidated Financial Statements. The Vista Facility was closed on
August 6, 1998.
RESULTS OF OPERATIONS
FISCAL YEAR 1999 AS COMPARED TO FISCAL YEAR 1998
Net Sales
Net sales for Fiscal 1999 increased 17.6% to $205,127,000, compared to
$174,497,000 for Fiscal 1998. The sales increase was driven by increased sales
through each of the Company's sales channels, as discussed below.
Total U.S. sales, including sales through the Company's U.S. retail
stores, increased 18.6% to $147,596,000 for Fiscal 1999 from $124,485,000 for
Fiscal 1998. Total international sales increased 15.0% to $57,531,000 for Fiscal
1999, as compared to $50,012,000 for Fiscal 1998.
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 27.8% 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 the Switch Autolock(R) System. The increase in U.S. retail
store sales was driven by sales from a net 13 new stores versus a year ago, and
an 11.1% increase in comparable store sales. The increase in international sales
through VFEL was primarily due to a 180.1% increase in sales in the fourth
quarter, led by a $9.0 million increase in sales in Europe in connection with
the European Conversion.
Gross Profit
Gross profit increased 39.1% to $86,669,000 in Fiscal 1999 from
$62,300,000 in Fiscal 1998. As a percentage of net sales, gross profit increased
to 42.3% for Fiscal 1999 from 35.7% for Fiscal 1998.
The increase in Fiscal 1999 gross profit was primarily due to: (i) the
unusually low gross profit for Fiscal 1998 due to the Inventory Write-Down; (ii)
the higher profit margin recognized in Europe due to the European Conversion;
(iii) increased sales through the Company's retail stores; and (iv) the benefits
of better sourcing prices from factories in Asia.
Earnings from Operations
Earnings from operations was $9,218,000 in Fiscal 1999 versus a loss of
$4,962,000 in Fiscal 1998 which reflected the Restructuring Costs and the
Inventory Write Down. Operating expenses in Fiscal 1999 increased 15.1% to
$77,451,000 from $67,262,000 in Fiscal 1998, 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
decreased from 38.5% to 37.8%, on a year-to-year basis, primarily because Q4
Fiscal 1998 included the Restructuring Costs.
Selling and distribution. Selling and distribution expenses increased
38.2% to $46,392,000 in Fiscal 1999 from $33,570,000 in Fiscal 1998, primarily
due to: (i) start-up costs related to the European Conversion; (ii) increased
personnel costs, rent expense and other operating costs associated with the
expansion of the Company's retail division by the net addition of 13 new stores;
(iii) the inclusion of operating costs related to certain of the Company's
subsidiaries, including Switch, which were not included in the Fiscal 1998
Consolidated Financial Statements because they were not yet owned by the Company
or formed; and (iv) costs required to support the Company's U.S. sales growth.
Marketing, advertising and promotion. Marketing, advertising and
promotion expenses increased 20.7% to $20,685,000 in Fiscal 1999 from
$17,138,000 in Fiscal 1998, 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
18
<PAGE> 22
Warped Tour(TM) '98 and the establishment of several events included in the
VANS Triple Crown(TM) 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 33.4% to $8,952,000 in Fiscal 1999 from $6,711,000 in Fiscal 1998,
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 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 reserve expense (recovery). The Company recovered $393,000
of Restructuring Costs in Fiscal 1999 due to the less-than-expected costs to
shut down the Vista Facility, compared to the Restructuring Costs recognized in
Q4 Fiscal 1998.
Provision for doubtful accounts. The amount that was provided for bad
debt expense in Fiscal 1999 decreased to $528,000 from $698,000 in Fiscal 1998
due to improvements in the management of past due accounts.
Amortization of intangibles. Amortization of intangibles increased 37.9%
to $1,287,000 in Fiscal 1999 from $933,000 in Fiscal 1998 primarily due to the
increase in goodwill associated with the Switch acquisition. See "--General."
Interest Income
Interest income decreased to $210,000 in Fiscal 1999 versus $480,000 in
Fiscal 1998 because the Company utilized a portion of interest-bearing
investments to fund sales growth. As a result, the Company's investment accounts
decreased to zero at May 31, 1999.
Interest and Debt Expense
Interest and debt expense increased to $1,158,000 for Fiscal 1999 from
$262,000 in Fiscal 1998, primarily due to increased borrowings to support sales
growth and to finance purchases of Common Stock pursuant to the Company's stock
repurchase program. See "Liquidity and Capital Resources-Borrowings."
Other Income
Other income primarily consists of royalty payments from the licensing
of the Company's trademarks to its distributor for Japan. Other income increased
to $6,000,000 for Fiscal 1999 from $2,161,000 for Fiscal 1998, primarily due to
increases in royalties from Japan versus the significant decline in royalties
from Japan which occurred in Q3 and Q4 Fiscal 1998.
Income Tax Expense (Benefit)
Income tax expense increased to $4,852,000 in Fiscal 1999 from an income
tax benefit of $510,000 in Fiscal 1998 as a result of the earnings discussed
above compared to the net loss the Company recognized for Fiscal 1998 as a
result of the Restructuring Costs and Inventory Write-Down.
Minority Share of Income
Minority interest increased to $693,000 for Fiscal 1999 from $603,000
for Fiscal 1998, primarily due to the increased earnings of Global, partially
offset by the decrease in the minority ownership of Global. See "--General."
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.
19
<PAGE> 23
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. The U.S. market for athletic footwear contracted for the first time in 16
years in 1998, falling 6.4% versus 1997. The Company's U.S. wholesale sales for
Fiscal 1998 were adversely affected by this contraction, decreasing 23.8% in Q4
Fiscal 1998 versus the same period of the prior year.
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.
Loss 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 because such subsidiaries were not yet formed; and
(iii) costs required to support Company's sales growth and the addition of the
Company's apparel division.
- ----------
* Note: 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.
20
<PAGE> 24
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(TM) '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.
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 "--General" 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
"--General."
Interest Income
Interest income declined approximately $117,000 during Fiscal 1998
because the Company utilized a portion of interest-bearing investments to fund
sales growth. As a result, the Company's investment accounts decreased to $12.0
million at May 31, 1998.
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 "--General" and Note 8 of Notes to the Company's Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
The Company finances its operations with a combination of cash flows
from operations and borrowings under a credit facility. See "--Borrowings"
below.
21
<PAGE> 25
The Company experienced an outflow of cash from operating activities of
$8,421,000 during Fiscal 1999, compared to an inflow of $6,114,000 for Fiscal
1998. Cash used by operations for Fiscal 1999 resulted primarily from: (i) an
increase in net accounts receivable to $30,056,000 at May 31, 1999, from
$17,253,000 at May 31, 1998, as described below; (ii) an increase in net
inventory to $37,025,000 at May 31, 1999, from $29,841,000 at May 31, 1998, as
described below; (iii) the decrease in the Restructuring Costs accrual; and (iv)
the decrease in income taxes payable. Cash outflows from operations in Fiscal
1999 were partially offset by the Company's earnings, the decrease in the
deferred tax assets, the add-back for depreciation and amortization and the
increase in accounts payable. Cash provided by operating activities in Fiscal
1998 was primarily the result of the add-back of the Inventory Write-Down, the
increase in the deferred tax assets, the decrease in accounts receivable and the
accrual for the Restructuring Costs, partially offset by earnings.
The Company had a net cash outflow from investing activities of
$5,570,000 in Fiscal 1999, compared to a net cash outflow of $7,463,000 in
Fiscal 1998. The Fiscal 1999 outflows were primarily due to capital expenditures
related to new retail store openings, and were partially offset by $849,000 of
proceeds from the sale of assets associated with the closing of the Vista
Facility. Cash used in investing activities for Fiscal 1998 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
$4,966,000 for Fiscal 1999, compared to a net cash inflow of $2,962,000 for
Fiscal 1998, primarily due to short-term borrowings under the Company's former
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 Fiscal 1998 was related to proceeds
from short-term borrowings under the former 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 $30,056,000 at May 31, 1999, primarily due
to the increase in net sales the Company experienced in Q4 Fiscal 1999 and the
timing of such sales. Inventories increased to $37,025,000 at May 31, 1999, from
$29,841,000 at May 31, 1998, primarily due to: (i) increased inventory held at
the Company's distribution center in Holland (established in connection with the
European Conversion); (ii) an increased number of finished goods held for sale
at the Company's retail stores to support increased sales; and (iii) the
consolidation of Vans Uruguay in the Company's financial statements.
Borrowings
In July 1999, The Company obtained a $63.5 million credit facility (the
"New Credit Facility") pursuant to a credit agreement (the "Credit Agreement")
with several lenders (the "Lenders"). The New Credit Facility replaced the
Company's former $30.0 million revolving line of credit with Bank of the West
(the "Bank of the West Facility"). The New Credit Facility permits the Company
to utilize the funds thereof for general corporate purposes, capital
expenditures, acquisitions and stock repurchases.
Of the $63.5 million amount of the New Credit Facility, $53.0 million is
in the form of an unsecured revolving line of credit (the "Revolver"), and $10.5
million is in the form of an unsecured term loan (the "Term Loan"). The Revolver
expires on October 31, 2002. The Company has the option to pay interest on
Revolver advances at a rate equal to either (i) LIBOR, or (ii) a base rate plus
a margin which will be based on the Company's ratio of "Funded Debt" to
"EBITDA," each as defined in the Credit Agreement.
Of the $10.5 million Term Loan, approximately $5.0 million was disbursed
at the closing of the New Credit Facility to replace a portion of the Bank of
the West Facility used for the Company's stock repurchase program, and the
remaining portion must be disbursed on or before January 31, 2001. The Term Loan
expires May 31, 2004, and the principal thereof is payable in 14 quarterly
installments beginning February 28, 2001, and ending May 31, 2004. The Company
has the option to pay interest on the Term Loan at LIBOR for advances of one,
two three or six months, or a base rate for U.S. dollar advances.
Under the Credit Agreement, the Company must maintain certain financial
covenants and is prohibited from engaging in certain transactions or taking
certain corporate actions, such as the payment of dividends, without the consent
of the Lenders. At May 31, 1999, the Company had drawn down $8,950,000 under the
Bank of the West Facility and had $14,115,000 in open letters of credit
thereunder. All amounts drawn under the Bank of the West Facility were repaid at
the closing of the New Credit 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
22
<PAGE> 26
operating capital, on an as-needed basis, in the form of loans to Vans
Latinoamericana and Vans Argentina. At May 31, 1999, $3,178,000 was the
aggregate outstanding balance under this facility.
Current Cash Position
The Company's cash position was $7,777,000 as of May 31, 1999, compared
to $16,780,000 at May 31, 1998. The Company believes that cash generated from
operations, coupled with the New Credit Facility, should be sufficient to meet
its cash requirements for the next 12 months.*
Capital Resources
As of May 31, 1999, the Company's material commitments for capital
expenditures were primarily related to the opening of new retail stores and
skateparks. In the remainder of Fiscal 2000, the Company plans to open five new
factory outlet retail stores, five full-price stores and three to five VANS
Triple Crown(TM) stores. The Company estimates the aggregate cost of all of
these new stores to be approximately $3,000,000.
The Company currently intends to open up to three additional skateparks
in Fiscal 2000 and estimates the aggregate cost of its portion of these projects
to be approximately $2,000,000.
The Company intends to utilize cash generated from operations and funds
drawn down under the New Credit Facility to fulfill its capital expenditure
requirements for Fiscal 2000.
Recent Accounting Pronouncements
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 June 15, 2000. Since the Company and its subsidiaries do not presently
invest in derivatives or engage in significant hedging activities or other
derivatives, FAS No. 133 does not currently 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 adopted
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.
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.
- ----------
* 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(TM) stores the Company
decides to open; (iii) the number of new skateparks 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.
23
<PAGE> 27
Seasonality
Historically, the Company's business has been moderately seasonal, with
the largest percentage of U.S. sales, and all revenues generated from the High
Cascade Snowboard Camp,(TM) realized in the first Fiscal quarter (June through
August), the "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 the Switch Autolock(R) 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 October 1999.* The
Company is still analyzing its non-IT systems for Year 2000 compliance and also
expects to complete substantially all of such analyses by October 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 75% 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 hopes to receive substantially
all of such answers by October 1999, and has updated 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
determined that its Human Resources and Payroll systems were not Year 2000
compliant. The Company spent approximately $32,500 to fix those systems and they
are now Year 2000 compliant. The Company has not incurred any other material
costs to date in fixing Year 2000 Issues.
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 by October 1999.*
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.
24
<PAGE> 28
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, transportation carriers may be unable to deliver
raw materials or product in a timely or cost-efficient 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.
- ----------
* Note: These are forward-looking statements regarding the completion
dates of the various phases 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.
25
<PAGE> 29
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 five European stores are not currently able to
recognize the Euro Conversion, however, since three of the Company's European
stores are located in the United Kingdom, which is not currently participating
in the Euro Conversion, and the Spain and Austria stores may continue to accept
local currencies until 2002, the Company does not expect its current overall
European store operations to be materially 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable as of the end of Fiscal 1999.
- --------
* Note: 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.
26
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VANS, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................ $ 7,777,192 $ 16,779,528
Accounts receivable, net of allowance for doubtful accounts
and sales returns and allowances of $1,432,214 and $1,117,695
at May 31, 1999 and 1998, respectively (notes 6 and 12) ........... 30,056,150 17,253,102
Inventories (note 4) ................................................ 37,024,553 29,841,235
Deferred income taxes (note 8) ...................................... 1,378,456 8,281,456
Prepaid expenses .................................................... 7,823,767 4,884,184
------------- -------------
Total current assets ......................................... 84,060,118 77,039,505
Property, plant and equipment, net (notes 3, 5 and 9) ............... 15,809,950 12,994,043
Property held for lease (notes 5 and 9) ............................. 4,601,326 4,789,314
Excess of cost over the fair value of net assets acquired,
net of accumulated amortization of $35,695,857 and
$34,513,349 at May 31, 1999 and 1998, respectively (note 3) ....... 23,126,700 18,500,327
Other assets .......................................................... 2,939,623 2,826,491
------------- -------------
$ 130,537,717 $ 116,149,680
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (note 6) ...................................... $ 9,184,836 $ 5,514,664
Accounts payable .................................................... 10,600,870 6,526,595
Accrued payroll and related expenses ................................ 2,132,446 2,672,047
Accrued interest ................................................... 479,210 --
Restructuring costs (note 3) ........................................ 730,141 5,612,758
Income taxes payable ................................................ 343,698 4,936,680
------------- -------------
Total current liabilities .................................... 23,471,201 25,262,744
Deferred income taxes (note 8) ...................................... 2,090,536 1,862,452
Capital lease obligations ( notes 7 and 9) .......................... 90,893 135,143
Long-term debt (note 7) ............................................. 8,712,129 1,874,153
------------- -------------
34,364,759 29,134,492
Minority interest ..................................................... 1,021,754 867,530
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, 13,238,567 and 13,290,042
shares issued and outstanding at May 31,
1999 and 1998, respectively ....................................... 13,235 13,290
Additional paid-in capital .......................................... 102,092,026 101,836,186
Accumulated other comprehensive income .............................. (37,774) (60,159)
Accumulated deficit ................................................. (6,916,283) (15,641,659)
------------- -------------
Net stockholders' equity ..................................... 95,151,204 86,147,658
Commitments and contingencies (note 9)
------------- -------------
$ 130,537,717 $ 116,149,680
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 31
VANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (note 12) .......................................... $ 205,127,113 $ 174,497,304 $ 159,390,654
Cost of sales ................................................ 118,458,384 112,197,573 96,690,956
------------- ------------- -------------
Gross profit ............................................... 86,668,729 62,299,731 62,699,698
Operating expenses:
Selling and distribution ................................... 46,392,299 33,569,858 28,111,805
Marketing, advertising and promotion ....................... 20,684,827 17,137,722 13,162,123
General and administrative ................................. 8,952,015 6,711,137 6,085,415
Restructuring reserve expense (recovery) (note 3) .......... (393,477) 8,212,238 --
Provision for doubtful accounts ............................ 528,001 697,926 710,611
Amortization of intangibles ................................ 1,287,029 933,208 836,021
------------- ------------- -------------
Total operating expenses ........................... 77,450,694 67,262,089 48,905,975
------------- ------------- -------------
Earnings (loss) from operations .................... 9,218,035 (4,962,358) 13,793,723
Interest income .............................................. 210,266 479,728 597,045
Interest and debt expense .................................... (1,157,955) (262,181) (438,485)
Other income (note 2) ........................................ 5,999,850 2,160,640 2,782,671
------------- ------------- -------------
Earnings (loss) before income taxes, minority
interest in income of consolidated
subsidiaries ............................................ 14,270,196 (2,584,171) 16,734,954
Income tax expense (benefit)(note 8) ......................... 4,851,867 (510,067) 5,996,180
Minority share of income ..................................... 692,953 603,247 301,917
------------- ------------- -------------
Net earnings (loss) .......................................... 8,725,376 (2,677,351) 10,436,857
Other comprehensive income (expense), net of tax:
Foreign currency translation adjustment ................. 14,774 (147,262) --
------------- ------------- -------------
Total comprehensive income (loss) ............................ $ 8,740,150 $ (2,824,613) $ 10,436,857
============= ============= =============
Per share information (note 2):
Basic:
Net earnings (loss) ..................................... $ .66 $ (.20) $ .81
============= ============= =============
Weighted average common and common equivalent shares .... 13,289,540 13,283,674 12,962,826
Diluted:
Net earnings (loss) ..................................... $ .64 $ (.20) $ .76
============= ============= =============
Weighted average common and common equivalent shares .... 13,666,759 13,283,674 13,805,000
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 32
VANS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED MAY 31, 1999
COMMON STOCK
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN STOCK
SHARES AMOUNT CAPITAL SUBSCRIPTION
----------- -------- ------------- -----------
<S> <C> <C> <C> <C>
BALANCE AT MAY 31, 1996 ................................. 12,628,085 $ 12,628 $ 96,201,083 $(85,000)
Issuance of common stock for cash .................... 368,862 369 2,269,565 80,500
Issuance of common stock for acquisition ............. 170,000 170 2,642,800 --
Foreign currency translation adjustment .............. -- -- -- --
Net earnings ......................................... -- -- -- --
----------- -------- ------------- --------
BALANCE AT MAY 31, 1997 ................................. 13,166,947 $ 13,167 $ 101,113,448 $ (4,500)
Issuance of common stock for cash .................... 188,265 188 1,105,981 4,500
Repurchase of common stock ........................... (102,500) (102) (980,523) --
Issuance of common stock for acquisition ............. 37,330 37 597,280 --
Foreign currency translation adjustment .............. -- -- -- --
Net earnings ......................................... -- -- -- --
----------- -------- ------------- --------
BALANCE AT MAY 31, 1998 ................................. 13,290,042 $ 13,290 $ 101,836,186 $ --
Issuance of common stock for cash ..................... 179,584 178 1,239,678 --
Repurchase of common stock ............................ (471,000) (473) (3,959,320) --
Issuance of common stock for acquisition .............. 239,941 240 2,975,482 --
Foreign currency translation adjustment ............... -- -- -- --
Net earnings .......................................... -- -- -- --
----------- -------- ------------- --------
BALANCE AT MAY 31, 1999 ................................. 13,238,567 $ 13,235 $ 102,092,026 $ --
=========== ======== ============= ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
RETAINED OTHER TOTAL
EARNINGS COMPREHENSIVE STOCKHOLDERS'
(ACUM. DEFICIT) INCOME EQUITY
--------------- ----------- -------------
<S> <C> <C> <C>
BALANCE AT MAY 31, 1996 ................................. $(23,401,165) $ -- $ 72,727,546
Issuance of common stock for cash .................... -- -- 2,350,434
Issuance of common stock for acquisition ............. -- -- 2,642,970
Cumulative foreign currency translation adjustment ... -- 123,919 123,919
Net earnings ......................................... 10,436,857 -- 10,436,857
------------ --------- ------------
BALANCE AT MAY 31, 1997 ................................. $(12,964,308) $ 123,919 $ 88,281,726
Issuance of common stock for cash .................... -- -- 1,110,669
Repurchase of common stock ........................... -- -- (980,625)
Issuance of common stock for acquisition ............. -- -- 597,317
Cumulative foreign currency translation adjustment ... -- (184,078) (184,078)
Net earnings ......................................... (2,677,351) -- (2,677,351)
------------ --------- ------------
BALANCE AT MAY 31, 1998 ................................. $(15,641,659) $ (60,159) $ 86,147,658
Issuance of common stock for cash ..................... -- -- 1,239,856
Repurchase of common stock ............................ -- -- (3,959,793)
Issuance of common stock for acquisition .............. -- -- 2,975,722
Cumulative foreign currency translation adjustment .... -- 22,385 22,385
Net earnings .......................................... 8,725,376 -- 8,725,376
------------ --------- ------------
BALANCE AT MAY 31, 1999 ................................. $ (6,916,283) $ (37,774) $ 95,151,204
============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 33
VANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED MAY 31, 1999
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .............................................. $ 8,725,376 $ (2,677,351) $ 10,436,857
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................. 5,027,972 4,500,480 3,430,203
Restructure cost recoveries ................................... (393,477) -- --
Net gain on sale of equipment ................................. (58,208) -- --
Minority share of income ...................................... 692,953 603,247 --
Provision for losses on accounts
receivable and sales returns ................................ 528,001 697,926 710,611
Inventory write-down and other non-cash restructuring
costs ........................................................ -- 10,830,848 --
Changes in assets and liabilities, net of acquisition effects:
Accounts receivable ......................................... (13,035,418) 6,475,843 (2,852,026)
Inventories ................................................. (6,166,521) (13,389,087) (5,219,924)
Deferred income taxes ....................................... 7,131,084 (8,055,609) 505,605
Prepaid expenses ............................................ (2,814,388) (1,923,749) (445,229)
Other assets ................................................ (386,331) 21,283 (96,483)
Accounts payable ............................................ 3,447,154 1,620,404 286,423
Accrued payroll and related expenses ........................ (823,366) 624,537 429,368
Accrued workers' compensation ............................... -- -- (803,964)
Restructuring costs ......................................... (5,702,393) -- --
Restructuring reserve ....................................... -- 5,612,758 (1,750,782)
Income taxes payable ........................................ (4,592,982) 1,172,953 2,411,426
------------ ------------ ------------
Net cash provided by (used in)
operating activities ................................... (8,420,544) 6,114,483 7,042,085
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment ....................... (6,011,615) (5,039,992) (5,092,936)
Investments in other companies ................................... (407,323) (2,423,377) (500,000)
Proceeds from sale of property, plant and equipment .............. 849,018 -- --
------------ ------------ ------------
Net cash used in investing activities .................... (5,569,920) (7,463,369) (5,592,936)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) short-term borrowings ................ 2,897,348 1,830,245 (2,746,930)
Payments on capital lease obligations ............................ (250,823) (87,462) (121,137)
Proceeds from long term debt ..................................... 5,452,703 1,615,559 258,594
Consolidated subsidiary dividends
paid to minority shareholder .................................. (413,548) (526,106) --
Proceeds from issuance of common stock, net ...................... 1,239,856 1,110,604 2,295,504
Payment for repurchase of common stock ........................... (3,959,793) (980,523) --
------------ ------------ ------------
Net cash provided by (used in) financing activities ...... 4,965,743 2,962,317 (313,969)
Effect of exchange rate changes .......................... 22,385 (184,078) (18,357)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ..... (9,002,336) 1,429,353 1,116,823
Cash and cash equivalents, beginning of year ..................... 16,779,528 15,350,175 14,233,352
------------ ------------ ------------
Cash and cash equivalents, end of year ........................... $ 7,777,192 $ 16,779,528 $ 15,350,175
============ ============ ============
SUPPLEMENTAL CASH FLOW Information -- amounts paid for:
Interest ......................................................... $ 780,423 $ 262,182 $ 438,485
Income taxes ..................................................... $ 1,968,805 $ 6,310,168 $ 2,588,541
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 ................................... 121,181 96,929 --
Stock issued .................................................... 976,342 597,280 --
Business Acquisition
Stock issued .................................................... 1,999,380 -- --
</TABLE>
30
<PAGE> 34
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Note payable issued ............................................. 1,483,479 -- --
Fair value of net liabilities assumed, excluding cash received .. 1,144,044 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 35
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999, 1998, AND 1997
1. BUSINESS AND ORGANIZATION
Vans, Inc. (the "Company") is a leading lifestyle, retail and
entertainment-based company which targets 10-24 year-old consumers through the
sponsorship of Core Sports(TM), 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 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 1998 the Company acquired an additional 10% of the
common shares of Global, to bring the total investment to 70%. The Company will
acquire the remaining 30% of the Global Shares in 1999, 2000 and 2001. 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.
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.
The Company's customers are located primarily in the United States.
However, there are customers located in a number of foreign countries (see note
12). 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 Uruguay S.A. ("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, Switch, Vans
International, Inc., a foreign sales corporation, Vans Footwear International,
Inc., a California corporation, VFEL, Vans Footwear Limited, a wholly-owned
United Kingdom subsidiary, Global, Vans Latinoamericana, Vans Argentina, Vans
Brazil, Vans Uruguay, 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.
32
<PAGE> 36
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 in Company acquisitions
represented trademarks, manufacturing know-how, dealer relationships and
distribution know-how and is being amortized on a straight-line basis over 15-30
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 impairment. If this review indicates that the assets
will not be recoverable from 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.
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.
33
<PAGE> 37
Other Income. Other income is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Royalty income ... $5,470,382 $ 2,216,619 $2,617,297
Rental income .... 295,283 (48,608) 36,373
Other ............ 234,185 (7,371) 129,001
---------- ----------- ----------
$5,999,850 $ 2,160,640 $2,782,671
========== =========== ==========
</TABLE>
Fair Value of Financial Instruments. As of May 31, 1999, the fair value
of most financial instruments approximated carrying value. The carrying value of
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. The Company accounts for its equity investment
in the ZoneNetwork.com, Inc. ("Zone") at cost. The fair value of Zone is not
readily determinable.
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).
Business Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," effective in the fiscal year ended May 31,
1999. SFAS No. 131 establishes new standards for reporting information about
business segments and related disclosures about products, geographic areas and
major customers, if applicable. Management of the Company has determined its
reportable segments are strategic business units that are distinct distribution
channels. Significant reportable business segments are the retail, wholesale and
international channels. Information related to these segments is summarized in
note 14.
Net Earnings (Loss) per Common Share
In Fiscal 1999 and 1997 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.
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 had an anti-dilutive effect because the Company
incurred a net loss.
Options to purchase 795,236, 105,334, and 371,540 shares of common stock
at prices ranging from $8.75 to $20.50 were outstanding during fiscal years
1999, 1998 and 1997, 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.
34
<PAGE> 38
Recent Accounting Pronouncements
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 June 15, 2000. Since the Company and its subsidiaries do not presently
invest in derivatives or engage in significant hedging activities or other
derivatives, SFAS No. 133 does not currently 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.
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.
Reclassifications. Certain amounts in the fiscal 1997 and 1998
consolidated financial statements have been reclassified to conform to the
fiscal 1999 presentation.
3. RESTRUCTURING COSTS
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 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. 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. The Vista Facility was
closed on August 6, 1998.
The estimated provision includes approximately $2,949,000 for terminated
international distributor agreements and other related European restructuring
costs such as legal, consulting and travel costs which were incurred in Q4
Fiscal 1998. Under the termination agreements, the international distributors
received an aggregate of 155,000 shares of the Company's Common Stock,
determined by negotiations between the parties, and some cash proceeds. The
Company also agreed to re-acquire certain inventory of the distributors. The
value of the inventory re-acquired from the distributors was approximately $1.0
million, valued at the distributors' cost basis, written down to the lower of
cost or market.
The estimated provision also includes $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 Vista Facility and prepare the
site for a new tenant.
The following table outlines the beginning balance of, and expenditures
related to, the restructuring accrual at May 31, 1999:
<TABLE>
<CAPTION>
May 31, 1998 May 31, 1999
Balance Cash Non-Cash Balance
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
European Restructuring:
Termination of international distributors .. $2,534,000 (300,000) (1,504,000) $730,000
U.S. Restructuring:
Plant closure costs ...................... $3,079,000 (2,686,000) (393,000) --
---------- ---------- ---------- --------
Total Restructuring Cost ................... $5,613,000 (2,986,000) (1,897,000) $730,000
========== ========== ========== ========
</TABLE>
35
<PAGE> 39
During Fiscal 1999, the Company incurred cash expenditures of $300,000
and non-cash expenditures of $1,504,000 related to the termination of two of the
Company's international distributors in Europe and incurred $2,686,000 in cash
expenditures related to the closure of the Vista Facility. In addition, in Q3
Fiscal 1999, the Company recognized $393,000 in restructure cost recoveries
related to the closure of the Vista Facility.
4. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Raw materials ..... $ -- $ 646,957
Work-in-process ... 138,004 378,300
Finished goods .... 36,886,549 28,815,978
----------- -----------
$37,024,553 $29,841,235
=========== ===========
</TABLE>
Inventories at May 31, 1999 and 1998 are reduced by $681,598 and
$637,546, respectively, to reflect the lower of cost or market valuation
allowances.
In Q4 Fiscal 1998, as a result of the U.S. and European restructurings,
the Company wrote-down its raw materials approximately $1,750,000 to its net
realizable value and its domestically-produced finished goods inventory
approximately $6,850,000 to its net realizable value and reserved approximately
$800,000 against the inventory to be purchased from the terminated international
distributors. The net realizable value was estimated using historical sales data
for similar inventory and the amount of the inventory reserve was estimated
based on the difference between the distributor's landed cost (purchase price)
and the Company's cost. The write-down is not included in the valuation
allowance at May 31, 1998, as it was recorded directly against the inventory and
the inventory reserve for the inventory to be purchased from the terminated
international distributors is included in the accrued liabilities as of May 31,
1998 (see note 3).
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Machinery and equipment ............................ $ 2,898,950 $ 2,692,859
Store fixtures and equipment ....................... 4,573,361 2,994,827
Automobiles and trucks ............................. 1,075,566 1,025,556
Computers, office furniture and equipment .......... 8,020,297 6,956,026
Leasehold improvements ............................. 11,061,832 7,996,503
------------ ------------
Less accumulated depreciation and amortization ..... (11,820,056) (8,671,728)
------------ ------------
$ 15,809,950 $ 12,994,043
============ ============
</TABLE>
The machinery and equipment balance as of May 31, 1998, is net of a
reserve for the estimated loss on the sale of the machinery and equipment of
$2,184,000 associated with the closing of the Vista Facility (see note 3). The
estimated loss was calculated by subtracting the estimated proceeds of $350,000
from the sale of the machinery and equipment from $2,534,000, the net book value
of the assets to be sold.
36
<PAGE> 40
As of May 31, 1999 and 1998, the property held for lease related to the
closed Orange, California manufacturing facility had a net book value of
$4,601,326 and $4,789,314, respectively (see note 9). These amounts are net of
$4,450,019 and $4,257,532, respectively, of accumulated depreciation. The amount
of future rental income under noncancellable leases for this property is
$1,868,700.
Included in machinery and equipment and automobiles and trucks at May
31, 1999 and 1998 are $828,558 of assets held under capital leases. At May 31,
1999 and 1998, accumulated amortization of assets held under capital leases
totaled $425,977 and $294,777, respectively (see note 9).
Depreciation expense totaled $3,434,787, $3,371,946 and $2,596,357 for
the years ended May 31, 1999, 1998 and 1997, 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 expired 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 (7 3/4% as of May 31, 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"). Under the loan agreement
establishing the 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, 1999, the Company was in
compliance with all such covenants. At May 31, 1999, the Company had drawn down
$8,950,000 under the Line of Credit, and had $14,115,000 in open letters of
credit thereunder.
In July 1999 the Company obtained a $63.5 million credit facility
pursuant to a credit agreement with several lenders. The new credit facility
replaced the Line of Credit (see note 13).
7. DEBT
Long-term debt at May 31, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
MAY 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Triple Crown of Surfing Note Payable ... $ -- $ 50,000
12% note payable to Tavistock .......... 3,178,225 1,934,229
Capitalized lease obligations with
interest at 9.6% (see note 9) ....... 282,030 263,879
Switch note payable .................... 1,611,733 --
Bank of the West Facility .............. 3,915,111 --
Astro van note payable ................. 7,060 --
---------- ----------
$8,994,159 $2,248,108
Less: Current portion ................. 191,137 238,812
---------- ----------
$8,803,022 $2,009,296
========== ==========
</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.
37
<PAGE> 41
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Current:
U.S. Federal ........ $(1,902,012) $ 3,280,477 $4,021,966
State ............... (482,957) 945,271 1,165,505
Foreign ............. 800,086 507,795 303,302
----------- ----------- ----------
(1,584,883) 4,733,543 5,490,773
----------- ----------- ----------
Deferred:
U.S. Federal ........ 5,098,666 (4,151,909) 393,413
State ............... 1,338,084 (1,091,701) 111,994
----------- ----------- ----------
6,436,750 (5,243,610) 505,407
----------- ----------- ----------
$ 4,851,867 $ (510,067) $5,996,180
=========== =========== ==========
</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,
-----------------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) ............ $ 4,994,569 $ (904,460) $ 5,857,234
Compensation under stock option plans ................ -- (18,953) (94,936)
Amortization of intangible assets .................... 422,191 318,311 284,247
State franchise taxes, net of Federal benefit ........ 555,832 (77,823) 821,368
Increase in valuation allowance ...................... 564,494 289,328 12,668
Other ................................................ 64,650 (159,545) 102,013
Tax effect of foreign operations ..................... (1,749,869) 43,075 (986,414)
----------- ----------- -----------
$ 4,851,867 $ (510,067) $ 5,996,180
=========== =========== ===========
</TABLE>
The components of net deferred taxes as of May 31, 1999 and 1998 follow:
<TABLE>
<CAPTION>
MAY 31,
-----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable ................................ $ 40,963 $ --
Inventories ........................................ 661,636 787,868
Restructuring costs ................................ 297,313 5,513,553
Accrued expenses ................................... 605,339 654,283
Compensation under stock option plans .............. -- 36,325
Tax credit and other carryforwards ................. 1,008,537 444,043
----------- -----------
2,613,788 7,436,072
Valuation allowance ................................ (1,008,537) (444,043)
Total deferred tax assets .......................... 1,605,251 6,992,029
Deferred tax liabilities:
Accounts receivable ................................ -- 62,351
Property, plant and equipment ...................... 1,319,054 196,710
Intangibles ........................................ 4,275 113,691
Unremitted earnings of foreign subsidiaries ........ 994,002 200,273
----------- -----------
Total deferred tax liabilities ..................... 2,317,331 573,025
----------- -----------
Net deferred tax asset (liabilities) ............... $ (712,080) $ 6,419,004
=========== ===========
</TABLE>
38
<PAGE> 42
Based on the Company's current and historical pre-tax results of
operations, management believes it is more likely than not that the Company will
realize the benefit of the existing deferred tax assets as of May 31, 1999, with
the exception of foreign tax credit and other carryforwards which may not be
realizable.
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 should 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, 1999 are as follows:
<TABLE>
<S> <C>
2000 ...................................................... $209,839
2001 ...................................................... 75,724
2002 ...................................................... 19,847
--------
Total minimum obligations ................................. 305,410
Less: amounts representing interest ...................... 23,380
--------
Present value of net minimum obligations .................. 282,030
Less current portion ...................................... 191,137
--------
Long-term obligations at May 31, 1999 (see note 7) ........ $ 90,893
========
</TABLE>
The current portion of capital lease obligations is included in accounts
payable in the accompanying balance sheets at May 31, 1999 and 1998.
Operating Leases. Substantially all of the Company's retail stores and
the distribution 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, 1999:
<TABLE>
<S> <C>
2000 ........................... $ 5,645,270
2001 ........................... 4,847,602
2002 ........................... 4,183,456
2003 ........................... 3,408,713
2004 ........................... 2,402,001
Thereafter ..................... 6,580,518
------------
27,067,560
Less: Sublease income ......... (364,500)
------------
$ 26,703,060
============
</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 agreements. The first party, CAPCO, leases
approximately 71,400 square feet under a gross lease for a period of five years
commencing November 1, 1996. Base rent of $21,000 is payable monthly. The second
party, Orange Engineering, leases approximately 76,000 square feet under a
triple net lease for a period of five 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, 1999 are as follows:
<TABLE>
<S> <C> <C>
2000 ....................................... $ 558,520
2001 ....................................... 576,280
2002 ....................................... 369,400
----------
Net minimum future lease receipts .......... $1,504,200
==========
</TABLE>
The Company also leases certain other equipment on a month-to-month
basis. Total rent expense incurred for the years ended May
39
<PAGE> 43
31, 1999, 1998 and 1997 under all operating leases was approximately $5,717,000,
$4,897,000, and $5,830,000, respectively.
Included in rent expense for each of the years ended May 31, 1999, 1998
and 1997 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, 1999, 1998 and 1997, 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 1999 and fiscal 1998 $204,732 and $188,699, respectively, was
recorded as compensation expense. At May 31, 1999 and 1998 the balance in
deferred compensation was $568,583 and $363,851.
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 and $350,000 for the years ended May 31, 1998 and 1997, respectively.
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 $953,000 at May 31, 1999. These agreements range from 1-3 years in
duration and are payable through July 2002. Approximately $978,000, $544,000 and
$550,000 were paid under such license agreements during the years ended May 31,
1999, 1998 and 1997, respectively.
Foreign Currency Contracts. Global enters into foreign currency
contracts from time to time to hedge against currency fluctuations for the
purchase of U.S. dollars. At May 31, 1999 and 1998 the amount in foreign
currency contracts approximated Pound Sterling400,000 and Pound Sterling600,000,
respectively. At May 31, 1999, the remaining time until the settlement dates
ranged from 1 to 2 months. The Company currently owns 70% of Global (see note
1).
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 the years ended May 31, 1999 and 1998.
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.
The Compensation Committee of the Board of Directors determined in June
1998 that the exercise prices of certain stock options previously granted to
certain Board members of the Company were at such high levels compared to the
existing market value that the retention powers of the options had been negated
to a certain extent. Accordingly, on June 16, 1998, the Committee approved the
amendment of the exercise price of certain director options to lower them to
$9.38, the closing sales price of the Common Stock on that date. 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.
40
<PAGE> 44
At May 31, 1999, the Company has three stock-based compensation plans.
No compensation cost has been recognized for fixed stock option plans. Had
compensation cost for the Company's three stock-based compensation plans been
recognized under SFAS Statement No. 123, the Company's net earnings (loss) and
earnings (loss) per share would have been reduced as indicated in the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
MAY 31, MAY 31, MAY 31,
1999 1998 1997
------- --------- --------
<S> <C> <C> <C>
Pro forma net earnings (loss) .............. $ 7,951 $ (3,407) $ 10,207
Pro forma earnings (loss) per share
Basic ...................................... $ .60 $ (0.26) $ 0.79
Diluted .................................... $ .58 $ (0.26) $ 0.74
</TABLE>
The pro forma net earnings (loss) and per share amounts reflect only
options granted from June 1, 1996 through May 31, 1999. 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 1999, 1998 and 1997, respectively:
expected volatility of 55% for Fiscal 1999 and 53% for Fiscal 1998 and 1997;
risk-free interest rates ranging from 4.42% to 5.54% for Fiscal 1999, from 5.43%
to 6.06% for Fiscal 1998, and 5.82% to 6.62% for Fiscal 1997; 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, 1999 no options had been exercised 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,
1999 and its 1991 Long-Term Incentive Plan as of May 31, 1999, 1998 and 1997 and
changes during the years then ended are presented below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- ---------------------------
WEIGHTED
SHARES WEIGHTED AVERAGE SHARES AVERAGE SHARES WEIGHTED AVERAGE
FIXED OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
- ---------------------------------- ------ ---------------- ------ -------------- ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ...... 1,106 $ 8.49 1,185 $ 8.88 1,212 $ 6.16
Granted ............................... 529 6.76 243 10.03 465 12.38
Exercised ............................. (21) 6.41 (178) 5.68 (324) 5.90
Forfeited ............................. (46) 8.73 (144) 8.76 (168) 5.25
----- ----- -----
Outstanding at end of year ............ 1,568 7.60 1,106 8.49 1,185 8.88
Options exercisable at year-end ....... 788 -- 594 424
Weighted average fair value of
options granted during the year ....... $ 6.75 $ 9.53 $ 6.23
</TABLE>
41
<PAGE> 45
The following table summarizes information about fixed stock options
outstanding at May 31, 1999:
<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, 1999 CONTRACTUAL LIFE EXERCISE PRICE MAY 31, 1999 EXERCISE PRICE
----------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$5.75-$ 9.50 164,767 $3.88 $6.93 164,767 $6.82
4.50- 6.88 164,655 5.67 5.25 160,855 5.25
4.25- 9.25 158,929 6.42 7.49 158,929 7.49
9.25- 14.13 379,000 7.56 9.30 260,687 9.30
8.53- 9.81 174,620 8.39 9.21 43,124 9.22
6.25- 10.88 506,299 9.50 6.72 -- --
--------- ---------
1,568,270 7.58 7.60 788,362 7.59
</TABLE>
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 $9.38 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, 1999, 797,496 options had been exercised, and
56,140 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, 1999, no shares
were sold and at May 31, 1999, 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 Plan was amended and restated by the
Board of Directors in its entirety in May 1999 to conform to certain changes in
Delaware law.
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, 1999 (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.
42
<PAGE> 46
12. EXPORT SALES
Sales to foreign unaffiliated customers, by major country, through
VFEL were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
France ............. $ 9,628,000 $ 5,922,000 $ 5,154,000
United Kingdom ..... 9,165,000 6,863,000 3,957,000
Germany ............ 7,506,000 3,957,000 5,446,000
Japan .............. 6,189,000 13,798,000 11,704,000
Mexico ............. 3,181,000 2,940,000 385,000
Argentina .......... 2,633,000 1,489,000 27,000
Canada ............. 2,585,000 1,585,000 1,941,000
Panama ............. 1,643,000 1,818,000 1,397,000
Other .............. 15,001,000 11,640,000 14,283,000
----------- ----------- -----------
$57,531,000 $50,012,000 $44,294,000
=========== =========== ===========
</TABLE>
The Company's operations are subject to the customary risks of doing
business abroad, including, but not limited to, currency fluctuations, customs
duties and related fees, various import controls and other non-tariff barriers,
restrictions on the transfer of funds, labor unrest and strikes and, in certain
parts of the world, political instability. The Company believes that it has
acted to reduce these risks by diversifying manufacturing among various
countries and, within those countries, among various factories.
13. SUBSEQUENT EVENTS
In July 1999 the Company obtained a $63.5 million credit facility (the
"New Credit Facility") pursuant to a Credit Agreement (the "Credit Agreement")
with several lenders (the "Lenders"). The New Credit Facility replaced the
Company's former $30.0 million revolving line of credit with Bank of the West
(the "Bank of the West Facility").
Of the $63.5 million amount of the New Credit Facility, $53.0 million is
in the form of an unsecured revolving line of credit (the "Revolver"), and $10.5
million is in the form of an unsecured term loan (the "Term Loan"). The Revolver
expires on October 31, 2002. The Company has the option to pay interest on
Revolver advances at a rate equal to either (i) LIBOR, or (ii) a base rate plus
a margin which will be based on the Company's ratio of "Funded Debt" to
"EBITDA," each as defined in the Credit Agreement.
Of the $10.5 million Term Loan, approximately $5.0 million was disbursed
at the closing of the New Credit Facility to replace a portion of the Bank of
the West Facility, and the remaining portion must be disbursed on or before
January 31, 2001. The Term Loan expires May 31, 2004, and the principal thereof
is payable in 14 quarterly installments beginning February 28, 2001, and ending
May 31, 2004. The Company has the option to pay interest on the Term Loan at
LIBOR for advances of one, two three or six months, or a base rate for U.S.
dollar advances.
Under the Credit Agreement, the Company must maintain certain financial
covenants and is prohibited from engaging in certain transactions or taking
certain corporate actions, such as the payment of dividends, without the consent
of the Lenders.
On July 29, 1999, the Company acquired all of the outstanding capital
stock of High Cascade Snowboard Camp, Inc., an Oregon corporation ("High
Cascade"), and its sister company, Snozone Boarding and Video, Inc., an Oregon
corporation, through mergers of the two companies with and into a wholly-owned
subsidiary of the Company. The merger will be accounted for as a pooling of
interests. High Cascade, located at the base of Mount Hood in Oregon, is the
leading summer snowboarding camp in the world.
The consideration exchanged by the Company primarily consisted of
236,066 shares of the Company's Common Stock. The results of the two companies
will be consolidated in the Company's financial statements starting with the
period beginning on June 1, 1999.
43
<PAGE> 47
14. BUSINESS SEGMENTS, CONCENTRATION OF BUSINESS AND CREDIT RISK AND
SIGNIFICANT CUSTOMERS
The Company's accounting policies of the segments below are the same as
those described in the summary of significant accounting policies, except that
the Company does not allocate corporate charges, income taxes or unusual items
to segments. The Company evaluates performance based on segment revenues and
consolidated operating income. The Company's reportable segments have distinct
sales channels. Each business segment is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Retail ............ $ 60,050,000 $ 46,984,000 $ 36,999,000
Wholesale ......... 87,546,000 77,501,000 78,127,000
International ..... 57,531,000 50,012,000 44,265,000
------------ ------------ ------------
$205,127,000 $174,497,000 $159,391,000
============ ============ ============
</TABLE>
The Company does not have any individual customers representing more
than 10% of sales.
44
<PAGE> 48
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, 1999 and 1998, 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, 1999. 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 audits 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, 1999 and 1998, and the results of their
operations and their cash flows for each year in the three-year period ended May
31, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Orange County, California
July 19, 1999
45
<PAGE> 49
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, 6, and 14 of the Proxy Statement for the
Company's 1999 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
8 of the Proxy Statement for the Company's 1999 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 1999
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
Not applicable.
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>
46
<PAGE> 50
<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
(1) 3.2 Amended and Restated By-laws of the Registrant, approved
by the Board of Directors of the Registrant on May 18,
1999
(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
(27) 4.3 Amended and Restated Rights Agreement, dated as of May
18, 1999, by and between the Registrant and ChaseMellon
Shareholder Services as Rights Agent.
(25)10.1 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) 10.2 1991 Long-Term Incentive Plan
(2) 10.2.1 Amendment No. 1 to 1991 Long-Term Incentive Plan
(2) 10.2.2 Amendment No. 2 to 1991 Long-Term Incentive Plan
(9) 10.2.3 Amendment No. 3 to the 1991 Long-Term Incentive Plan
(11)10.2 4 Amendment No. 4 to the 1991 Long-Term Incentive Plan
(11)10.2.5 Amendment No. 5 to the 1991 Long-Term Incentive Plan
(18)10.2.6 Amendment No. 6 to the 1991 Long-Term Incentive Plan
(25)10.3 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
(1) 10.4 Credit Agreement, dated as of July 13, 1999, among the
Registrant, Bank of America NT&SA and other lenders
(12)10.5 Employment Agreement, dated as of September 1, 1995, by
and between the Registrant and Gary H. Schoenfeld
(25)10.5.1 Amendment No. 1 to the Employment Agreement of Gary H.
Schoenfeld
(13)10.6 Employment Agreement dated as of December 1, 1995, by
and between Walter E. Schoenfeld and the Registrant
(19)10.6.1 Amendment No. 1 to the Employment Agreement of Walter E.
Schoenfeld
(31)10.6.2 Amendment No. 2 to the Employment Agreement of Walter E.
Schoenfeld, dated May 18, 1998
(1) 10.6.3 Amendment No. 3 to the Employment Agreement of Walter E.
Schoenfeld
(30)10.7 Employment Agreement, dated as of April 1, 1999, by and
between Kyle B. Wescoat and the Registrant, superseding
his Agreement dated February 14, 1996
</TABLE>
47
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(16)10.8 Employment Agreement, dated July 1, 1996, by and between
the Registrant and Charles C. Kupfer
(16)10.9 Standard Industrial/Commercial Single Tenant Lease -
Gross, dated August 15, 1996, by and between the
Registrant and CAPCO, Inc.
(16)10.10 Standard Industrial/Commercial Single Tenant Lease -
Net, dated July 22, 1996, by and between the Registrant
and Orange Engineering & Machine, Inc.
(16)10.11 Trust Under Vans, Inc. Deferred Compensation Plan, dated
as of June 3, 1996
(16)10.11.1 Amendment to Trust Under Vans, Inc. Deferred
Compensation Plan
(16)10.12 Deferred Compensation Agreement for Walter Schoenfeld,
dated as of June 1, 1996
(25)10.13 Standard Industrial Sublease, dated March 25, 1997, by
and between the Registrant and Frank Zamarripa Inc.
(17)10.14 Lease between Wohl Venture One, LLC, a Delaware limited
liability company, and the Registrant
(17)10.15 Construction Agreement between Wohl Venture One, LLC, a
Delaware limited liability company, and the Registrant
(18)10.16 Employment Agreement, dated December 4, 1996, by and
between the Registrant and Jay E. Wilson
(1) 10.17 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)10.18 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)10.19 Side Letter to the Operating Agreement
(20)10.20 Share Sale and Purchase Option Agreement, dated November
20, 1996, by and among the Registrant and the
shareholders of Global Accessories Limited
(25)10.21 Investor Rights Agreement, dated July 8, 1997, by and
between the Registrant and The Zone Network, Inc.
(23)10.22 Employment Agreement, dated as of February 3, 1998, by
and between the Registrant and Michael C. Jonte
(24)10.23 Employment Agreement, dated as of October 29, 1997, by
and between the Registrant and Scott A. Brabson
(28)10.24 Surrender of Leasehold, dated as of September 14, 1998,
by and between the Registrant and Pacific Gulf
Properties, Inc.
(29)10.25 Employment Agreement, dated October 21, 1998, by and
between the Registrant and Stephen M. Murray
(30)10.26 Employment Agreement, dated March 15, 1999, by and
between the Registrant and Joseph D. Giles
(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>
48
<PAGE> 52
- ----------
(1) Filed previously.
(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.
(27) Filed as an exhibit to the Registrant's Form 8-A/A Registration
Statement, filed with the SEC on June 28, 1999.
(28) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended August 29, 1998.
(29) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 28, 1998.
(30) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 27. 1999.
(31) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1998.
49
<PAGE> 53
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarterly period ended May 31, 1999.
50
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this amendment no. 1
to be signed on its behalf by the undersigned thereunto duly authorized.
VANS, INC.
(Registrant)
/s/ CRAIG E. GOSSELIN
----------------------------------------
By: Craig E. Gosselin
Date: September 16, 1999 Vice President and General Counsel
51
<PAGE> 55
<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
(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
(1) 3.2 Amended and Restated By-laws of the Registrant, approved
by the Board of Directors of the Registrant on May 18,
1999
(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
(27) 4.3 Amended and Restated Rights Agreement, dated as of May
18, 1999, by and between the Registrant and ChaseMellon
Shareholder Services as Rights Agent.
(25)10.1 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) 10.2 1991 Long-Term Incentive Plan
(2) 10.2.1 Amendment No. 1 to 1991 Long-Term Incentive Plan
(2) 10.2.2 Amendment No. 2 to 1991 Long-Term Incentive Plan
(9) 10.2.3 Amendment No. 3 to the 1991 Long-Term Incentive Plan
(11)10.2 4 Amendment No. 4 to the 1991 Long-Term Incentive Plan
(11)10.2.5 Amendment No. 5 to the 1991 Long-Term Incentive Plan
(18)10.2.6 Amendment No. 6 to the 1991 Long-Term Incentive Plan
(25)10.3 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
(1) 10.4 Credit Agreement, dated as of July 13, 1999, among the
Registrant, Bank of America NT&SA and other lenders
(12)10.5 Employment Agreement, dated as of September 1, 1995, by
and between the Registrant and Gary H. Schoenfeld
(25)10.5.1 Amendment No. 1 to the Employment Agreement of Gary H.
Schoenfeld
(13)10.6 Employment Agreement dated as of December 1, 1995, by
and between Walter E. Schoenfeld and the Registrant
(19)10.6.1 Amendment No. 1 to the Employment Agreement of Walter E.
Schoenfeld
(31)10.6.2 Amendment No. 2 to the Employment Agreement of Walter E.
Schoenfeld, dated May 18, 1998
</TABLE>
E-1
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(1) 10.6.3 Amendment No. 3 to the Employment Agreement of Walter E.
Schoenfeld
(30)10.7 Employment Agreement, dated as of April 1, 1999, by and
between Kyle B. Wescoat and the Registrant, superseding
his Agreement dated February 14, 1996
(16)10.8 Employment Agreement, dated July 1, 1996, by and between
the Registrant and Charles C. Kupfer
(16)10.9 Standard Industrial/Commercial Single Tenant Lease -
Gross, dated August 15, 1996, by and between the
Registrant and CAPCO, Inc.
(16)10.10 Standard Industrial/Commercial Single Tenant Lease -
Net, dated July 22, 1996, by and between the Registrant
and Orange Engineering & Machine, Inc.
(16)10.11 Trust Under Vans, Inc. Deferred Compensation Plan, dated
as of June 3, 1996
(16)10.11.1 Amendment to Trust Under Vans, Inc. Deferred
Compensation Plan
(16)10.12 Deferred Compensation Agreement for Walter Schoenfeld,
dated as of June 1, 1996
(25)10.13 Standard Industrial Sublease, dated March 25, 1997, by
and between the Registrant and Frank Zamarripa Inc.
(17)10.14 Lease between Wohl Venture One, LLC, a Delaware limited
liability company, and the Registrant
(17)10.15 Construction Agreement between Wohl Venture One, LLC, a
Delaware limited liability company, and the Registrant
(18)10.16 Employment Agreement, dated December 4, 1996, by and
between the Registrant and Jay E. Wilson
(1) 10.17 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)10.18 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)10.19 Side Letter to the Operating Agreement
(20)10.20 Share Sale and Purchase Option Agreement, dated November
20, 1996, by and among the Registrant and the
shareholders of Global Accessories Limited
(25)10.21 Investor Rights Agreement, dated July 8, 1997, by and
between the Registrant and The Zone Network, Inc.
(23)10.22 Employment Agreement, dated as of February 3, 1998, by
and between the Registrant and Michael C. Jonte
(24)10.23 Employment Agreement, dated as of October 29, 1997, by
and between the Registrant and Scott A. Brabson
(28)10.24 Surrender of Leasehold, dated as of September 14, 1998,
by and between the Registrant and Pacific Gulf
Properties, Inc.
(29)10.25 Employment Agreement, dated October 21, 1998, by and
between the Registrant and Stephen M. Murray
(30)10.26 Employment Agreement, dated March 15, 1999, by and
between the Registrant and Joseph D. Giles
(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>
E-3
<PAGE> 57
- ----------
(1) Filed previously.
(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.
(27) Filed as an exhibit to the Registrant's Form 8-A/A Registration
Statement, filed with the SEC on June 28, 1999.
(28) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended August 29, 1998.
(29) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 28, 1998.
(30) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 27, 1999.
(31) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1998.
E-3
<PAGE> 58
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page
----
<S> <C>
Consolidated Balance Sheets as of May 31, 1999 and 1998 27
Consolidated Statements of Operations
for the Years Ended May 31, 1999, 1998 and 1997 28
Consolidated Statements of Stockholders' Equity
for the Years Ended May 31, 1999, 1998 and 1997 29
Consolidated Statements of Cash Flows
for the Years Ended May 31, 1999, 1998 and 1997 30
Notes to Consolidated Financial Statements 32
Independent Auditors' Report 45
Report on Schedule and Consent of Independent Auditors F-2
Schedule II - Valuation and Qualifying Accounts and Reserves F-3
</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> 59
THE REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Vans, Inc.:
The audits referred to in our report dated July 19, 1999, included the
related financial statement schedule as of May 31, 1999, and for each of the
years in the three-year period ended May 31, 1999, 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 19, 1999, relating
to the consolidated balance sheets of Vans, Inc. and subsidiaries as of May 31,
1999 and 1998, 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, 1999, and the related schedule, which report appears in the
May 31, 1999 annual report on Form 10-K of Vans, Inc.
KPMG LLP
Orange County, California
September 16, 1999
F-2
<PAGE> 60
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, 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
Year end May 31, 1999:
Allowance for doubtful accounts ................. $1,117,695 $ 528,001 $ (213,482)(a) $1,432,214
Lower of cost or market valuation allowance ..... $ 637,546 $1,075,383(b) $(1,031,331)(b) $ 681,598
</TABLE>
- ----------
(a) Charge-off of uncollectible accounts receivable.
(b) Represents reserves established in connection with the acquisition of
consolidated subsidiaries.
F-3
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 7,777,192
<SECURITIES> 0
<RECEIVABLES> 30,056,150
<ALLOWANCES> 1,432,214
<INVENTORY> 37,024,553
<CURRENT-ASSETS> 84,060,119
<PP&E> 15,809,119
<DEPRECIATION> 0
<TOTAL-ASSETS> 130,537,718
<CURRENT-LIABILITIES> 34,364,758
<BONDS> 0
0
0
<COMMON> 13,235
<OTHER-SE> 95,151,206
<TOTAL-LIABILITY-AND-EQUITY> 130,537,718
<SALES> 205,127,113
<TOTAL-REVENUES> 205,127,113
<CGS> 118,458,384
<TOTAL-COSTS> 118,458,384
<OTHER-EXPENSES> 77,450,694
<LOSS-PROVISION> 528,001
<INTEREST-EXPENSE> (210,266)
<INCOME-PRETAX> 14,270,196
<INCOME-TAX> 4,851,867
<INCOME-CONTINUING> 8,725,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,725,376
<EPS-BASIC> .66
<EPS-DILUTED> .64
</TABLE>
