<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[XX] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required)
For the fiscal year ended May 31, 2000, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission file number: 0-19402
VANS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 33-0272893
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15700 Shoemaker Avenue, Santa Fe Springs, California 90670
(Address of principal executive offices) (Zip Code)
(562) 565-8267
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.001 par value per share
(Title of Class)
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, 2000), was
$206,524,925.
The number of shares of registrant's Common Stock outstanding at August 25,
2000, was 13,854,157.
<PAGE> 2
Documents Incorporated By Reference:
Portions of registrant's definitive Proxy Statement for its 2000 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.
(ii)
<PAGE> 3
VANS, INC.
FORM 10-K
For the Fiscal Year Ended May 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
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.................................................... 24
Item 8. Financial Statements and Supplementary Data.................. 25
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure................. 43
Part III
Item 10. Directors and Executive Officers of the Registrant........... 43
Item 11. Executive Compensation....................................... 43
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................... 43
Item 13. Certain Relationships and Related Transactions............... 43
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................................. 43
</TABLE>
(iii)
<PAGE> 4
ITEM 1. BUSINESS
GENERAL
Vans, Inc. (the "Company") is a leading branded sports and lifestyle
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, wakeboarding, BMX, freestyle motocross and
supercross, and through major entertainment events and venues, such as the VANS
Triple Crown(TM) Series, the VANS Warped Tour,(TM) the VANS World Amateur
Skateboarding Championships, the world's largest VANS skateparks, and the High
Cascade Snowboard Camp, (TM) located at Mt. Hood. The Company operates 137
retail stores in the U.S. and Europe (as of August 25, 2000), and designs,
markets and distributes active-casual footwear, clothing and accessories,
performance footwear for Core Sports, (TM) snowboard boots, step-in snowboard
boot bindings, and outerwear worldwide. 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 AND EVENT SPONSORSHIPS
The Company's marketing and promotion strategy includes the ownership
and sponsorship of Core Sports(TM) and various entertainment events. The Company
owns and/or sponsors numerous events collectively known as the "VANS Triple
Crown(TM) Series." These events feature top athletes competing in sanctioned
contests at venues around the world. Currently, the VANS Triple Crown(TM) Series
is comprised of the VANS Triple Crown of Skateboarding(R) (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); the VANS Triple Crown
of Supercross(TM) (events owned by Pace Motor Sports; Series name co-owned by
the Company and Pace Motor Sports); and the VANS Triple Crown of BMX(TM) (owned
by the Company). The VANS Triple Crown(TM) Series is televised around the world
by ESPN and its international affiliates.
The Company also sponsors other Core Sports(TM) contests, events and
leagues, such as the Mt. Baker Banked Slalom, the National Bike League and the
American Bike Association, and owns the High Cascade Snowboard Camp,(TM) the
leading summer snowboarding camp in the world ("HCSC"). HCSC is located at the
base of Mt. Hood in 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 other recreational facilities and have the
opportunity to go wakeboarding and skateboarding.
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 1999 Tour visited 33 U.S. and Canadian markets
and 13 cities in Europe, and appeared before approximately 630,000 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 2000 Tour traveled to 39 cities in North
America and featured such popular bands as Green Day, the Mighty Mighty
Bosstones, and the Long Beach Dub All Stars. In June 2000, the owners of the
Tour, including the Company, entered into an agreement to sell the Tour to
Launch Media, Inc., a media company dedicated to creating the premier Internet
music site ("Launch"), for a combination of cash and Launch common stock. The
transaction is subject to closing.
Additionally, from time to time the Company sponsors other musical
tours, such as the "Punk-O-Rama" tour (organized by Epitaph Records), and the
"Californopia 2000" tour (organized by the College Entertainment Network).
1
<PAGE> 5
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, freestyle motocross, supercross, 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 print and television advertising and
the distribution of approximately one million posters per year, all featuring
its sponsored athletes.
ENTERTAINMENT PROPERTIES
From time to time, the Company finances selected entertainment
properties which the Company believes enhances the VANS brand. In that regard,
in Fiscal 2000, the Company provided financing for a filmed documentary on the
history of modern skateboarding entitled "Dogtown and the Z Boys - A History of
Modern Skateboarding." The Company owns the copyright to this film and expects
it to be completed in the Fall of 2000 and distributed in the Spring of 2001.
The Company is also providing financing for an animated series entitled "The
Loonatic" which chronicles the adventures of a free-spirited, innocent youth and
his companions. The Company anticipates that the pilot for this series will be
completed in 2001.
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, espn2, and ESPN International, 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, Source, and Maxim. 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 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. Vans.com LLC, a Delaware limited liability company
wholly-owned by the Company, offers VANS footwear, snowboard boots and bindings,
apparel and sunglasses for sale over the Internet. This online store displays
high quality digital product images 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, and, from time to time, purchase "internet-exclusive" product
offerings which are based on customer requests. 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.
MountainZone.com. In 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. As part of the agreement, Zone
provided the Company with the opportunity to market the VANS brand and VANS
products on The Mountain Zone website. In February 2000, Zone was sold to Quokka
Sports, Inc., a digital sports network that provides real-time coverage of
sporting events for worldwide audiences, in a stock-for-stock transaction.
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.
2
<PAGE> 6
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.
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 $35 to $85 for casual and performance footwear, from $129 to $245 for
strap-in snowboard boots, and $169 to $269 for step-in snowboard boots. The
Company's clothing and accessories lines offer knit shirts, T-shirts, hats,
pants, shorts and snowboard outerwear, bags, wallets and backpacks.
The Company's footwear line is segmented into the following categories:
Pro Series. This line includes the most technical skateboarding shoes
and is built around five of the Company's pro riders. The line is primarily sold
in independent skate and surf shops.
Signature Series. This line includes technical skateboarding shoes which
are endorsed by top athletes such as Steve Caballero, Willy Santos and Geoff
Rowley, and are sold strategically across the Company's entire matrix of
distribution.
High Performance Skate. This line includes technical,
performance-oriented skateboarding shoes which are mainly sold in athletic
footwear and fashion/lifestyle stores.
Prelims. This line includes skate and surf-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.
Outdoor. This line includes technical outdoor product for activities
such as hiking and trail running, and is sold mainly to athletic footwear
stores.
MEN'S FOOTWEAR
Pro Series, Signature Series and High Performance Skate Series.
Throughout its 34-year history, the VANS brand has long been associated with
skateboarding. The Company offers a variety of Pro Series, Signature Series and
High Performance Skate Series 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. During Fiscal 1998, the
Company introduced the first-ever skate-specific technology in its skate shoes,
the patented Impulse Technology(R) which 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's Signature Skate Series shoes are endorsed by some of the
world's top skaters, such as Steve Caballero, Salman Agah, Omar Hassan, Geoff
Rowley, John Cardiel and Willy Santos. The Company believes the identification
of its shoes with top skaters helps to increase sales of its performance
footwear. Signature Skate Series shoes include the Cab 6,(TM) Hassan III(TM) and
Santos II.(TM)
3
<PAGE> 7
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
Tabloid(TM), the 72(TM), the Influence(TM), and the Graph(TM). The Classics
include the Classic Slip-On, Authentic(TM), Old Skool(TM), SK8-Hi(TM),
Wally(TM), and Disasters(TM).
OUTDOOR
The Company's outdoor product is designed to address the versatility of
activities such as day hiking and trail running through technical designs,
materials and construction. The line also includes technical snowboard boots and
mountain biking and BMX shoes.
WOMEN'S FOOTWEAR
The Company's footwear products for women include skate-influenced
casual shoes, as well as basic, classic deck shoes. Many of these products
incorporate fundamental features of the Company's skate shoes with
fashion-conscious detailing, colors and fabrics, such as suede, leather and
canvas. The line includes vulcanized shoes, as well as cemented cup-soled shoes
and sandals. Some of the Company's women's shoes include the Cara-Beth III(TM)
(the third generation of the first women's signature skate shoe), the
Perfection(TM), the Upland(TM), and the Resolve(TM).
CHILDREN'S FOOTWEAR
The Company offers a variety of boys' and youth's casual footwear that
follow the direction of the men's Signature Series and Prelims Series, as well
as Classics. These shoes include the Cab 6(TM), the Hassan III(TM), the
Revert(TM), and the Bent(TM). The Company has also expanded its children's
line to include young girl's shoes which follow the direction of the women's
line, including the Radiant(TM), Essential(TM), and Refine(TM).
SNOWBOARD BOOTS; STEP-IN BINDINGS
For the 2000/2001 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
Autolock(R) step-in binding system (see below). The Company's boots are endorsed
by several world-class snowboarders, including Jamie Lynn, Tara Dakides, Daniel
Franck (winner of a Silver Medal at the 1998 Winter Olympics), Temple Cummings,
Kurt Wastell, 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 into the boot as a lateral flexing adjustable forward lean
system, and "T-5" integrated bail technology. See Item 3. "Legal Proceedings"
for a discussion of litigation with The Burton Corporation with respect to the
T-5 technology. 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 and Drake 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 line includes T-shirts, hats, Polo
shirts, woven shirts, fleece, walkshorts and pants which focus on the skateboard
culture. The line also includes wallets and backpacks and 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.
4
<PAGE> 8
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 sells 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.
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
sells 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) trademarks and logos to VASH for use on the licensed products
throughout the world, except Japan.
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 137 retail stores (as of August 25, 2000).
The Company's retail stores are divided into four store groups: conventional
mall and freestanding stores; factory outlet stores; clearance stores; and VANS
Triple Crown(TM) stores, which are theme stores focused on Core Sports(TM) the
Company supports, such as skateboarding and surfing. 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. The Company operates stores
in 26 states, Guam, the United Kingdom, Austria and Spain.
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 62 factory outlets (as of August 25, 2000). The
Company opened seven factory outlets during Fiscal 2000. The Company continually
works to upgrade the design and layout of its retail stores as part of its
overall marketing plan and remodels older stores as its resources permit to
further promote the VANS brand image. The Company also, as a matter of course,
seeks to identify underperforming stores for possible closure. The Company
closed two stores in Fiscal 2000.
Skateparks. The Company operates a chain of the world's largest
skateparks. Currently, the chain consists of five parks: Orange, California
(opened in November 1998), Bakersfield, California (opened in August 1999),
Ontario, California (opened in November 1999), Woodbridge, Virginia (opened in
April 2000), and Milpitas, California (opened in June 2000). Each of the current
parks is in excess of 45,000 square feet. The parks each feature world-class
skateboarding facilities, with vertical ramps, mini-ramps, street courses and
empty swimming pools suitable for skating. Each park features a retail store and
a pro shop. The Ontario park also includes a 15,000 square foot BMX dirt racing
course.
The Company's strategy is to locate the parks in metropolitan areas with
high concentrations of skateboarders, on a per capita basis, and, where
possible, in large destination shopping centers where the landlords are willing
to help finance the construction of the parks. The Company intends to continue
to build its skatepark chain in the future through the opening of the following
parks:
5
<PAGE> 9
<TABLE>
<CAPTION>
LOCATION APPROXIMATE SIZE (Sq. ft) EXPECTED OPENING DATE
-------- ------------------------- ---------------------
<S> <C> <C>
Houston, Texas 29,500 September 2000
Westminster, Colorado 45,000 indoor and 10,000 outdoor December 2000
Toronto, Canada 50,000 Fall 2001
Novi, Michigan 48,000 Fall 2001
Orlando, Florida 45,000 indoor and 10,000 outdoor December 2001
</TABLE>
The Company also is in negotiations for several additional parks.
DOMESTIC SALES
The Company sells its products through approximately 3,000 active
accounts, including Journeys, Pacific Sunwear, Venator Group, Inc. (which
includes Foot Locker, Kids Foot Locker, Lady Foot Locker, and Champs Sporting
Goods), Kohls, Mervyns, Famous Footwear, 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 customers through distributors and sales agents in
approximately 90 foreign countries. VFEL's foreign customers include: Sports
Check and Karlstadt in Germany; 3 Suisse, Le Redoute and Decathlon in France;
J.D. Sports, Schuh and Sole Trader in the United Kingdom; and La Corte Ingles in
Spain.
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, in total, acquired an
additional 29% of the shares of Global in Fiscal 1998, 1999 and 2000, and has
reached an agreement with Global to acquire the remaining 20% of Global shares
effective as of November 2, 2000. 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
product availability 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."
Financial information about the Company's export sales through VFEL is
included in Note 12 of Notes to the Company's Consolidated Financial Statements.
6
<PAGE> 10
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 the People's
Republic of China, Macao, South Korea, the Republic of 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, and manages all overseas production.
Approximately 70% of the Company's apparel is sourced off-shore in
countries such as China, Korea, Israel and India. Generally, the Company's
apparel division works directly with the foreign factories to source and develop
all fabrics, trims and styles for the line, but in some cases the Company
utilizes sourcing agents.
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, Korea,
Taiwan, Hong Kong, South Africa, New Zealand, Chile, 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, sunglasses and stationery items. 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."
As of June 1, 2000, the Company extended its footwear and apparel
license agreements with International Trading Corporation of Japan ("ITC"). The
new agreements cover Japan, Korea, Taiwan and Hong Kong for footwear and Japan
for apparel and sports bags, have three-year terms, and provide for aggregate
annual minimum royalty payments of over $4.0 million. ITC is one of the leading
distributors and retailers of footwear and related accessories in Japan.
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 34-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), some of
which may have significantly greater financial and other
7
<PAGE> 11
resources than the Company. The Company also competes with smaller companies,
such as D.C. Shoes, Globe, and Sole Technology, which specialize in marketing to
the Company's core skateboarding customers.
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 The Burton
Corporation, 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(R) 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 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 26, 2000, the Company's backlog of orders for delivery in
the second and third quarters of Fiscal 2001 was approximately $37.6 million, as
compared to approximately $27.1 million as of August 26, 1999. 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", certain patents
it holds for the Switch Autolock(R) System and related technology, 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 and
patents in any of the jurisdictions where conflicts exist. The Company regards
its trademarks and other proprietary rights as valuable assets and believes that
they have significant value in the marketing of its products. The Company
vigorously protects its trademarks against infringement both in the United
States and internationally, including through the use of cease and desist
letters, administrative proceedings and lawsuits. See "- Certain
Considerations - Ability to Protect Intellectual Property Rights."
EMPLOYEES
As of August 25, 2000, the Company had 1,315 employees. The Company
considers its employee relations to be satisfactory. The Company has never
suffered a material interruption of business caused by labor disputes.
RISK FACTORS
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
8
<PAGE> 12
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 and 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 34-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 brand recognition. In addition, in the casual footwear
market, the Company competes with a number of companies, such as Airwalk, K2
9
<PAGE> 13
Inc., Converse Inc. and Stride Rite Corporation (Keds), some 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
Sole Technology, 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 34-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 The Burton
Corporation, 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 "--Brand
Strength; Changes in Fashion Trends."
DEPENDENCE ON FOREIGN MANUFACTURERS
All of the Company's shoes and snowboard boots are manufactured by
independent suppliers located in the People's Republic of China, Macao, South
Korea, 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 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.
10
<PAGE> 14
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. During Fiscal 1999, in the course
of an audit, U.S. Customs disagreed with the Company's classification of certain
styles of its footwear and reclassified a substantial number of such styles as
unisex, thereby increasing the duty rate on such styles by 1.5%.
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 2000, the Company's net sales to its top 10 customers
accounted for approximately 18.4% 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; in early
1999, Edison Brothers closed its Wild Pair shoe stores; and in 1999, Just For
Feet liquidated its entire operations. The loss of major customers could have a
significant adverse effect on the Company's business and results of operations.
SKATEPARKS AND JOINT VENTURES
During Fiscal 1999, the Company introduced a new retail strategy: the
operation of large-scale VANS skateparks. The initial parks have been successful
and the Company has continued to expand the skatepark division. See " Retail
Sales, Skateparks." However, the parks have a limited operating history and
their future performance could vary significantly. Additionally, although the
landlords for the parks generally finance a significant portion of the cost of
the parks' construction, the Company still expends a large amount of funds on
the construction of the parks, and the operation of the parks requires a
significant amount of operation expense and management time and energy. If some
or all of the parks ultimately are not successful, there could be a material
adverse affect on the Company's business and results of operations.
Also in Fiscal 1999, the Company 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 Item 1. "Business -- Product Design and
Development, Apparel and Sunglasses." The joint venture with Pacific Sunwear
requires significant management time and energy to ensure its success. 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 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 2001. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity." 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 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
11
<PAGE> 15
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.
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 and management 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
seasonal, with the largest percentage of net income, U.S. sales and
substantially all revenues generated from High Cascade realized in the first
fiscal quarter (June through August), the "back to school" selling months. As
the Company increases sales to Europe, the Company is recognizing 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.
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.
12
<PAGE> 16
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 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 European sales agents and
Latin American subsidiaries collect payments in customers' local currencies.
Accordingly, the Company and its subsidiaries may be exposed to transaction
gains and losses that could result from changes in foreign currency exchange
rates. The Company seeks to hedge against these risks when possible.
ABILITY TO PROTECT INTELLECTUAL PROPERTY RIGHTS; INFRINGEMENT OF THIRD
PARTY RIGHTS
The Company considers its intellectual property to be material to its
business. See "Intellectual Property." The Company relies on trademark, trade
dress, 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. The Company is currently in
litigation with The Burton Corporation regarding certain patents. See Item 3.
"Legal Proceedings."
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 Company's
intellectual property, 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
13
<PAGE> 17
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, 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 and its plans to expand its chain
of skateparks.
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.
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 137 retail stores (as of
August 25, 2000), one is owned by the Company and the remainder are leased. The
Company does not have any franchised stores. The Company leases its five
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."
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 $22,000 per month, and one of whom
currently pays the Company rent of $28,500 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.
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.
14
<PAGE> 18
ITEM 3. LEGAL PROCEEDINGS
Switch Manufacturing and Vans, Inc. v. The Burton Corporation, Case No.
C00-20738, United States District Court for the Northern District of California;
The Burton Corporation v. Vans, Inc. and Northwave North America Inc., Case No.
1:00-cv-206, United States District Court for the District of Vermont.
In May 2000, the Company and Switch brought an action (the "Declaratory
Relief Action") for declaratory relief against The Burton Corporation ("Burton")
in Federal District Court for the Northern District of California asking the
Court to find that (i) Burton has no right to threaten or maintain suit against
the Company and Switch for alleged infringement of Burton's so-called "3D and
4X4 hole" patent, U.S. patent number 5,261,689 (the "3D Patent"), (ii) the 3D
Patent is invalid and unenforceable, and (iii) the 3D Patent is not infringed
by any products or processes of the Company or Switch. The action was brought in
response to the Company's belief that Burton intended to eventually sue the
Company and Switch for allegedly infringing the 3D Patent, and because the
Company desired to resolve the matter. Discovery has not yet commenced in this
matter, and there can be no assurance as to the outcome of this matter at this
time.
Subsequently, in June 2000, Burton brought an action against the Company
and Northwave North America Inc. in Federal Court for the District of Vermont
alleging that the Company's "T-4" and "T-5" snowboard boots, which incorporate
an integrated bale in the midsole area of the boots, infringe U.S. patent number
6,050,005 issued to Burton on April 18, 2000. Discovery has not yet commenced in
this matter, and there can be no assurance as to the outcome of this matter at
this time.
The Company also is a party to other 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, 2000:
1st Quarter.......................................... 11.81 10.19
2nd Quarter.......................................... 12.23 11.63
3rd Quarter.......................................... 15.50 14.25
4th Quarter.......................................... 15.88 14.63
HIGH LOW
------ -----
(IN DOLLARS)
FISCAL YEAR ENDED MAY 31, 1999:
1st Quarter.......................................... 11.75 6.38
2nd Quarter.......................................... 9.75 5.25
3rd Quarter.......................................... 7.81 5.06
4th Quarter.......................................... 11.50 6.06
</TABLE>
On August 25, 2000, the last reported sales price on The Nasdaq Stock
Market for the Company's Common Stock was $15.25 per share. As of August 25,
2000, there were 228 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 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."
15
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MAY 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................................. $ 273,510 $ 205,127 $ 174,497 $ 159,391 $ 117,407
Net earnings (loss) ........................ $ 12,087 $ 8,725 $ (2,677)(1) $ 10,437 $ 3,148
Earnings (loss) Per Share Information:
Basic:
Net earnings (loss) per share before
extraordinary item ..................... $ 0.89 $ 0.66 $ (0.20)(1) $ 0.81 $ 0.42
Weighted average common shares
and equivalents ......................... 13,603 13,290 13,284 12,963 9,747
Diluted:
Net earnings (loss) per share before
extraordinary item ...................... $ 0.84 $ 0.64 $ (0.20)(1) $ 0.76 $ 0.40
Weighted average common shares and
equivalents ............................. 14,468 13,667 13,284 13,805 10,406
BALANCE SHEET DATA:
Total assets ............................... $ 171,170 $ 130,538 $ 116,150 $ 105,824 $ 90,461
Long-term debt ............................. $ 12,131 $ 8,712 $ 1,874 $ 481 $ 344
Stockholders' equity ....................... $ 108,009 $ 95,151 $ 86,148 $ 88,282 $ 72,728
</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.
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 - Risk Factors."
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. In Q2 Fiscal 2000 the Company acquired
an additional 10% of the Global common shares in exchange for Company Common
Stock, and the Company has reached an agreement with Global to acquire the
remaining 20% of the Global common shares in Q2 Fiscal 2001. The results of
Global are consolidated in the Company's financial statements.
On July 21, 1998, the Company acquired all of the outstanding capital
stock of Switch Manufacturing, a California corporation ("Switch"), through a
merger (the "Switch Merger") with and into a wholly-owned subsidiary of the
Company. 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 Switch 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 financial performance of Switch during the fiscal year ending May
31, 2001, due to be settled 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 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"), a subsidiary in Uruguay, Vans Uruguay, S.A. ("Vans
Uruguay"), a subsidiary in Hong Kong, Vans Far East Limited ("VFEL") through
which the Company conducts its foreign sales operations, and a subsidiary in
England, Vans Footwear Limited ("VFL"). The Company also co-owns two joint
venture subsidiaries, Van Pac LLC and VASH, LLC, with Pacific Sunwear of
California, Inc. and Sunglass Hut International, Inc., respectively. Finally,
the Company is the sole member of Vans.com LLC, a Delaware limited liability
company which owns and operates the Vans.com website. The results of these
subsidiaries are consolidated in the Company's financial statements.
Additionally, certain financial information regarding the Company's business
segments is set forth in Note 13 to Notes to the Company's Consolidated
Financial Statements.
RECENT RESTRUCTURINGS
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 "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 has enabled the Company to recognize the sales and
income previously recognized by the distributors, and the Company believes that
the establishment of a
17
<PAGE> 21
Company-owned European operational structure should enable it to more
efficiently coordinate its sales and marketing efforts and control its
distribution. The Company has experienced increased operating expenses in
connection with the European Conversion, as discussed below.
The Company incurred a 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. The remaining cash payments to one of the terminated
distributors will be completed in Fiscal 2002. 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 2000 AS COMPARED TO FISCAL YEAR 1999
Net Sales
Net sales for Fiscal 2000 increased 33.3% to $273,510,000 from
$205,127,000 for Fiscal 1999. 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 26.3% to $186,424,000 for Fiscal 2000 from $147,596,000 for
Fiscal 1999. Total international sales, including sales through the Company's
six European stores, increased 51.4% to $87,086,000 for Fiscal 2000, as compared
to $57,531,000 for Fiscal 1999.
The increase in total U.S. sales resulted from (i) a 24.1% increase in
domestic wholesale sales, and (ii) a 29.5% increase in sales through the
Company's U.S. retail stores. The increase in wholesale sales was primarily due
to increased penetration of existing accounts and the addition of new customers.
The increase in U.S. retail store sales was driven by sales from (i) a net 20
new stores versus a year ago, including three skateparks, and (ii) an 8.2%
increase in comparable store sales (which excludes revenue from skate sessions
at the Company's skateparks). The increase in international sales through VFEL
was primarily due to a significant increase in sales to France, Germany, Japan,
Latin America and Canada.
Gross Profit
Gross profit increased 32.5% to $114,860,000 in Fiscal 2000 from
$86,669,000 in Fiscal 1999. The increase in gross profit was primarily due to
the increase in sales discussed above. As a percentage of net sales, gross
profit was slightly lower for Fiscal 2000 at 42.0% versus 42.3% for Fiscal 1999.
Earnings from Operations
The Company had earnings from operations of $17,785,000 in Fiscal 2000
versus $9,218,000 in Fiscal 1999. Operating expenses in Fiscal 2000 increased
25.3% to $97,075,000 from $77,451,000 in Fiscal 1999, due primarily to the
increases in selling and distribution and general and administrative expenses
discussed below. As a percentage of sales, operating expenses decreased from
37.8% to 35.5% on a year-to-year basis.
Selling and distribution. Selling and distribution expenses increased
37.0% to $63,542,000 in Fiscal 2000 from $46,392,000 in Fiscal 1999, 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 20 new stores, including three skateparks; (ii) operating costs
related to the European Conversion, which was not yet fully implemented in
Fiscal 1999; and (iii) increased sales commissions due to the increase in
wholesale sales discussed above.
Marketing, advertising and promotion. Marketing, advertising and
promotion expenses decreased 2.2% to $20,228,000 in Fiscal 2000 from $20,685,000
in Fiscal 1999. The net decrease in marketing, advertising and promotion
expenses was the result of increased third party sponsorship of the Company's
major entertainment events and venues which offset: (i) increased print and
television advertising expenditures; (ii) increased direct advertising and
promotional expense in Europe resulting from the European Conversion; and (iii)
increased costs associated with new events included in the VANS Triple Crown(TM)
Series.
General and administrative. General and administrative expenses
increased 24.3% to $11,125,000 in Fiscal 2000 from $8,952,000 in Fiscal 1999,
primarily due to: (i) increased labor, recruiting and other employee-related
expenses to support the Company's sales
18
<PAGE> 22
growth; (ii) operating costs related to the European Conversion, which was not
yet fully implemented Fiscal 1999; (iii) increased legal expenses related to the
Company's ongoing worldwide efforts to protect and preserve its intellectual
property rights; and (iv) the inclusion of operating costs related to High
Cascade which were not included in the Fiscal 1999 Consolidated Financial
Statements because High Cascade was not yet owned by the Company.
Provision for doubtful accounts. The amount that was provided for bad
debt expense in Fiscal 2000 increased to $763,000 from $528,000 in Fiscal 1999,
due to an increase in the general allowance for doubtful accounts to correspond
to the increase in accounts receivable which resulted from higher sales.
Amortization of intangibles. Amortization of intangibles increased to
$1,417,000 for Fiscal 2000 from $1,287,000 in Fiscal 1999, primarily due to the
increase in goodwill related to the acquisition of an additional 10% of Global's
common shares in Q2 Fiscal 2000. See "--General."
Interest Income
Interest income declined to $172,000 in Fiscal 2000 versus $210,000 in
Fiscal 1999 due to increased utilization of the Company's cash to fund its sales
growth. The Company had no investment accounts at May 31, 2000.
Interest and Debt Expense
Interest and debt expense increased to $2,637,000 for Fiscal 2000 from
$1,158,000 in Fiscal 1999, primarily due to increased borrowings under the
Company's credit facility to support its sales growth. See "--Liquidity and
Capital Resources, Borrowings."
Other Income
Other income primarily consists of royalty payments received from the
licensing of the Company's trademarks to its distributor for Japan. Other income
decreased to $4,571,000 for Fiscal 2000 from $6,000,000 for Fiscal 1999,
primarily due to decreases in royalties received from such distributor.
Income Tax Expense
Income tax expense increased to $6,800,000 in Fiscal 2000 from
$4,852,000 in Fiscal 1999 as a result of the increase in earnings discussed
above. The effective tax rate increased slightly from 34.0% in Fiscal 1999 to
34.2% in Fiscal 2000 primarily due to changes in the tax benefit derived from
the operation of VFEL.
Minority Share of Income
Minority share of income increased to $1,004,000 in Fiscal 2000 from
$693,000 in Fiscal 1999, primarily due to: (i) increased earnings of Vans
Latinoamericana; (ii) the addition of the Van Pac LLC and VASH LLC joint
ventures which did not exist in the same period a year ago; and (iii) increased
earnings of Global, partially offset by the decrease in the minority ownership
of Global. See "--General."
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
19
<PAGE> 23
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 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.
20
<PAGE> 24
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 the 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."
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.
The Company experienced an inflow of cash from operating activities of
$5,225,000 during Fiscal 2000, compared to an outflow of $8,421,000 for Fiscal
1999. Cash provided by operations for Fiscal 2000 primarily resulted from: (i)
earnings from operations; (ii) the add-back for depreciation and amortization;
(iii) the increase in income taxes payable; and (iv) the increase in accrued
payroll and related expenses. Cash inflows from operations were partially offset
by: (i) an increase in net inventory to $50,142,000 at May 31, 2000, from
$37,025,000 at May 31, 1999, as described below; (ii) an increase in net
accounts receivable to $34,600,000 at May 31, 2000, from $30,056,000 at May 31,
1999, as described below; (iii) an increase in prepaid expenses; and (iv) an
increase in other assets. Cash outflows were a result of increased business
activities to support increased sales. Cash outflows from operations in Fiscal
1999 primarily resulted from increases in accounts receivable and inventories
and a decrease in the non-recurring Restructuring Costs accrual.
The Company had a net cash outflow from investing activities of
$12,455,000 in Fiscal 2000, compared to a net cash outflow of $5,570,000 in
Fiscal 1999. The Fiscal 2000 outflows were primarily due to capital expenditures
related to new retail store openings and skateparks. Cash used in investing
activities for Fiscal 1999 was primarily related to new retail store openings,
and were partially offset by proceeds from the sale of assets in connection with
the closing of the Vista Facility.
The Company had a net cash inflow from financing activities of
$15,302,000 for Fiscal 2000, compared to a net cash inflow of $4,966,000 for
Fiscal 1999, primarily due to short-term borrowings under the Company's credit
facility and long-term debt incurred by the Company and the Company's South
American subsidiaries. See "--Borrowings" below. Cash provided by financing
activities in Fiscal 1999 was related to proceeds from short-term borrowings
under the Company's former bank revolving line of credit, and proceeds from
long-term debt incurred by Vans Latinoamericana, partially offset by the
repurchase of $3,960,000 of common stock pursuant to the Company's stock
repurchase program.
Accounts receivable, net of allowance for doubtful accounts, increased
from $30,056,000 at May 31, 1999, to $34,600,000 at May 31, 2000, primarily due
to: (i) an increase in the Company's domestic accounts receivable due to the
increase in sales discussed above; and (ii) the inclusion of accounts receivable
for sales in Europe due to the European Conversion, which was not yet fully
implemented in Fiscal 1999. Inventories increased to $50,142,000 at May 31,
2000, from $37,025,000 at May 31, 1999, primarily due to: (i)
21
<PAGE> 25
increased inventory held at the Company's distribution center in Holland
(established in connection with the European Conversion); (ii) increased
inventory held by the Company's South American subsidiaries; (iii) increased
inventory held at the Santa Fe Springs Facility to support increased sales; and
(iv) an increased number of finished goods held for sale at the Company's retail
stores to support the net addition of 20 new stores, including three skateparks,
and increased sales.
Borrowings
In July 1999, the Company obtained a $63.5 million unsecured credit
facility (the "Credit Facility") pursuant to a credit agreement (the "Credit
Agreement") with several lenders (the "Lenders"). The Credit Facility permits
the Company to utilize the funds thereof for general corporate purposes, capital
expenditures, acquisitions and stock repurchases. In April 2000, the Credit
Facility was increased to $78.0 million.
Of the $78.0 million amount of the Credit Facility, $63.0 million is in
the form of an unsecured revolving line of credit (the "Revolver"), and $15.0
million is in the form of an unsecured term loan (the "Term Loan"). The Revolver
expires on April 30, 2003. The Company has the option to pay interest on
Revolver advances at a rate equal to either (i) LIBOR plus a margin, or (ii) the
base rate plus a margin. The LIBOR rate margin and the base rate margin are
based on the Company's ratio of "Funded Debt" to "EBITDA," each as defined in
the Credit Agreement.
Of the $15.0 million Term Loan: (i) approximately $5.0 million was
disbursed at the closing of the Credit Facility to replace a portion of the
Company's former credit facility used for the Company's stock repurchase
program, which was completed in Fiscal 1999; (ii) approximately $3.0 million was
disbursed in Q2 Fiscal 2000 for capital expenditures; and (iii) the remaining
portion must be disbursed on or before February 28, 2001, or it will expire. 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 plus a margin
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, 2000, the Company had drawn down and/or borrowed
$23,034,000 under the Credit Facility and was in compliance with all financial
and other convenants under the Credit Agreement.
Vans Latinoamericana maintains a note payable to Tavistock Holdings
A.G., a 49.99% owner of such company ("Tavistock"). The loans evidenced by the
note were made by Tavistock pursuant to a shareholders' agreement requiring
Tavistock to provide operating capital, on an as-needed basis, in the form of
loans to Vans Latinoamericana. At May 31, 2000, the aggregate outstanding
balance under the notes was $2,253,737. The note is due and payable on December
31, 2001.
Current Cash Position
The Company's cash position was $15,516,000 at May 31, 2000, compared to
$7,777,000 at May 31, 1999. The Company believes that cash generated from
operations, coupled with the Credit Facility, should be sufficient to meet its
cash requirements for the next 12 months.*
Capital Resources
As of May 31, 2000, the Company's material commitments for capital
expenditures were primarily related to the opening and remodeling of retail
stores and the opening of skateparks. In Fiscal 2001, the Company plans to open
approximately two new factory
----------
* 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 skateparks the Company decides to open which
must be financed in whole, or in part, by the Company; (iii) the Company's
product mix between footwear and snowboard boots; (iv) the Company's ability to
effectively manage its inventory levels; (v) timing differences in payment for
the Company's foreign-sourced product; (vi) the increased utilization of letters
of credit for purchases of foreign-sourced product; and (vii) timing differences
in payment for product which is sourced from countries which have longer
shipping lead times, such as China.
22
<PAGE> 26
outlet retail stores, five full-price stores, and remodel seven existing stores.
The Company estimates the aggregate cost of all of these new stores and remodels
to be $2.0 to $3.0 million.
The Company also currently intends to open four additional skateparks in
Fiscal 2001 and estimates the aggregate cost of its portion of these projects to
be approximately $6.0 to $8.0 million, since the landlords for these skateparks
have agreed to pay either most of or substantially all of the capital costs
associated with the construction of the parks.
The Company intends to utilize cash generated from operations and funds
drawn down and/or borrowed under the Credit Facility to fulfill its capital
expenditure requirements for the balance of Fiscal 2001.
Future Accounting Changes
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, hedging activities and exposure definition. SFAS No. 133 requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value will either be offset against the change in fair value of the hedged
asset, liabilities, or firm commitments through earnings, or reported in other
comprehensive income until the hedge is recognized in earnings. In June 1999,
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133" was issued. The
statement defers the effective date of SFAS No. 133 until the first quarter of
Fiscal 2002. In June 2000, SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" was issued. Although the Company continues to review the effect of the
implementation of SFAS No. 133 and No. 138, the Company does not currently
believe their adoption will have a material impact on its financial position or
results of operations and does not believe adoption will result in significant
changes to its financial risk management practices.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The Company is required to follow
the guidance in the SAB no later than the third quarter of Fiscal 2001. The SEC
has recently indicated it intends to issue further guidance with respect to
adoption of specific issues addressed by SAB No. 101. Until such time as this
additional guidance is issued, the Company is unable to assess the impact, if
any, it may have on the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company does not believe that the impact of FIN 44 will
have a material effect on its historical financial position or results of
operations.
Seasonality
The Company's business is seasonal, with the largest percentage of net
income, U.S. sales, and substantially all revenues generated from High Cascade
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 is recognizing 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.
23
<PAGE> 27
Year 2000 Compliance Update
As of the date of this report, the Company has not experienced any
material Year 2000-related problems with any of its systems and has not received
any reports of such problems from any of its sales agents, distributors,
customers, landlords, financial partners, or third-party vendors.
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 six 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 recognize the Euro Conversion, and
all of its European distributors have represented to the Company that their
systems do the same.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's exposure to market risk associated with changes in
interest rates relates primarily to its debt obligations. The Revolver bears
interest at a rate equal to either (i) LIBOR plus a margin, or (ii) a base rate
plus a margin. The margins are based on the Company's rate of "Funded Debt" to
"EBITDA," each as defined in the Credit Agreement. See Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations
--Liquidity and Capital Resources." The Company does not use derivative
financial instruments to hedge its interest rate risks.
Foreign Currency Risk
The Company operates its business and sells its products in a number of
countries throughout the world and, as a result, is exposed to movements on
foreign currency exchange rates. Although the Company has most of its products
manufactured outside of the United States on a per order basis, these purchases
are made in U.S. dollars. The major foreign currency exposures involve Japan and
Europe. In order to protect against the volatility associated with earnings
currency translations of foreign subsidiaries and royalty income from sources
outside the United States, the Company may, from time to time, utilize forward
foreign exchange contracts and/or foreign currency options with durations of
generally three to twelve months. As of May 31, 2000, the Company had no
outstanding foreign exchange forward contracts.
---------
* 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.
24
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VANS, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash ........................................................... $ 15,516,337 $ 7,777,192
Accounts receivable, net of allowance for doubtful
accounts and sales returns and allowances of $2,030,187
and $1,432,214 at May 31, 2000 and 1999,
respectively (note 12) ....................................... 34,599,884 30,056,150
Inventories (note 4) ........................................... 50,142,401 37,024,553
Deferred income taxes (note 8) ................................. 2,981,295 1,378,456
Prepaid expenses ............................................... 11,924,998 7,823,767
------------- -------------
Total current assets .................................... 115,164,915 84,060,118
Property, plant and equipment, net (notes 3, 5 and 9) .......... 25,096,102 15,809,950
Property held for lease (notes 5 and 9) ........................ 4,704,639 4,601,326
Excess of cost over the fair value of net assets
acquired, net of accumulated amortization
of $37,113,248 and $35,695,857 at May 31, 2000 and 1999,
respectively ................................................. 23,523,328 23,126,700
Other assets ................................................... 2,988,900 2,939,623
------------- -------------
$ 171,477,884 $ 130,537,717
============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (note 6) ................................. $ 19,705,814 $ 9,184,836
Accounts payable ............................................... 11,878,439 10,600,870
Accrued payroll and related expenses ........................... 6,814,877 2,132,446
Accrued interest .............................................. 636,682 479,210
Restructuring costs (note 3) ................................... 204,014 730,141
Income taxes payable ........................................... 5,224,656 343,698
------------- -------------
Total current liabilities ............................... 44,464,482 23,471,201
Deferred income taxes (note 8) ................................. 3,313,308 2,090,536
Capital lease obligations (notes 7 and 9) ...................... 13,259 90,893
Long-term debt (note 7) ........................................ 12,130,773 8,712,129
------------- -------------
59,921,822 34,364,759
------------- -------------
Minority interest ................................................ 3,239,210 1,021,754
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, 13,761,839 and 13,238,567
shares issued and outstanding at May 31, 2000 and
1999, respectively ........................................... 13,762 13,235
Accumulated other comprehensive income:
Cumulative foreign translation adjustment ................... (634,570) (37,774)
Unrealized loss on securities ............................... (314,510) --
Additional paid-in capital ..................................... 104,474,904 102,092,026
Retained earnings (accumulated deficit) ........................ 4,777,266 (6,916,283)
------------- -------------
Net stockholders' equity ................................ 108,316,852 95,151,204
Commitments and contingencies (note 9) ------------- -------------
$ 171,477,884 $ 130,537,717
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 29
VANS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
THREE-YEAR PERIOD ENDED MAY 31, 2000
<TABLE>
<CAPTION>
2000 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales (note 12) ........................................ $ 273,510,463 $ 205,127,113 $ 174,497,304
Cost of sales .............................................. 158,650,668 118,458,384 112,197,573
------------- ------------- -------------
Gross profit ............................................. 114,859,795 86,668,729 62,299,731
Operating expenses:
Selling and distribution ................................. 63,542,346 46,392,299 33,569,858
Marketing, advertising and promotion ..................... 20,227,988 20,684,827 17,137,722
General and administrative ............................... 11,124,643 8,952,015 6,711,137
Restructuring reserve expense (recovery) (note 3) ........ --- (393,477) 8,212,238
Provision for doubtful accounts .......................... 763,384 528,001 697,926
Amortization of intangibles .............................. 1,416,857 1,287,029 933,208
------------- ------------- -------------
Total operating expenses ......................... 97,075,218 77,450,694 67,262,089
------------- ------------- -------------
Earnings (loss) from operations .................. 17,784,577 9,218,035 (4,962,358)
Interest income ............................................ 172,392 210,266 479,728
Interest and debt expense .................................. (2,637,079) (1,157,955) (262,181)
Other income (note 2) ...................................... 4,571,290 5,999,850 2,160,640
------------- ------------- -------------
Earnings (loss) before income taxes and minority
interest in income of consolidated
subsidiaries .......................................... 19,891,180 14,270,196 (2,584,171)
Income tax expense (benefit) (note 8) ...................... 6,800,000 4,851,867 (510,067)
Minority share of income ................................... 1,004,335 692,953 603,247
------------- ------------- -------------
Net earnings (loss) ........................................ 12,086,845 8,725,376 (2,677,351)
Other comprehensive income (expense):
Foreign currency translation adjustment, net of
tax of $307,441 ....................................... (596,796) 14,774 (147,262)
Unrealized loss on securities ......................... (314,510) -- --
------------- ------------- -------------
Total comprehensive income (loss) .......................... $ 11,175,539 $ 8,740,150 $ (2,824,613)
============= ============= =============
Per share information (note 2):
Basic:
Net earnings (loss) ................................... $ .89 $ .66 $ (.20)
============= ============= =============
Weighted average common and common
equivalent shares ................................... 13,603,013 13,289,540 13,283,674
Diluted:
Net earnings (loss) ................................... $ .84 $ .64 $ (.20)
============= ============= =============
Weighted average common and common
equivalent shares ................................... 14,468,228 13,666,759 13,283,674
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 30
VANS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED MAY 31, 2000
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL STOCK RETAINED OTHER TOTAL
---------------------- PAID-IN SUB- EARNINGS COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL SCRIPTION (ACUM. DEFICIT) INCOME EQUITY
---------- --------- ------------- --------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1997 ......... 13,166,947 $ 13,167 $ 101,113,448 $ (4,500) $ (12,964,308) $ 123,919 $ 88,281,726
Issuance of common
stock for cash .............. 188,265 188 1,105,981 4,500 -- -- 1,110,669
Repurchase of common stock ... (102,500) (102) (980,523) -- -- -- (980,625)
Issuance of common
stock for acquisition ....... 37,330 37 597,280 -- -- -- 597,317
Foreign currency
translation adjustment ...... -- -- -- -- -- (184,078) (184,078)
Net earnings ................. -- -- -- -- (2,677,351) -- (2,677,351)
---------- --------- ------------- --------- ------------- ---------- ------------
BALANCE AT MAY 31, 1998 ......... 13,290,042 13,290 101,836,186 -- (15,641,659) (60,159) 86,147,658
Issuance of common
stock for cash .............. 179,584 178 1,239,678 -- -- -- 1,239,856
Repurchase of common stock ... (471,000) (473) (3,959,320) -- -- -- (3,959,793)
Issuance of common
stock for acquisition ....... 239,941 240 2,975,482 -- -- -- 2,975,722
Foreign currency
translation adjustment ...... -- -- -- -- -- 22,385 22,385
Net earnings ................. -- -- -- -- 8,725,376 -- 8,725,376
---------- --------- ------------- --------- ------------- ---------- ------------
BALANCE AT MAY 31, 1999 ......... 13,238,567 13,235 102,092,026 -- (6,916,283) (37,774) 95,151,204
Issuance of common
stock for cash .............. 171,658 175 1,180,659 -- -- -- 1,180,834
Issuance of common
stock for acquisition ....... 351,614 352 1,202,219 -- (393,296) -- 809,275
Foreign currency
translation adjustment ...... -- -- -- -- -- (596,796) (596,796)
Unrealized loss on
securities .................. -- -- -- -- -- (314,510) (314,510)
Net earnings ................. -- -- -- -- 12,086,845 -- 12,086,845
---------- --------- ------------- --------- ------------- ---------- ------------
BALANCE AT MAY 31, 2000 ......... 13,761,839 $ 13,762 $ 104,474,904 $ -- $ 4,777,266 $ (949,080) $108,316,852
========== ========= ============= ========= ============= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 31
VANS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED MAY 31, 2000
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) .................................................... $ 12,086,845 $ 8,725,376 $ (2,677,351)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization ....................................... 6,051,871 5,027,972 4,500,480
Restructure cost recoveries ......................................... -- (393,477) --
Net (gain) loss on sale of equipment ................................ 176,894 (58,208) --
Minority share of income ............................................ 1,004,335 692,953 603,247
Provision for losses on accounts
receivable and sales returns ...................................... 763,384 528,001 697,926
Inventory write-down and other non-cash restructuring costs ......... -- -- 10,830,848
Changes in assets and liabilities, net of acquisition effects:
Accounts receivable ............................................... (5,618,118) (13,035,418) 6,475,843
Inventories ....................................................... (13,366,079) (6,166,521) (13,389,087)
Deferred income taxes ............................................. (72,627) 7,131,084 (8,055,609)
Prepaid expenses .................................................. (3,887,602) (2,814,388) (1,923,749)
Other assets ...................................................... (1,166,219) (386,331) 21,283
Accounts payable .................................................. 1,835,922 3,447,154 1,620,404
Accrued payroll and related expenses .............................. 3,062,011 (823,366) 624,537
Restructuring costs ............................................... (526,127) (5,702,393) --
Restructuring reserve ............................................. -- -- 5,612,758
Income taxes payable .............................................. 4,880,958 (4,592,982) 1,172,953
------------ ------------ ------------
Net cash provided by (used in) operating activities ............ 5,225,448 (8,420,544) 6,114,483
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment ........................................................... (12,560,478) (6,011,615) (5,039,992)
Proceeds from sale of (investment in) other companies .................. 80,044 (407,323) (2,423,377)
Proceeds from sale of property, plant and
equipment ............................................................ 25,255 849,018 --
------------ ------------ ------------
Net cash used in investing activities .......................... (12,455,179) (5,569,920) (7,463,369)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings, net ............................... 10,069,822 2,897,348 1,830,245
Payments on capital lease obligations .................................. (191,990) (250,823) (87,462)
Proceeds from long term debt ........................................... 4,837,212 5,452,703 1,615,559
Consolidated subsidiary dividends
paid to minority shareholder ........................................ (593,766) (413,548) (526,106)
Proceeds from issuance of common stock, net ............................ 1,180,834 1,239,856 1,110,604
Payment for repurchase of common stock ................................. -- (3,959,793) (980,523)
------------ ------------ ------------
Net cash provided by financing activities ...................... 15,302,112 4,965,743 2,962,317
Effect of exchange rates on cash ....................................... (333,236) 22,385 (184,078)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ............................................. 7,739,145 (9,002,336) 1,429,353
Cash and cash equivalents, beginning of year ........................... 7,777,192 16,779,528 15,350,175
------------ ------------ ------------
Cash and cash equivalents, end of year ................................. $ 15,516,337 $ 7,777,192 $ 16,779,528
============ ============ ============
SUPPLEMENTAL CASH FLOW
Information -- amounts paid for:
Interest ............................................................. $ 1,646,941 $ 780,423 $ 262,182
Income taxes ......................................................... $ 1,696,686 $ 1,968,805 $ 6,310,168
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Supplemental Disclosures:
Increase in investment in consolidated subsidiary
Fair value of tangible assets acquired ............................... 145,967 121,181 96,929
Stock issued ......................................................... 1,273,339 976,342 597,280
Business Acquisition
Stock issued .......................................................... 2,700,005 1,999,380 --
Note payable issued ................................................... -- 1,483,479 --
Fair value of net liabilities assumed, excluding cash received ........ 603,384 1,144,044 --
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 32
VANS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2000, 1999, AND 1998
1. BUSINESS AND ORGANIZATION
Vans, Inc. (the "Company") is a leading branded sports and lifestyle
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, 1999 and 2000 the Company acquired, in total,
an additional 29% of the common shares of Global, to bring the total investment
to 80%. The Global Acquisition has been accounted for under the purchase method
of accounting, and accordingly, the purchase price was allocated to assets
acquired based on their estimated fair values. The excess of the purchase price
over the fair market value of net assets acquired has been recorded as goodwill.
The results of operations of Global have been included in the Company's
consolidated statements of operations since the date of acquisition. The Company
has reached an agreement with Global to acquire the remaining Global shares
effective November 2, 2000.
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, 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) 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.
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 consideration exchanged by the Company primarily
consisted of 236,066 shares of the Company's Common Stock. The results of the
two companies have been consolidated in the Company's financial statements
starting with the period beginning on June 1, 1999. The merger was 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 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 the following partnership ventures: (i) in
Mexico, Vans Latinoamericana (Mexico), S.A. de C.V. ("Vans Latinoamericana");
(ii) in Argentina, Vans Argentina S.A. ("Vans Argentina"); (iii) in Brazil, Vans
Brazil S.A. ("Vans Brazil"); (iv) in Uruguay, Vans Uruguay S.A. ("Vans
Uruguay"); (v) in the United Kingdom, Vans Footwear Limited; and (vi) in the
U.S., Van Pac, LLC, a Delaware limited liability company (""Van Pac") and VASH,
LLC, a Delaware limited liability company ("VASH").
29
<PAGE> 33
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its subsidiaries, Switch Manufacturing,
a California corporation, Vans International, Inc., a foreign sales corporation
("FSC"), Vans Footwear International, Inc., a California corporation, VFEL, Vans
Footwear Limited, a wholly-owned United Kingdom subsidiary, Vans.com LLC, a
Delaware limited liability company, Global, Vans Latinoamericana, Vans
Argentina, Vans Brazil, Vans Uruguay, Vans Shoes Outlets, Ltd., a Texas Limited
Partnership of which the Company is a general partner, Van Pac, VASH and High
Cascade.
Use of Estimates. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. In
preparing the consolidated 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.
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, VFEL and Vans Latinoamericana enter
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. and shipped directly to the international customers, revenue is recognized
when goods are accepted by the freight forwarder. Revenues from royalty
agreements are recognized as earned.
Property, Plant and Equipment. Property, plant and equipment are stated
at cost, less depreciation and amortization. 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
30
<PAGE> 34
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 a non-discounted 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.
Other Income. Other income is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Royalty income ................... $ 4,522,106 $ 5,470,382 $ 2,216,619
Rental income .................... 587,855 295,283 (48,608)
Foreign currency transaction
gain (loss) .................... (541,614) 282,088 --
Other ............................ 2,943 (47,903) (7,371)
----------- ----------- -----------
$ 4,571,290 $ 5,999,850 $ 2,160,640
=========== =========== ===========
</TABLE>
Fair Value of Financial Instruments. As of May 31, 2000, 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 carrying value of the Company's fixed and
variable long-term borrowings approximates fair value because the fixed and
variable rates approximate the market rates for such borrowings. In Fiscal 1997,
the Company acquired a minority equity investment in The Zone Network.com, Inc.
("Zone") which the Company accounted for at cost. In February 2000, Zone was
sold to Quokka Sports, Inc., a public company ("Quokka"), in a stock-for-stock
transaction for which the Company recognized a $194,000 gain on its Zone
investment. The Company now classifies its equity investment in Quokka as an
available-for-sale security and as such the investment is reported at fair value
with unrealized gains and losses excluded from earnings, but reported in other
comprehensive income. As of May 31, 2000, the Company had incurred an unrealized
loss of $315,000 on its Quokka investment.
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 13.
Net Earnings (Loss) per Common Share
31
<PAGE> 35
In Fiscal 2000 and 1999 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 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 70,000, 795,236 and 105,334 shares of common stock
at prices ranging from $8.75 to $20.50 were outstanding during fiscal years
2000, 1999 and 1998, 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.
Future Accounting Changes
In June 1998, Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" was issued.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, hedging activities and exposure definition. SFAS No. 133 requires
an entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value will either be offset against the change in fair value of the hedged
asset, liabilities, or firm commitments through earnings, or reported in other
comprehensive income until the hedge is recognized in earnings. In June 1999,
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133" was issued. The
statement defers the effective date of SFAS No. 133 until the first quarter of
Fiscal 2002. In June 2000, SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" was issued. Although the Company continues to review the effect of the
implementation of SFAS No. 133 and No. 138, the Company does not currently
believe their adoption will have a material impact on its financial position or
results of operations and does not believe adoption will result in significant
changes to its financial risk management practices.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The Company is required to follow
the guidance in the SAB no later than the third quarter of Fiscal 2001. The SEC
has recently indicated it intends to issue further guidance with respect to
adoption of specific issues addressed by SAB No. 101. Until such time as this
additional guidance is issued, the Company is unable to assess the impact, if
any, it may have on the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25" ("FIN 44"). This
Interpretation clarifies the definition of employee for purposes of applying
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the criteria for determining whether a plan qualifies as
a noncompensatory plan, the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. This
Interpretation is effective July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company does not believe that the impact of FIN 44 will
have a material effect on its historical financial position or results of
operations.
Reclassifications. Certain amounts in the Fiscal 1998 and 1999
consolidated financial statements have been reclassified to conform to the
Fiscal 2000 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. The Vista Facility was closed on
August 6, 1998. 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
32
<PAGE> 36
support such agents.
The Company incurred a 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. The remaining cash payments to one of the
terminated distributors will be completed in Fiscal 2002. Such cash expenditures
will be funded out of operations.
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 150,000 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, 2000:
<TABLE>
<CAPTION>
May 31, 1998 May 31, 1999 May 31, 2000
Balance Cash Non-Cash Balance Cash Non-Cash Balance
------------ ---------- ---------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
European restructuring:
Termination of international
distributors .......................... $2,534,000 (300,000) (1,504,000) 730,000 (525,986) -- $ 204,014
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 (525,986) -- $ 204,014
========== ========== ========== ========== ======== ==== ==========
</TABLE>
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.
During Fiscal 2000, the Company incurred cash expenditures of $526,000
related to the termination of two of the Company's international distributors in
Europe.
4. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
MAY 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Work-in-process ...... $ 256,546 $ 138,004
Finished goods ....... 49,885,855 36,886,549
----------- -----------
$50,142,401 $37,024,553
=========== ===========
</TABLE>
Inventories at May 31, 2000 and 1999 are reduced by $679,000 and
$682,000, respectively, to reflect the lower of cost or market valuation
allowances.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following:
33
<PAGE> 37
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Land ................................................. $ 135,641 $ --
Building ............................................. 1,210,597 --
Machinery and equipment .............................. 4,031,170 2,898,950
Store fixtures and equipment ......................... 7,008,545 4,573,361
Automobiles and trucks ............................... 1,095,174 1,075,566
Computers, office furniture and equipment ............ 9,212,536 8,020,297
Leasehold improvements ............................... 18,575,952 11,061,832
Less accumulated depreciation and amortization ....... (16,173,513) (11,820,056)
------------ ------------
$ 25,096,102 $ 15,809,950
============ ============
</TABLE>
As of May 31, 2000 and 1999, the property held for lease related to the
Orange, California manufacturing facility, which was closed in Fiscal 1996, and
had a net book value of $4,705,000 and $4,601,000, respectively (see note 9).
These amounts are net of $4,508,000 and $4,450,000, respectively, of accumulated
depreciation. The amount of future rental income under noncancellable leases for
this property is $1,915,000.
Included in machinery and equipment and automobiles and trucks at May
31, 2000 and 1999 are $708,000 of assets held under capital leases. At May 31,
2000 and 1999, accumulated amortization of assets held under capital leases
totaled $632,000 and $426,000, respectively (see note 9).
Depreciation expense totaled $4,381,000, $3,435,000 and $3,372,000 for
the years ended May 31, 2000, 1999 and 1998, respectively.
6. CREDIT FACILITIES AND SHORT-TERM BORROWINGS
In July 1999 the Company obtained a $63.5 million credit facility (the
"Credit Facility") pursuant to a Credit Agreement (the "Credit Agreement") with
several lenders (the "Lenders"). The 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 Credit Facility was increased to $78.0 million in
April 2000.
Of the $78.0 million amount of the Credit Facility, $63.0 million is in
the form of an unsecured revolving line of credit (the "Revolver"), and $15.0
million is in the form of an unsecured term loan (the "Term Loan"). The Revolver
expires on April 30, 2003. The Company has the option to pay interest on
Revolver advances at a rate equal to either (i) LIBOR plus a margin, or (ii) the
base rate plus a margin. The LIBOR rate margin and the base rate margin are
based on the Company's ratio of "Funded Debt" to "EBITDA," each as defined in
the Credit Agreement.
Of the $15.0 million Term Loan, approximately $5.0 million was disbursed
at the closing of the Credit Facility to replace a portion of the Bank of the
West Facility, approximately $3.0 million was disbursed in the second quarter of
Fiscal 2000 for capital expenditures, and the remaining portion must be
disbursed on or before February 28, 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 plus a margin 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. The Company was in compliance with all such covenants at May 31,
2000.
34
<PAGE> 38
7. DEBT
Long-term debt at May 31, 2000 and 1999 consists of the following:
<TABLE>
<CAPTION>
MAY 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
12% note payable to Tavistock .......... $ 2,253,737 $ 3,178,225
Capitalized lease obligations with
interest at 9.6% (see note 9) ......... 75,998 282,030
Switch note payable .................... 1,780,625 1,611,733
Bank of the West Facility .............. -- 3,915,111
Bank of America term loan .............. 7,678,588 --
High Cascade notes payable ............. 414,714 --
Astro van note payable ................. 3,109 7,060
----------- -----------
12,206,771 8,994,159
Less: Current portion ................. 62,739 191,137
----------- -----------
$12,144,032 $ 8,803,022
=========== ===========
</TABLE>
The Company's foreign owned subsidiary, Vans Latinoamericana, maintains
a 12% note payable to Tavistock Holdings A.G., a 49.99% owner of such company.
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. The note is due and payable on December 31, 2001.
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
U.S. Federal ....... $ 3,026,744 $(1,902,012) $ 3,280,477
State .............. 1,412,710 (482,957) 945,271
Foreign ............ 2,433,173 800,086 507,795
----------- ----------- -----------
6,872,627 (1,584,883) 4,733,543
----------- ----------- -----------
Deferred:
U.S. Federal ....... (213,330) 5,098,666 (4,151,909)
State .............. 140,703 1,338,084 (1,091,701)
----------- ----------- -----------
(72,627) 6,436,750 (5,243,610)
----------- ----------- -----------
$ 6,800,000 $ 4,851,867 $ (510,067)
=========== =========== ===========
</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,
-----------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) ...... $ 6,961,913 $ 4,994,569 $ (904,460)
Compensation under stock option plans .......... -- -- (18,953)
Amortization of intangible assets .............. 458,659 422,191 318,311
State franchise taxes, net of Federal
benefit ...................................... 1,009,718 555,832 (77,823)
Increase in valuation
allowance .................................... -- 564,494 289,328
Foreign tax credit ............................. (1,118,341) -- --
Other .......................................... 720,693 64,650 (159,545)
</TABLE>
35
<PAGE> 39
<TABLE>
<S> <C> <C> <C>
Tax effect of foreign operations ............... (1,232,642) (1,749,869) 43,075
----------- ----------- -----------
$ 6,800,000 $ 4,851,867 $ (510,067)
=========== =========== ===========
</TABLE>
The components of net deferred taxes as of May 31, 2000 and 1999 follow:
<TABLE>
<CAPTION>
MAY 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable ....................... $ 401,170 $ 40,963
Inventories ............................... 596,509 661,636
Restructuring costs ....................... 89,440 297,313
Accrued expenses .......................... 1,553,891 605,339
Intangibles ............................... 97,098 --
Tax credit and other carryforwards ........ 1,251,724 1,008,537
----------- -----------
3,989,832 2,613,788
Valuation allowance ....................... (1,008,537) (1,008,537)
----------- -----------
Total deferred tax assets ................. 2,981,295 1,605,251
----------- -----------
Deferred tax liabilities:
Property, plant and equipment ............. 2,187,592 1,319,054
Intangibles ............................... -- 4,275
Unremitted earnings of foreign subsidiaries 1,125,716 994,002
----------- -----------
Total deferred tax liabilities ............ 3,313,308 2,317,331
----------- -----------
Net deferred tax liabilities ............. $ (332,013) $ (712,080)
=========== ===========
</TABLE>
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, 2000, with
the exception of certain 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. The
Company believes 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, 2000 are as follows:
<TABLE>
<S> <C>
2001 ................................................... $67,331
2002 ................................................... 13,459
-------
Total minimum obligations .............................. 80,790
Less: amounts representing interest ................... 4,792
-------
Present value of net minimum obligations ............... 75,998
Less current portion ................................... 62,739
-------
Long-term obligations at May 31, 2000 (see note 7) ..... $13,259
=======
</TABLE>
The current portion of capital lease obligations is included in accounts
payable in the accompanying consolidated balance sheets at May 31, 2000 and
1999.
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, 2000:
<TABLE>
<S> <C>
2001.................... $ 10,171,695
2002.................... 9,373,549
2003.................... 8,874,520
2004.................... 7,985,227
2005.................... 7,332,544
Thereafter.............. 22,083,402
-------------
</TABLE>
36
<PAGE> 40
<TABLE>
<S> <C>
$ 65,820,937
=============
</TABLE>
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 $22,000 is payable monthly. The second
party, Multilayer Technology, leases approximately 76,000 square feet under a
triple net lease for a period of five years commencing June 1, 2000. Base rent
of $28,500 is payable monthly.
Future minimum lease payments receivable under noncancelable operating
leasing arrangements as of May 31, 2000 are as follows:
<TABLE>
<S> <C>
2001.................... $ 558,400
2002.................... 440,880
2003.................... 305,280
2004.................... 305,280
Thereafter.............. 305,280
----------
$1,915,120
==========
</TABLE>
The Company also leases certain other equipment on a month-to-month
basis. Total rent expense incurred for the years ended May 31, 2000, 1999 and
1998 under all operating leases was approximately $8,934,000, $5,717,000 and
$4,897,000, respectively.
Included in rent expense for each of the years ended May 31, 2000, 1999
and 1998 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, 2000 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. Mr.
Schoenfeld has a one-time option to receive a lump sum payment of the balance of
the trust, provided such option is exercised between November 1, 2000 and
December 15, 2000. During Fiscal 2000 and Fiscal 1999 $223,000 and $205,000,
respectively, was recorded as compensation expense. At May 31, 2000 and 1999 the
balance in deferred compensation was $791,000 and $569,000, respectively.
The Company has established a split dollar life insurance plan for Gary
H. Schoenfeld, the Company's President and Chief Executive Officer. A split
dollar plan is a non-qualified employee benefit plan in which the Company and
the employee agree to share the costs and benefits of a whole life insurance
policy. Under the plan, the Company pays all premiums due and is assigned a
death benefit equal to the cumulative net premium contributed. During Fiscal
2000, $93,000 was recorded as compensation expense. At May 31,2000, the balance
in the liability account was $62,000.
The Company had entered into a management agreement, as amended, with a
company owned by a former significant stockholder of the Company. The agreement
provided for a management fee aggregating $350,000 annually. Payments under this
agreement were made monthly. The Company incurred management fee expenses of
$350,000 for the year ended May 31, 1998. 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 $632,000 at May 31, 2000. These agreements range from 1-3 years in
duration and are payable through July 2003. Approximately $976,000, $978,000 and
$544,000 were paid under such license agreements during the years ended May 31,
2000, 1999 and 1998, 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, 2000, the Company had no foreign currency
contracts outstanding. At May 31, 1999, the amount in foreign currency contracts
approximated (pound sterling) 400,000.
Third Party Manufacturing. No manufacturer accounted for more than 10%
of third-party shoes manufactured for the Company
37
<PAGE> 41
during the three-year period ended May 31, 2000.
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.
At May 31, 2000, the Company has three stock-based compensation plans.
No compensation cost has been recognized for fixed stock option plans consistent
with the intrinsic value method. 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,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net earnings (loss) .......... $ 11,435 $ 7,951 $ (3,407)
Pro forma earnings (loss) per share
Basic ............................... $ .84 $ .60 $ (.26)
Diluted ............................. $ .79 $ .58 $ (.26)
</TABLE>
The pro forma net earnings (loss) and per share amounts reflect only
options granted from June 1, 1997 through May 31, 2000. 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, 1996 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 2000, 1999 and 1998, respectively:
expected volatility of 54% for Fiscal 2000, 55% for Fiscal 1999, and 53% for
Fiscal 1998; risk-free interest rates ranging from 5.63 to 6.62 for Fiscal 2000,
4.42% to 5.54% for Fiscal 1999, and from 5.43% to 6.06% for Fiscal 1998; assumed
dividend yield of zero for all three years; and expected lives of four and six
years.
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 2,300,000 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.
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
38
<PAGE> 42
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.
A summary of the status of the Company's Vanstastic Plan as of May 31,
2000 and its 1991 Long-Term Incentive Plan as of May 31, 2000, 1999 and 1998 and
changes during the years then ended are presented below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
FIXED OPTIONS (000) PRICE (000) PRICE (000) PRICE
------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ..... 1,568 $ 7.60 1,106 $ 8.49 1,185 $ 8.88
Granted .............................. 307 10.69 529 6.76 243 10.03
Exercised ............................ (156) 7.43 (21) 6.41 (178) 5.68
Forfeited ............................ (131) 8.74 (46) 8.73 (144) 8.76
----- ----- -----
Outstanding at end of year ........... 1,588 8.14 1,568 7.60 1,106 8.49
Options exercisable at year-end ...... 903 788 594
Weighted average fair value of
options granted during the year ...... $ 5.52 $ 6.75 $ 9.53
</TABLE>
The following table summarizes information about fixed stock options
outstanding at May 31, 2000:
<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, 2000 CONTRACTUAL LIFE EXERCISE PRICE MAY 31, 2000 EXERCISE PRICE
----------------- --------------- ---------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$5.75 - 9.75 144,858 2.87 $7.01 144,858 $6.88
$1.50 - 6.88 137,989 4.77 $5.22 137,989 $5.22
$4.50 - 9.25 124,215 5.41 $7.62 124,215 $7.62
$6.25 - 9.38 337,034 6.56 $9.26 290,954 $9.26
$8.53 - 9.56 128,942 7.37 $9.24 62,152 $9.24
$6.25 - 10.88 444,612 8.52 $6.74 133,599 $6.83
$6.75 - 15.00 270,530 9.22 $10.84 9,270 $6.93
--------- -------
1,588,180 903,037
========= =======
</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, 2000, 803,676 options had been exercised, and
37,960 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, 2000, no shares
were sold and at May 31, 2000, 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
39
<PAGE> 43
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.
12. EXPORT SALES
Sales to foreign unaffiliated customers, by major country through VFEL,
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
France ............. $21,987,000 $ 9,628,000 $ 5,922,000
Germany ............ 14,319,000 7,506,000 3,957,000
Japan .............. 9,750,000 6,189,000 13,798,000
United Kingdom ..... 7,334,000 9,165,000 6,863,000
Mexico ............. 5,304,000 3,181,000 2,940,000
Canada ............. 4,305,000 2,585,000 1,585,000
Argentina .......... 3,778,000 2,633,000 1,489,000
Australia .......... 2,644,000 1,948,000 1,188,000
Spain .............. 2,023,000 1,239,000 1,055,000
Switzerland ........ 1,827,000 1,537,000 961,000
Other .............. 13,815,000 11,920,000 10,254,000
----------- ----------- -----------
$87,086,000 $57,531,000 $50,012,000
=========== =========== ===========
</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. 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:
40
<PAGE> 44
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Retail ............. $ 77,761,000 $ 60,050,000 $ 46,984,000
Wholesale .......... 108,663,000 87,546,000 77,501,000
International ...... 87,086,000 57,531,000 50,012,000
------------ ------------ ------------
$273,510,000 $205,127,000 $174,497,000
============ ============ ============
</TABLE>
The Company does not have any individual customers representing more
than 10% of sales.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal year ended May 31, 2000:
Net Sales $82,151,000 $57,823,000 $67,756,000 $65,780,000
Gross Profit 34,564,000 25,223,000 27,577,000 27,496,000
Earnings from operations 8,658,000 4,141,000 2,350,000 2,636,000
Net earnings 5,935,000 2,666,000 1,712,000 1,774,000
Net income per share, basic $ 0.44 $ 0.20 $ 0.13 $ 0.12
Net income per share, diluted $ 0.42 $ 0.19 $ 0.12 $ 0.11
Fiscal year ended May 31, 1999:
Net Sales $65,504,000 $45,559,000 $45,517,000 $48,547,000
Gross Profit 28,105,000 19,879,000 18,529,000 20,156,000
Earnings (loss) from operations 6,973,000 3,634,000 (191,000) (1,198,000)
Net earnings 4,738,000 2,533,000 636,000 818,000
Net income per share, basic $ 0.36 $ 0.19 $ 0.05 $ 0.06
Net income per share, diluted $ 0.35 $ 0.19 $ 0.05 $ 0.05
</TABLE>
41
<PAGE> 45
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, 2000 and 1999 and the related consolidated
statements of operations and comprehensive earnings, stockholders' equity and
cash flows for each of the years in the three-year period ended May 31, 2000.
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 auditing standards generally
accepted in the United States of America. 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, 2000, and 1999, and the results of their
operations and their cash flows for each year in the three-year period ended May
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
KPMG LLP
Orange County, California
July 24, 2000
42
<PAGE> 46
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 4, 7, and 15 of the Proxy Statement for the
Company's 2000 Annual Meeting of Stockholders, which will be filed with the
Commission within 120 days after the end of the fiscal year covered by this
report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the caption "Executive Compensation and Other Information" on page
9 of the Proxy Statement for the Company's 2000 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 2000
Annual Meeting of Stockholders, which will be filed with the Commission within
120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the caption "Certain Transactions" on page 15 of the Proxy
Statement for the Company's 2000 Annual Meeting of Stockholders, which will be
filed with the Commission within 120 days after the end of the fiscal year
covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The Company's Financial Statements, and the Notes thereto, listed in the
Index to Financial Information located at page F-1 of this Report, are set forth
in Item 8 of this Report.
(2) Financial Statement Schedules
The Financial Statement Schedule and the report of independent auditors
thereon are set forth at pages F-2 and F-3 of this Report.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(5)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
</TABLE>
43
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(2)2.2 Certificate of Ownership (California) of the Registrant and
Van Doren Rubber, dated August 19, 1991
(19)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
(25)3.2 Amended and Restated By-laws of the Registrant, approved by
the Board of Directors of the Registrant on May 18, 1999
(5)3.3 Certificate of Designation of Preferences and Rights of Series
A Junior Participating Preferred Stock of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2
(5)4.2 Specimen Stock Certificate
(20)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.
(18)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
(3)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
(6)10.2.3 Amendment No. 3 to the 1991 Long-Term Incentive Plan
(8)10.2.4 Amendment No. 4 to the 1991 Long-Term Incentive Plan
(8)10.2.5 Amendment No. 5 to the 1991 Long-Term Incentive Plan
(13)10.2.6 Amendment No. 6 to the 1991 Long-Term Incentive Plan
(27)10.2.7 Amendment No. 7 to the 1991 Long-Term Incentive Plan
(1)10.3 Employment Agreement, dated as of June 15, 2000, by and
between the Registrant and Steven J. Van Doren, superseding
his Employment Agreement, dated March 10, 1997
(25)10.4 Credit Agreement, dated as of July 13, 1999, among the
Registrant, Bank of America NT&SA and other lenders
(1)10.4.1 Amendment Agreement to Original Credit Agreement, dated as of
April 11, 2000, among the Registrant, Bank of America, N.A.
and other lenders
(1)10.4.2 Amended and Restated Credit Agreement, dated as of April 11,
2000, among the Registrant, Bank of America, N.A. and other
lenders
(26)10.5 Employment Agreement, dated as of August 16, 1999, by and
between the Registrant and Gary H. Schoenfeld, superseding his
Agreement dated as of August 16, 1999, as amended
(10)10.6 Employment Agreement dated as of December 1, 1995, by and
between Walter E. Schoenfeld and the Registrant
(14)10.6.1 Amendment No. 1 to the Employment Agreement of Walter E.
Schoenfeld
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(24)10.6.2 Amendment No. 2 to the Employment Agreement of Walter E.
Schoenfeld
(25)10.6.3 Amendment No. 3 to the Employment Agreement of
Walter E. Schoenfeld
(1)10.6.4 Amendment No. 4 to the Employment Agreement of Walter E.
Schoenfeld
(23)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
(1)10.8 Employment Agreement, dated as of July 27, 2000, by and
between the Registrant and Charles C. Kupfer
(11)10.9 Standard Industrial/Commercial Single Tenant Lease - Gross,
dated August 15, 1996, by and between the Registrant and
CAPCO, Inc.
(1)10.9.1 Standard Industrial/Commercial Single Tenant Lease - Net,
dated May 30, 2000, by and between the Registrant and
Multilayer Technology Inc.
(11)10.10 Trust Under Vans, Inc. Deferred Compensation Plan, dated as of
June 3, 1996
(11)10.10.1 Amendment to Trust Under Vans, Inc. Deferred Compensation Plan
(11)10.11 Deferred Compensation Agreement for Walter Schoenfeld, dated
as of June 1, 1996
(12)10.12 Lease between Wohl Venture One, LLC, a Delaware limited
liability company, and the Registrant
(12)10.13 Construction Agreement between Wohl Venture One, LLC, a
Delaware limited liability company, and the Registrant
(28)10.14 Employment Agreement, dated as of December 3, 1999, by and
between the Registrant and Jay E. Wilson, superseding his
Agreement dated as of December 4, 1996
(25)10.15 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
(14)10.16 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")
(14)10.17 Side Letter to the Operating Agreement
(15)10.18 Share Sale and Purchase Option Agreement, dated November 20,
1996, by and among the Registrant and the shareholders of
Global Accessories Limited
(18)10.19 Investor Rights Agreement, dated July 8, 1997, by and between
the Registrant and The Zone Network, Inc.
(16)10.20 Employment Agreement, dated as of February 3, 1998, by and
between the Registrant and Michael C. Jonte
(1)10.21 Employment Agreement dated as of July 27, 2000, by and between
the Registrant and Scott A. Brabson, superseding his Agreement
dated as of October 29, 1997
(21)10.22 Surrender of Leasehold, dated as of September 14, 1998, by and
between the Registrant and Pacific Gulf Properties, Inc.
(22)10.23 Employment Agreement, dated October 21, 1998, by and between
the Registrant and Stephen M. Murray
</TABLE>
45
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(23)10.24 Employment Agreement dated March 15, 1999, by and between
the Registrant and Joseph D. Giles
(1)10.25 2000 Long-Term Incentive Plan
(1)10.26 Employment Agreement, dated as of July 19, 2000, by and
between the Registrant and Arthur I. Carver
(26)10.27 Employment Agreement, dated as of January 20, 2000, by and
between the Registrant and Charles A. Ponthier
(26)10.28 Employment Agreement, dated as of January 20, 2000, by and
between the Registrant and Mark Smith
(27)10.29 Employment Agreement, dated as of April 1, 1999, by and
between the Registrant and Neal R. Lyons
(27)10.30 Employment Agreement, dated as of April 1, 1999, by and
between the Registrant and Chris D. Strain
(17)10.31 Vanstastic Employee Stock Option Plan
(1)21 List of Subsidiaries
23.1 Report on Schedule and Consent of Independent Auditors is set
forth at page F-2 of this report
(1)27 Financial Data Schedule
</TABLE>
----------
(1) Filed herewith.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1992, and incorporated herein by this reference
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1993, and incorporated herein by this reference
(4) Filed as an exhibit to the Registrant's Form 8-A Registration Statement
(SEC File No. 0-19402), and incorporated herein by this reference
(5) Filed as an exhibit to the Registrant's Form 8-K, dated February 15,
1994, and incorporated herein by this reference
(6) Filed as an exhibit to the Registrant's Form 10-K for the year ended May
31, 1994, and incorporated herein by this reference
(7) 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
(8) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1995
(9) 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
(10) 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
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) Filed as an exhibit to the Registrant's Form 8-K, dated November 20,
1996, and incorporated herein by this reference.
(16) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 28, 1998.
(17) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 29, 1997.
46
<PAGE> 50
(18) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1997.
(19) Filed as an exhibit to the Registrant's Form 8-K, dated July 21, 1998.
(20) Filed as an exhibit to the Registrant's Form 8-A/A Registration
Statement, filed with the SEC on June 28, 1999.
(21) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended August 29, 1998.
(22) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 28, 1998.
(23) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 27. 1999.
(24) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1998.
(25) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1999.
(26) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 26, 2000.
(27) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended August 26, 1999.
(28) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 27, 1999.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K
during the quarterly period ended May 31, 2000.
47
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
VANS, INC.
(Registrant)
/s/ Gary H. Schoenfeld
---------------------------------------
By: Gary H. Schoenfeld
Date: August 29, 2000 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
on the dates indicated.
<TABLE>
<S> <C>
/s/ Gary H. Schoenfeld Date: August 29, 2000
-----------------------------------------------
Gary H. Schoenfeld
President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Walter E. Schoenfeld Date: August 29, 2000
-----------------------------------------------
Walter E. Schoenfeld
Chairman of the Board and Director
/s/ Kyle B. Wescoat Date: August 29, 2000
-----------------------------------------------
Kyle B. Wescoat
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ George E. McCown Date: August 29, 2000
-----------------------------------------------
George E. McCown
Director
/s/ Wilbur J. Fix Date: August 29, 2000
-----------------------------------------------
Wilbur J. Fix
Director
/s/ James R. Sulat Date: August 29, 2000
-----------------------------------------------
James R. Sulat
Director
/s/ Kathleen M. Gardarian Date: August 29, 2000
-----------------------------------------------
Kathleen M. Gardarian
Director
/s/ Lisa M. Douglas Date: August 29, 2000
-----------------------------------------------
Lisa M. Douglas
Director
/s/ Gerald Grinstein Date: August 29, 2000
-----------------------------------------------
Gerald Grinstein
Director
/s/ Charles G. Armstrong Date: August 29, 2000
-----------------------------------------------
Charles G. Armstrong
Director
/s/ Leonard R. Wilkens Date: August 29, 2000
-----------------------------------------------
Leonard R. Wilkens
Director
</TABLE>
48
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(5)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
(19)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
(25)3.2 Amended and Restated By-laws of the Registrant, approved by
the Board of Directors of the Registrant on May 18, 1999
(5)3.3 Certificate of Designation of Preferences and Rights of Series
A Junior Participating Preferred Stock of the Registrant
4.1 Reference is made to Exhibits 3.1 and 3.2
(5)4.2 Specimen Stock Certificate
(20)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.
(18)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
(3)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
(6)10.2.3 Amendment No. 3 to the 1991 Long-Term Incentive Plan
(8)10.2.4 Amendment No. 4 to the 1991 Long-Term Incentive Plan
(8)10.2.5 Amendment No. 5 to the 1991 Long-Term Incentive Plan
(13)10.2.6 Amendment No. 6 to the 1991 Long-Term Incentive Plan
(27)10.2.7 Amendment No. 7 to the 1991 Long-Term Incentive Plan
(1)10.3 Employment Agreement, dated as of June 15, 2000, by and
between the Registrant and Steven J. Van Doren, superseding
his Employment Agreement, dated March 10, 1997
(25)10.4 Credit Agreement, dated as of July 13, 1999, among the
Registrant, Bank of America NT&SA and other lenders
(1)10.4.1 Amendment Agreement to Original Credit Agreement, dated as of
April 11, 2000, among the Registrant, Bank of America, N.A.
and other lenders
(1)10.4.2 Amended and Restated Credit Agreement, dated as of April 11,
2000, among the Registrant, Bank of America, N.A. and other
lenders
(26)10.5 Employment Agreement, dated as of August 16, 1999, by and
between the Registrant and Gary H. Schoenfeld, superseding his
Agreement dated as of August 16, 1999, as amended
(10)10.6 Employment Agreement dated as of December 1, 1995, by and
between Walter E. Schoenfeld and the Registrant
(14)10.6.1 Amendment No. 1 to the Employment Agreement of Walter E.
Schoenfeld
(24)10.6.2 Amendment No. 2 to the Employment Agreement of Walter E.
Schoenfeld
</TABLE>
E-1
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(25)10.6.3 Amendment No. 3 to the Employment Agreement of
Walter E. Schoenfeld
(1)10.6.4 Amendment No. 4 to the Employment Agreement of Walter E.
Schoenfeld
(23)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
(1)10.8 Employment Agreement, dated as of July 27, 2000, by and
between the Registrant and Charles C. Kupfer
(11)10.9 Standard Industrial/Commercial Single Tenant Lease - Gross,
dated August 15, 1996, by and between the Registrant and
CAPCO, Inc.
(1)10.9.1 Standard Industrial/Commercial Single Tenant Lease - Net,
dated May 30, 2000, by and between the Registrant and
Multilayer Technology Inc.
(11)10.10 Trust Under Vans, Inc. Deferred Compensation Plan, dated as of
June 3, 1996
(11)10.10.1 Amendment to Trust Under Vans, Inc. Deferred Compensation Plan
(11)10.11 Deferred Compensation Agreement for Walter Schoenfeld, dated
as of June 1, 1996
(12)10.12 Lease between Wohl Venture One, LLC, a Delaware limited
liability company, and the Registrant
(12)10.13 Construction Agreement between Wohl Venture One, LLC, a
Delaware limited liability company, and the Registrant
(28)10.14 Employment Agreement, dated as of December 3, 1999, by and
between the Registrant and Jay E. Wilson, superseding his
Agreement dated as of December 4, 1996
(25)10.15 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
(14)10.16 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")
(14)10.17 Side Letter to the Operating Agreement
(15)10.18 Share Sale and Purchase Option Agreement, dated November 20,
1996, by and among the Registrant and the shareholders of
Global Accessories Limited
(18)10.19 Investor Rights Agreement, dated July 8, 1997, by and between
the Registrant and The Zone Network, Inc.
(16)10.20 Employment Agreement, dated as of February 3, 1998, by and
between the Registrant and Michael C. Jonte
(1)10.21 Employment Agreement dated as of July 27, 2000, by and between
the Registrant and Scott A. Brabson, superseding his Agreement
dated as of October 29, 1997
(21)10.22 Surrender of Leasehold, dated as of September 14, 1998, by and
between the Registrant and Pacific Gulf Properties, Inc.
(22)10.23 Employment Agreement, dated October 21, 1998, by and between
the Registrant and Stephen M. Murray
(23)10.24 Employment Agreement, dated March 15, 1999, by and between
the Registrant and Joseph D. Giles
(1)10.25 2000 Long-Term Incentive Plan
(1)10.26 Employment Agreement, dated as of July 19, 2000, by and
between the Registrant and Arthur I. Carver
(26)10.27 Employment Agreement, dated as of January 20, 2000, by and
between the Registrant and Charles A. Ponthier
</TABLE>
E-2
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- -------------------
<S> <C>
(26)10.28 Employment Agreement, dated as of January 20, 2000, by and
between the Registrant and Mark Smith
(27)10.29 Employment Agreement, dated as of April 1, 1999, by and
between the Registrant and Neal R. Lyons
(27)10.30 Employment Agreement, dated as of April 1, 1999, by and
between the Registrant and Chris D. Strain
(17)10.31 Vanstastic Employee Stock Option Plan
(1)21 List of Subsidiaries
23.1 Report on Schedule and Consent of Independent Auditors is set
forth at page F-2 of this report
(1)27 Financial Data Schedule
</TABLE>
----------
(1) Filed herewith.
(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1992, and incorporated herein by this reference
(3) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1993, and incorporated herein by this reference
(4) Filed as an exhibit to the Registrant's Form 8-A Registration Statement
(SEC File No. 0-19402), and incorporated herein by this reference
(5) Filed as an exhibit to the Registrant's Form 8-K, dated February 15,
1994, and incorporated herein by this reference
(6) Filed as an exhibit to the Registrant's Form 10-K for the year ended May
31, 1994, and incorporated herein by this reference
(7) 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
(8) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1995
(9) 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
(10) 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
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) Filed as an exhibit to the Registrant's Form 8-K, dated November 20,
1996, and incorporated herein by this reference.
(16) Filed as an exhibit to the Registrant's Form 8-K, dated December 17,
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 November 29, 1997.
E-3
<PAGE> 55
(18) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended May 31, 1997.
(19) Filed as an exhibit to the Registrant's Form 8-K, dated July 21, 1998.
(20) Filed as an exhibit to the Registrant's Form 8-A/A Registration
Statement, filed with the SEC on June 28, 1999.
(21) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended August 29, 1998.
(22) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended November 28, 1998.
(23) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q
for the period ended February 27, 1999.
(24) Filed as an exhibit to the Registrant's Annual Repot on Form 10-K for
the year ended May 31, 1998.
E-4
<PAGE> 56
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page
----
<S> <C>
Consolidated Balance Sheets as of May 31, 2000 and 1999 25
Consolidated Statements of Operations and Comprehensive
Earnings for the Years Ended May
31, 2000, 1999 and 1998 26
Consolidated Statements of Stockholders' Equity
for the Years Ended May 31, 2000, 1999 and 1998 27
Consolidated Statements of Cash Flows
for the Years Ended May 31, 2000, 1999 and 1998 28
Notes to Consolidated Financial Statements 29
Independent Auditors' Report 42
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> 57
THE REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Vans, Inc.:
The audits referred to in our report dated July 24, 2000, included the
related financial statement schedule as of May 31, 2000, and for each of the
years in the three-year period ended May 31, 2000, 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 24, 2000, relating
to the consolidated balance sheets of Vans, Inc. and subsidiaries as of May 31,
2000 and 1999, and the related consolidated statements of operations and
comprehensive earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended May 31, 2000, and the related schedule,
which report appears in the May 31, 2000 annual report on Form 10-K of Vans,
Inc.
/s/ KPMG LLP
KPMG LLP
Orange County, California
August 29, 2000
F-2
<PAGE> 58
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, 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
Year end May 31, 2000:
Allowance for
doubtful accounts ............ $ 1,432,214 $ 763,384 $ (165,411)(a) $ 2,030,187
Lower of cost or market
valuation allowance .......... $ 681,598 $ 784,427 $ (786,963) $ 679,062
</TABLE>
--------
(a) Charge-off of uncollectible accounts receivable.
(b) Represents reserves established in connection with the acquisition of
consolidated subsidiaries.
F-3
