##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q
 (Mark One) [X]
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended February 28,
2004 or[  ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
 Commission File Number 0-19402 VANS, INC.  DELAWARE
(State or Other Jurisdiction
of Incorporation or Organization)
    
    33-0272893
(I.R.S. Employer
Identification No.)
 15700 Shoemaker Avenue
Santa Fe Springs, California 90670-5515
(Address of Principal Executive Offices) (Zip Code) (562) 565-8267
(Registrants Telephone Number, Including Area Code) Not applicable
(Former Name, Former Address and Formal Fiscal Year,
if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days. [X] YES [  ] NO Indicate the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date: 17,944,787 shares
of Common Stock, $.001 par value, as of April 2, 2004. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] YES [  ] NO




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESExhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 PART I
FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS. VANS, INC. 
 
 FEBRUARY 28,
    
    MAY 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    64,464
    
    
    $
    52,844Accounts receivable, net of allowance for doubtful
accounts of $2,606 and $2,297 at February 28, 2004,
and May 31, 2003, respectively
    
    
    46,472
    
    
    
    25,596Inventories
    
    
    45,186
    
    
    
    63,955Deferred income taxes
    
    
    2,620
    
    
    
    3,055Prepaid expenses and other
    
    
    6,081
    
    
    
    11,617Total current assets
    
    
    164,823
    
    
    
    157,067Property, plant and equipment, net
    
    
    24,165
    
    
    
    25,120Trademarks and patents, net of accumulated
amortization of $1,729 and $1,378 at February 28,
2004, and May 31, 2003, respectively
    
    
    15,205
    
    
    
    15,533Goodwill
    
    
    32,322
    
    
    
    31,702Other assets
    
    
    3,097
    
    
    
    8,362Total assets
    
    $
    239,612
    
    
    $
    237,784LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    16,050
    
    
    $
    24,484Lease termination liabilities
    
    
    596
    
    
    
    8,338Accrued liabilities
    
    
    18,776
    
    
    
    13,307Income taxes payable
    
    
    7,675
    
    
    
    3,296Liabilities in connection with disposal activities
    
    
    84
    
    
    
    1,543Total current liabilities
    
    
    43,181
    
    
    
    50,968Deferred income taxes
    
    
    2,153
    
    
    
    2,383Long-term debt
    
    
    1,189
    
    
    
    2,523Total liabilities
    
    
    46,523
    
    
    
    55,874Minority interest
    
    
    1,872
    
    
    
    1,735Stockholders equity:Common stock, $.001 par value, 40,000 shares authorized,
17,881 and 17,826 shares issued and outstanding at
February 28, 2004, and May 31, 2003, respectively
    
    
    18
    
    
    
    18Additional paid-in capital
    
    
    188,497
    
    
    
    188,275Deferred compensation
    
    
    (765
    )
    
    
    (976
    )Retained deficit
    
    
    (5,824
    )
    
    
    (12,856
    )Accumulated other comprehensive income
    
    
    9,291
    
    
    
    5,714Total stockholders equity
    
    
    191,217
    
    
    
    180,175Total liabilities and stockholders equity
    
    $
    239,612
    
    
    $
    237,784
 See accompanying notes to condensed consolidated financial statements. 2




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VANS, INC. 
 
 THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003Retail sales
    
    $
    31,160
    
    
    $
    28,371
    
    
    $
    91,638
    
    
    $
    84,645National sales
    
    
    25,790
    
    
    
    22,566
    
    
    
    103,553
    
    
    
    97,378International sales
    
    
    31,622
    
    
    
    29,832
    
    
    
    87,251
    
    
    
    81,280Net sales
    
    
    88,572
    
    
    
    80,769
    
    
    
    282,442
    
    
    
    263,303Cost of sales
    
    
    42,073
    
    
    
    42,581
    
    
    
    145,732
    
    
    
    145,881Gross profit
    
    
    46,499
    
    
    
    38,188
    
    
    
    136,710
    
    
    
    117,422Operating Expenses:Retail
    
    
    15,507
    
    
    
    16,136
    
    
    
    47,585
    
    
    
    48,180Marketing, advertising and promotion
    
    
    6,351
    
    
    
    6,265
    
    
    
    22,046
    
    
    
    22,630Selling, distribution and administrative
    
    
    16,585
    
    
    
    14,825
    
    
    
    46,464
    
    
    
    40,714Impairment charges
    
    
    
    
    
    
    12,509
    
    
    
    
    
    
    
    12,509Lease termination costs
    
    
    
    
    
    
    
    
    
    
    3,892
    
    
    
    Amortization of intangible assets
    
    
    92
    
    
    
    203
    
    
    
    350
    
    
    
    568Total operating expenses
    
    
    38,535
    
    
    
    49,938
    
    
    
    120,337
    
    
    
    124,601Income (loss) from operations
    
    
    7,964
    
    
    
    (11,750
    )
    
    
    16,373
    
    
    
    (7,179
    )Interest income, net
    
    
    (275
    )
    
    
    (254
    )
    
    
    (460
    )
    
    
    (679
    )Other expense, net
    
    
    142
    
    
    
    775
    
    
    
    518
    
    
    
    1,035Income (loss) from continuing operations before income
taxes and minority interest
    
    
    8,097
    
    
    
    (12,271
    )
    
    
    16,315
    
    
    
    (7,535
    )Income tax (benefit) expense
    
    
    778
    
    
    
    (4,658
    )
    
    
    2,486
    
    
    
    (3,152
    )Minority interest
    
    
    226
    
    
    
    (368
    )
    
    
    1,709
    
    
    
    597Income (loss) from continuing operations
    
    
    7,093
    
    
    
    (7,245
    )
    
    
    12,120
    
    
    
    (4,980
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (1,961
    )
    
    
    (5,088
    )
    
    
    (2,471
    )Net income (loss)
    
    $
    7,093
    
    
    $
    (9,206
    )
    
    $
    7,032
    
    
    $
    (7,451
    )Earnings (loss) per share information:Basic:Income (loss) from continuing operations
    
    $
    0.40
    
    
    $
    (0.40
    )
    
    $
    0.68
    
    
    $
    (0.28
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.11
    )
    
    
    (0.29
    )
    
    
    (0.13
    )Net income (loss)
    
    $
    0.40
    
    
    $
    (0.51
    )
    
    $
    0.39
    
    
    $
    (0.41
    )Basic weighted average common shares outstanding
    
    
    17,874
    
    
    
    17,920
    
    
    
    17,851
    
    
    
    17,999Diluted:Income (loss) from continuing operations
    
    $
    0.39
    
    
    $
    (0.40
    )
    
    $
    0.66
    
    
    $
    (0.28
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.11
    )
    
    
    (0.27
    )
    
    
    (0.13
    )Net income (loss)
    
    $
    0.39
    
    
    $
    (0.51
    )
    
    $
    0.39
    
    
    $
    (0.41
    )Diluted weighted average common shares outstanding
    
    
    18,393
    
    
    
    17,920
    
    
    
    18,245
    
    
    
    17,999
 See accompanying notes to condensed consolidated financial statements. 3




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VANS, INC. 
 
 THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Income (loss) from continuing operations
    
    $
    12,120
    
    
    $
    (4,980
    )Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:Depreciation and amortization
    
    
    5,842
    
    
    
    7,840Impairment charges
    
    
    
    
    
    
    12,509Stock-based compensation expense
    
    
    211
    
    
    
    209Net loss on disposal of equipment
    
    
    23
    
    
    
    32Non-cash lease termination costs
    
    
    (177
    )
    
    
    Minority share of income
    
    
    1,709
    
    
    
    597Provision for losses on accounts receivable
    
    
    445
    
    
    
    1,034Changes in assets and liabilities, net of effects of business acquisitions:Accounts receivable
    
    
    (20,392
    )
    
    
    (14,788
    )Inventories
    
    
    19,578
    
    
    
    (304
    )Deferred income taxes
    
    
    205
    
    
    
    313Prepaid expenses
    
    
    5,536
    
    
    
    4,678Other assets
    
    
    140
    
    
    
    (150
    )Accounts payable
    
    
    (8,434
    )
    
    
    1,266Accrued liabilities
    
    
    5,432
    
    
    
    283Lease termination liabilities
    
    
    (7,742
    )
    
    
    Income taxes payable
    
    
    4,379
    
    
    
    (2,294
    )Net cash provided by continuing operations
    
    
    18,875
    
    
    
    6,245Net cash provided by (used in) discontinued operations
    
    
    (6,840
    )
    
    
    737Net cash provided by operating activities
    
    
    12,035
    
    
    
    6,982CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property, plant and equipment
    
    
    (4,450
    )
    
    
    (7,396
    )Investments in other companies
    
    
    (730
    )
    
    
    (1,244
    )Purchases of marketable debt securities
    
    
    
    
    
    
    (1,006
    )Sales of marketable debt securities
    
    
    
    
    
    
    28,550Proceeds from repayment of note receivable
    
    
    5,103
    
    
    
    Proceeds from sale of property, plant and equipment
    
    
    
    
    
    
    29Proceeds from sale of investments
    
    
    
    
    
    
    169Net cash provided by (used in) investing activities
    
    
    (77
    )
    
    
    19,102CASH FLOWS FROM FINANCING ACTIVITIES:Debt repayments
    
    
    (1,334
    )
    
    
    (295
    )Consolidated subsidiary dividends paid to minority shareholders
    
    
    (1,572
    )
    
    
    (1,112
    )Proceeds from issuance of common stock
    
    
    222
    
    
    
    18Repurchases of common stock
    
    
    
    
    
    
    (2,184
    )Net cash used in financing activities
    
    
    (2,684
    )
    
    
    (3,573
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    2,346
    
    
    
    2,204Net increase in cash and cash equivalents
    
    
    11,620
    
    
    
    24,715Cash and cash equivalents, beginning of period
    
    
    52,844
    
    
    
    28,447Cash and cash equivalents, end of period
    
    $
    64,464
    
    
    $
    53,162SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid
    
    $
    94
    
    
    $
    294Income taxes refunded
    
    $
    (1,854
    )
    
    $
    (2,222
    )
 See accompanying notes to condensed consolidated financial statements. 4




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VANS, INC. 
  1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company Vans is a leading global action sports and lifestyle company that
merchandises, designs, sources and distributes VANS-branded active-casual and
performance footwear, apparel and accessories. Over the past eight years our
focus has been proprietary branding with the goal of creating a leadership
position for our brand and a strong emotional connection with our customers.
Our VANS brand targets 10 to 24 year-old participants, enthusiasts and
emulators of the action sports culture. Action sports, including skateboarding,
snowboarding, surfing, wakeboarding, BMX and motocross, are generally
recognized for the fun, creativity and individual achievement experienced while
attempting various tricks or maneuvers within these sports. We have implemented
a unique marketing plan to reach our customers through multiple points of
contact which include: owning and operating action sports entertainment events
and venues, such as the VANS Triple Crown Series and the VANS High Cascade
Snowboard Camp®; sponsoring professional and amateur athletes; and operating a
summer musical tour known as the VANS Warped Tour®. We operate retail stores in the U.S. and Europe, and design, market and
distribute active-casual footwear, apparel and accessories, performance
footwear for action sports, snowboard boots, conventional snowboard boot
bindings under our AGENCY brand, step-in snowboard boot bindings under our
SWITCH® brand, and outerwear worldwide. We also offer the PRO-TEC® line of
protective helmets and pads through our wholly-owned subsidiary, Pro-tec, Inc. Basis of Presentation The condensed consolidated financial statements included herein are
unaudited and reflect all adjustments, which are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods
presented. The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year. The accompanying unaudited condensed consolidated financial statements do
not include certain footnotes and financial presentations as permitted by
accounting principles generally accepted in the United States for interim
purposes. Therefore, these financial statements should be read in conjunction
with our audited consolidated financial statements and notes thereto for the
year ended May 31, 2003, included in our Annual Report on Form 10-K which is
filed with the Securities and Exchange Commission. As discussed further in Note 5, in Fiscal 2003 we made the decision to
substantially exit the skatepark business. The results of operations for
skateparks that have ceased operations are presented as discontinued operations
in the accompanying unaudited condensed consolidated financial statements. Use of Estimates The consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States. 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. We regularly evaluate the estimates and assumptions related to
allowances for doubtful accounts, sales returns and allowances, inventory
reserves, goodwill and intangible asset valuations, long-lived asset
valuations, deferred income tax valuation allowances, litigation and other
contingencies. We base our estimates on historical experience and on various
other factors that we believe to be reasonable under the circumstances, which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. To the extent
there are material differences between the estimates and actual results, future
results of operations will be affected. Revenue Recognition Retail sales consist solely of sales through our U.S. retail stores and
skatepark sessions and concessions. National sales include all U.S. sales
except sales through our U.S. retail stores. International sales include all
foreign sales as well as sales through our eight European stores. 5




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Retail revenue is recognized at the point of sale. Wholesale revenue is
recognized when title passes and the risks and rewards of ownership have
transferred to the customer. Title generally passes upon the delivery of
product to the customer or the customers agent. Royalty revenue is recognized
as it is earned, based on the terms of the underlying royalty agreement.
Skatepark, event and other revenues are recognized when the related goods or
services have been delivered to the customer and we are substantially free from
future obligation, provided that the fundamental criteria for revenue
recognition have been met. Concurrent with the recording of revenues, provision
is made for estimated returns and allowances. Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with
original maturities of ninety days or less. Inventories Inventories are substantially comprised of finished goods and are valued
at the lower of cost or market (net realizable value). Cost is determined using
the first-in, first-out (FIFO) method. We provide inventory allowances based
on estimates of excess and obsolete inventories. Such allowances are permanent
reductions in the carrying value of the inventory. Goodwill and Long-Lived Assets In accordance with Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Intangible Assets, we test goodwill for impairment at
the reporting unit level (operating segment or one level below an operating
segment) on an annual basis or more frequently if we believe indicators of
impairment exist. The performance of the test involves a two-step process. The
first step of the impairment test involves comparing the fair value of our
reporting units with the reporting units carrying amount, including goodwill.
We generally determine the fair value of our reporting units using a weighted
average of the income approach and the market approach. If the carrying amount
of our reporting units exceeds the reporting units fair value, we perform the
second step of the goodwill impairment test to determine the amount of any
impairment loss. The second step of the goodwill impairment test involves
comparing the implied fair value of our reporting units goodwill with the
carrying amount of that goodwill. We account for long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present. Reviews are performed to
determine whether the carrying value of assets is impaired, based on comparison
to undiscounted expected future cash flows. If this comparison indicates that
there is impairment, the impaired asset is written down to fair value, which is
typically calculated using discounted expected future cash flows using a
discount rate based upon our weighted average cost of capital adjusted for
risks associated with the related operations. Impairment is based on the excess
of the carrying amount over the fair value of those assets. Other Assets At May 31, 2003, other assets included a note receivable of $5.1 million,
for which payment was received in July 2003. Contingent Consideration In connection with certain of our acquisitions, if designated future
performance goals are satisfied, the aggregate consideration for these
acquisitions will be increased. Such additional consideration, if earned, will
be paid in the form of cash or unrestricted shares of our common stock, and
will be accounted for in accordance with SFAS No. 141, Business Combinations
(SFAS 141) which superceded Accounting Principles Board (APB) Opinion No.
16, Business Combinations, as of July 1, 2001, and Emerging Issues Task Force
(EITF) Issue No. 95-8, Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination. Any
additional consideration paid will be allocated to goodwill, which will be
periodically reviewed for impairment. See Note 3. Income Taxes We utilize the liability method of accounting for income taxes as set
forth in SFAS No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on the temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates. A valuation allowance is recorded when it is more likely
than not that some of the deferred tax assets will not be realized. 6




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Income taxes for the interim periods were computed using the effective tax
rate estimated to be applicable in each jurisdiction for the full fiscal year,
which is subject to ongoing review and evaluation by management. Stock-Based Compensation We account for stock-based awards to employees in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and have
adopted the disclosure-only alternative of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123). In accordance with the requirements of the disclosure-only alternative of
SFAS 123, set forth below are the assumptions used and pro forma statement of
operations data giving effect to valuing stock-based awards to employees using
the Black-Scholes option pricing model instead of the guidelines provided by
APB 25. Among other factors, the Black-Scholes model considers the expected
life of the option and the expected volatility of our stock price in arriving
at an option valuation. The per share fair value of stock options granted in connection with stock
option plans has been estimated with the following weighted average
assumptions: FISCAL 2004
    
    FISCAL 2003Expected life (in years)
    
    
    5
    
    
    
    5Volatility
    
    
    0.74
    
    
    
    0.75Risk-free interest rate
    
    
    2.9
    %
    
    
    2.3
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
 The results of applying the requirements of the disclosure-only
alternative to SFAS 123 to our stock-based awards to employees would
approximate the following (in thousands, except per share data): THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003Net income (loss)  as reported
    
    $
    7,093
    
    
    $
    (9,206
    )
    
    $
    7,032
    
    
    $
    (7,451
    )Add: Stock-based compensation expense included
in net income  as reported
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct: Stock-based compensation expense
determined under fair value method
    
    
    (468
    )
    
    
    (262
    )
    
    
    (1,362
    )
    
    
    (733
    )Net income (loss)  pro forma
    
    $
    6,625
    
    
    $
    (9,468
    )
    
    $
    5,670
    
    
    $
    (8,184
    )Basic earnings (loss) per share  as reported
    
    $
    0.40
    
    
    $
    (0.51
    )
    
    $
    0.39
    
    
    $
    (0.41
    )Basic earnings (loss) per share  pro forma
    
    $
    0.37
    
    
    $
    (0.53
    )
    
    $
    0.32
    
    
    $
    (0.45
    )Diluted earnings (loss) per share  as reported
    
    $
    0.39
    
    
    $
    (0.51
    )
    
    $
    0.39
    
    
    $
    (0.41
    )Diluted earnings (loss) per share  pro forma
    
    $
    0.36
    
    
    $
    (0.53
    )
    
    $
    0.31
    
    
    $
    (0.45
    )
 For pro forma purposes, the estimated fair value of our stock-based awards
to employees is amortized over the vesting period of the underlying
instruments. Reclassifications Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation. Recent Accounting Pronouncements In July 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 146, Accounting For Costs Associated With Exit or Disposal
Activities (SFAS 146), which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF Issue
No. 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. As a result of the
implementation of SFAS 146, the accounting for 7




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amounts recorded in connection with our decision to substantially exit the
skatepark business was materially impacted. Under the guidance of EITF 94-3, we
would have recorded as an expense during the year ended May 31, 2003 (the
period in which management committed to an exit plan for the skateparks), an
estimate of certain costs that would be directly incurred in connection with
skatepark closures. The most significant element of these costs is lease
termination charges. With the implementation of SFAS 146, costs associated with
exit activities are to be recorded in the period in which they are incurred. In
the case of lease termination costs, this is the period in which we enter into
an agreement with the landlord. Accordingly, our consolidated results of
operations include lease termination charges in the periods in which we entered
into an agreement. Additionally, other direct costs associated with closing
skateparks will be expensed in future periods as they are incurred. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148), which
permits two additional transition methods for companies that elect to adopt the
fair-value-based method of accounting for stock-based employee compensation.
The statement also expands the disclosure requirements for stock-based
compensation. The provisions of this statement apply to financial statements
for fiscal years ending after December 15, 2002. The adoption of SFAS 148 had
no material financial impact to our consolidated financial statements. We have
provided the additional disclosures required by SFAS 148 for the thirteen and
thirty-nine week periods ended February 28, 2004, and March 1, 2003, elsewhere
in Note 1. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 requires a company to consolidate a
variable interest entity if it is designated as the primary beneficiary of that
entity even if the company does not have a majority of voting interests. A
variable interest entity is generally defined as an entity that has
insufficient equity to finance its activities or the owners of the entity lack
the risk and rewards of ownership. The provisions of this statement apply at
inception for any entity created after January 31, 2003. For an entity created
before February 1, 2003, the provisions of this Interpretation must be applied
at the beginning of the first interim or annual period beginning
after December 15, 2003. In December 2003, the FASB revised FIN 46
(FIN 46-R) to exempt certain entities from its
requirements and to clarify certain issues arising during the initial
implementation of FIN 46. The provisions of FIN 46-R were adopted
in the third quarter ended February 28, 2004; however, since we
do not currently have any variable interest entities, the adoption of
FIN 46-R did not have a material impact on our financial
position or results of operations. 2. SUPPLEMENTAL FINANCIAL INFORMATION Goodwill and Identifiable Intangible Assets The following table summarizes our identifiable intangible assets and
goodwill balances as of February 28, 2004, and May 31, 2003: FEBRUARY 28, 2004
    
    MAY 31, 2003Gross
    
    
    
    
    
    GrossCarrying
    
    Accumulated
    
    Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    Amortization(In thousands)Intangible assets subject to amortization:Trademarks and patents
    
    $
    5,163
    
    
    $
    (1,213
    )
    
    $
    5,140
    
    
    $
    (938
    )Other
    
    
    886
    
    
    
    (516
    )
    
    
    886
    
    
    
    (440
    )Total
    
    $
    6,049
    
    
    $
    (1,729
    )
    
    $
    6,026
    
    
    $
    (1,378
    )
 FEBRUARY 28,
    
    MAY 31,2004
    
    2003(In thousands)Carrying amount of intangible assets not subject to amortization:Goodwill
    
    $
    32,322
    
    
    $
    31,702Trademarks
    
    
    10,885
    
    
    
    10,885Total
    
    $
    43,207
    
    
    $
    42,587
 Goodwill is comprised of $12.7 million associated with the acquisition of
our predecessor company; $6.2 million associated with the acquisition of Mosa
Extreme Sports, Inc., now known as Pro-tec, Inc. (Pro-tec); $5.8 million
related to the acquisition of Global Accessories Limited (now known as Vans
Inc. Limited), our U.K. distributor; $4.9 million associated with our
acquisition of a 8




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majority interest in the VANS
Warped Tour®; $2.3 million associated with
the acquisition of Compagnie Sunspot SA (Sunspot), our exclusive sales agent
for France; and $400,000 associated with the acquisition of certain assets and
liabilities of Max MadHouse GmbH (Max MadHouse), our exclusive sales agent
for Germany, Austria and the Czech Republic. Amortization expense for intangible assets subject to amortization was
$92,000 and $203,000 for the thirteen week periods ended February 28, 2004, and
March 1, 2003, respectively, and $350,000 and $568,000 for the thirty-nine week
periods ended February 28, 2004, and March 1, 2003, respectively. Future
estimated amortization expense for the remainder of Fiscal 2004, the next four
years and thereafter is as follows (in thousands): FISCAL YEAR ENDING MAY 31,:2004
    
    $
    972005
    
    
    4482006
    
    
    4472007
    
    
    4402008
    
    
    364Thereafter
    
    
    2,524$
    4,320
 Computation of Earnings Per Share Basic earnings per share represents net income divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share represents net income divided by the weighted-average number
of shares outstanding, inclusive of all potentially dilutive common shares. The
reconciliations of basic to diluted weighted average shares are as follows: THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003(In thousands)Weighted average shares used
in basic computation
    
    
    17,874
    
    
    
    17,920
    
    
    
    17,851
    
    
    
    17,999Unvested restricted stock grant
    
    
    57
    
    
    
    
    
    
    
    62
    
    
    
    Dilutive stock options
    
    
    462
    
    
    
    
    
    
    
    332
    
    
    
    Weighted average shares used
for dilutive computation
    
    
    18,393
    
    
    
    17,920
    
    
    
    18,245
    
    
    
    17,999
 The following shares were excluded from the computation of diluted
earnings (loss) per share as their effect would have been anti-dilutive: THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003(In thousands)Unvested restricted stock grants
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    84Stock options
    
    
    
    
    
    
    2,150
    
    
    
    
    
    
    
    2,142
 Other Comprehensive Income Other comprehensive income refers to revenue, expenses, gains and losses
that are recorded as an element of stockholders equity but are excluded from
net income. Accumulated other comprehensive income is comprised of: (i)
unrealized gains and losses on derivative instruments qualifying as cash flow
hedges; and (ii) foreign currency translation adjustments. The components of
other comprehensive income for the thirteen and thirty-nine week periods ended
February 28, 2004, and March 1, 2003, were as follows: 9




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THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003(In thousands)Net income (loss)
    
    $
    7,093
    
    
    $
    (9,206
    )
    
    $
    7,032
    
    
    $
    (7,451
    )Other comprehensive income:Derivatives qualifying as hedges, net of tax:Net derivative loss
    
    
    (674
    )
    
    
    (481
    )
    
    
    (1,274
    )
    
    
    (936
    )Reclassifications to expense
    
    
    314
    
    
    
    205
    
    
    
    767
    
    
    
    351Foreign currency translation adjustments
    
    
    2,955
    
    
    
    2,293
    
    
    
    4,084
    
    
    
    4,426Total comprehensive income (loss)
    
    $
    9,688
    
    
    $
    (7,189
    )
    
    $
    10,609
    
    
    $
    (3,610
    )
 3. ACQUISITIONS On June 1, 2003, we acquired certain assets and liabilities of Max
MadHouse for initial cash consideration of $117,000. The assets and liabilities
acquired constituted what was formerly the business of our exclusive sales
agent for Germany, Austria and the Czech Republic. The consideration for the
acquisition was attributed to acquired identifiable net assets and goodwill. In
addition to the initial purchase price paid, we are required to pay additional
cash consideration based on the level of sales achieved by the acquired
business over the three-year period ending May 31, 2006. Although the aggregate
amount of additional consideration to be paid cannot yet be determined, we
currently estimate that $500,000 will be paid in the current fiscal
year, of which $400,000 has been recorded within the accompanying condensed consolidated financial
statements, and an aggregate of $1 million in additional consideration may be
required. Any such additional consideration will be allocated to goodwill. On June 11, 2002, we acquired 100% of the outstanding capital stock of
Sunspot for cash consideration of $2.9 million. During the first quarter of
Fiscal 2004, an additional $900,000 was paid as a result of the sales levels
achieved by Sunspot during the year ended May 31, 2003. Of the total purchase
consideration paid to date, $1.7 million was allocated to identifiable acquired
assets and liabilities on the acquisition date and the remaining $2.3 million
has been allocated to goodwill. In addition, we are required to pay additional
cash consideration in connection with this acquisition based on the level of
sales achieved by Sunspot through June 11, 2007. Although the aggregate amount
of additional consideration to be paid cannot yet be determined, we currently
estimate that $1 million will be paid in the current fiscal year and an
aggregate of $4.5 million in additional consideration may be required. Any such
additional consideration will be allocated to goodwill. Had the acquisitions of Max MadHouse and Sunspot occurred on June 1, 2002,
our results of operations for the thirteen week and thirty-nine week periods
ended February 28, 2004, and March 1, 2003, would not have differed materially
from our reported results of operations for these periods. Additionally, in connection with our acquisition of Pro-tec on April 15,
2002, the acquisition agreement provides for additional consideration of up to
$1.0 million to be paid by us if certain performance criteria are met during
Fiscal 2004. Such additional consideration, if earned, will be paid either in
cash or unrestricted shares of our common stock and will be allocated to
goodwill. 4. COMMITMENTS AND CONTINGENCIES Litigation Vans, Inc. vs. Scott Brabson, Gordana Brabson, Jay Rosendahl, Heidi
Rosendahl, et al, Superior Court for the County of Los Angeles, Case No.
BC27031.The allegations we have made in this case, the companion arbitration,
and the resulting arbitration award are described in our Annual Report on Form
10-K for Fiscal 2003, which is filed with the Securities and Exchange
Commission. Recently, the District Court for the Central District of California
entered a default judgment against the interests of certain of the defendants
in this matter with respect to certain shoes, apparel and accessories (the
goods) seized by the federal government in connection with the allegations we
made in this case. The government granted our petition to obtain ownership of
the goods. We intend to liquidate them as part of our effort to recover monies
in this matter. Additionally, in Q3 Fiscal 2004, we entered into an agreement
with the trustee of the bankruptcy estate of Scott Brabson (the Estate)
whereby the Estate assigned any rights it may have had in certain bank accounts
and other property that were subject to the preliminary injunction previously
obtained in this case (the Assigned Property) in exchange for the assignment
by us of any rights we may have had in certain U.S. bank accounts and the
payment of additional monies to the Estate. The agreement is subject to
approval by the U.S. bankruptcy court. A hearing on the 10




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motion to approve the agreement will be held on April 6, 2004. If the
motion is approved by the court, we will be entitled to pursue the liquidation
of the Assigned Property as part of our efforts to recover monies in this
matter. Gordana Brabson vs. Vans, Inc. et. al, Superior Court of California,
County of Santa Barbara, Case No. 01110315. This lawsuit was filed against
Vans, one of Vans current executive officers, one of its former executive
officers, and certain other individuals and entities on December 6, 2002, in
connection with the lawsuit filed by us against the plaintiff, her husband and
other individuals described above. The allegations are set forth in our
Quarterly Report on Form 10-Q for the period ended November 29, 2003. An
agreement to settle this case was reached in Q1 Fiscal 2004, and during Q3
Fiscal 2004, a settlement agreement was executed by the various parties to the
case. The settlement agreement is subject to certain conditions, and the terms
of the settlement are confidential. The settlement of this case will not have a
material adverse impact on our future results of operations or financial
condition. City of Dearborn Heights ACT 345 Police & Fire Retirement System, on
behalf of Itself and all others similarly situated vs. Vans, Inc., Andrew J.
Greenebaum and Gary Schoenfeld, United States District Court, Central District
of California, Case No. CV04-0431.This putative class action lawsuit was
filed against Vans, and one current and one former officer of Vans, on January
23, 2004. The complaint alleges that Vans and those individuals violated the
federal securities laws by improperly inflating revenue and earnings during
each fiscal quarter in the period from March 1998 through May 2001, and issuing
false and misleading statements to the public about its business. Two
additional putative class action lawsuits containing identical allegations have
also been filed in the United States District Court for the Central District of
California (Robert Lechter vs. Vans, Inc., Andrew J. Greenebaum and Gary H.
Schoenfeld, Case No. CV04-0707, and Mary Ann Mason vs. Vans, Inc., Andrew J.
Greenebaum and Gary H. Schoenfeld, Case No. 2:04CV01578). Additionally, on
January 29, 2004, a shareholder derivative complaint containing allegations
identical to the above federal lawsuits was filed in the Superior Court for the
County of Los Angeles against Vans, as a nominal defendant, and the current
members of the Board of Directors and certain former officers and directors of
Vans alleging breaches of fiduciary duty and violations of the California
Corporations Code. (Sherryl Halpern, derivatively on behalf of Vans, Inc. vs.
Walter E. Schoenfeld, et al, Case No. BC309805). This case was subsequently
consolidated with a second derivative complaint (Anne Ratnofsky, derivatively
on behalf of Vans, Inc. vs. Walter E. Schoenfeld, et al, Case No. BC310782),
and a consolidated complaint was filed. Discovery has commenced in the
derivative case, but is stayed in the federal lawsuits pending a motion to
consolidate the cases, the appointment of a lead plaintiff, and the filing of a
motion to dismiss by Vans. Franklin C. Ferrana a/k/a Nikki Sixx vs. Vans, Inc., High Speed
Productions, Inc. d/b/a Thrasher Magazine, Superior Court for the County of Los
Angeles, Case No. BC303262.This lawsuit was filed on September 30, 2003, and
alleges that Vans and Thrasher Magazine misappropriated the image of the
plaintiff in an advertisement. Recently, we were advised that Thrasher Magazine
will be dismissed from the case. The complaint seeks compensatory damages in
excess of $1.0 million, disgorgement of profits, and punitive damages. In the
second quarter of Fiscal 2004 we filed an answer in this matter denying the
plaintiffs allegations and asserting numerous affirmative defenses. The
parties are currently engaged in discovery. From time to time, we are involved in legal proceedings arising in the
ordinary course of business. Management does not currently expect that any of
the legal proceedings in which we are currently involved will have a material
adverse impact on our consolidated results of operations or financial condition. Derivatives and Hedging We are exposed to foreign currency risk primarily through our wholly-owned
subsidiaries, Vans Europe BV (VEBV), whose functional currency is the euro,
and Vans Inc. Limited (VIL), whose functional currency is the British
sterling. This currency risk is primarily related to purchases of inventory by
our subsidiaries which are priced and settled in U.S. dollars. To hedge this
risk, our subsidiaries enter into cash flow hedges of forecasted inventory
purchases, thereby fixing the cost of the product and the associated gross
margins in their functional currency. As of February 28, 2004, our subsidiaries
hedged approximately 70% of forecasted inventory purchases through the fourth
quarter of Fiscal 2005. At February 28, 2004, we also had foreign currency forward contracts
outstanding to purchase U.S. dollars using Japanese yen. These contracts were
entered into to hedge projected future cash flows in connection with certain
royalty payments to be received from our licensee for Japan during the
remainder of Fiscal 2004. The following is a summary of outstanding foreign currency forward
contracts at February 28, 2004 (in thousands, except contract rates): 11




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AGGREGATE FAIR
    
    NET UNREALIZEDCURRENCY
    
    AGGREGATE
    
    AVERAGE
    
    VALUE OF FORWARD
    
    LOSSES IN OTHERHEDGED
    
    NOTIONAL VALUE
    
    CONTRACT RATE
    
    CONTRACT LIABILITY
    
    COMPREHENSIVE INCOMEEuro
    
    $
    11,900
    
    
    1.14 dollars per euro
    
    $
    1,090
    
    
    $
    896Yen
    
    
    785
    
    
    110 yen per dollar
    
    
    11
    
    
    
    14$
    12,685
    
    
    
    
    
    
    $
    1,101
    
    
    $
    910
 In addition to hedging inventory purchases and royalties, we may also
hedge other foreign currency cash flow and balance sheet exposures as they are
identified. Net unrealized losses on foreign exchange contracts at February 28, 2004,
were included in accumulated other comprehensive income and are expected to be
reclassified into earnings within the next ten months as the related underlying
transactions affect earnings. Actual amounts ultimately reclassified to
earnings are dependent on the exchange rates in effect when derivative
contracts that are currently outstanding mature. Inventory purchase commitments At February 28, 2004, we had firm commitments to purchase inventory in the
amount of $54.3 million. These commitments included contingent liabilities
under open letters of credit with foreign suppliers aggregating $1.4 million. Skatepark lease termination contingency As discussed further in Note 5, we have renegotiated the facility leases
for two skateparks we expect to continue to operate in the future. Under the
terms of one of these renegotiated lease agreements, we are required to pay up
to $1.8 million if the landlord terminates the revised lease agreement prior to
June 1, 2005. The amount of this lease termination payment decreases to
$600,000 on a straight-line basis over the fifteen month period ending on May
31, 2005. If the landlord does not terminate the lease agreement by May 31,
2005, no amounts will be required to be paid. As of February 28, 2004, no
amounts have been recorded in the accompanying condensed consolidated financial
statements in connection with this contingency. 5. DISCONTINUED OPERATIONS In Fiscal 2003 we made the decision to substantially exit the skatepark
business. This decision was driven by the proliferation of large, free public
skateparks that have been constructed in close proximity to our skateparks over
the past three years, and which adversely affected attendance and revenues at
our skateparks. When the decision to substantially exit the skatepark business
was made, we operated 11 skateparks and were party to a lease for the
construction of an additional park to be opened in Sacramento, California in
Fiscal 2004. Our skatepark in Bakersfield, California was closed in February
2003, before we made the decision to substantially exit the skatepark business. As of February 28, 2004, we had closed four skateparks: Bakersfield,
California; Denver, Colorado; Phoenix, Arizona; and Atlanta, Georgia. Of those,
the Denver, Phoenix and Atlanta parks closed during the first quarter of Fiscal
2004. The Bakersfield park closed in Fiscal 2003. Of the eight skateparks that
we continued to operate, we had reached agreements with the landlords to close
five of the parks generally over the next four to eighteen months. We have also
reached agreements to significantly reduce the future rent under the leases for
two of the three parks we expect to operate in the future. Upon the closure of each of our skateparks, the related operating results
are recast as discontinued operations in the consolidated statements of
operations for all periods presented. Accordingly, the four skateparks we had
closed through February 28, 2004, are presented as discontinued operations in
the accompanying condensed consolidated statements of operations. Also see
Note 7. In addition to the four skateparks we have closed, our discontinued
operations include the operating results of a Triple Crown specialty retail
store that was closed during the second quarter of Fiscal 2004 as a result of
underperformance. In connection with the closure of this store, we incurred
pre-tax lease termination charges of $150,000, which are included within net
loss from discontinued operations for the thirty-nine week period ended February 28, 2004. Summarized operating results for our discontinued operations were as
follows: 12




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THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28, 2004
    
    MARCH 1, 2003
    
    FEBRUARY 28, 2004
    
    MARCH 1, 2003(In thousands)Net sales
    
    $
    
    
    
    $
    1,295
    
    
    $
    1,325
    
    
    $
    4,000Gross profit
    
    
    
    
    
    
    848
    
    
    
    733
    
    
    
    2,763Impairment charges
    
    
    
    
    
    
    2,829
    
    
    
    
    
    
    
    2,829Lease termination costs
    
    
    
    
    
    
    
    
    
    
    4,822
    
    
    
    Net loss
    
    $
    
    
    
    $
    (1,961
    )
    
    $
    (5,088
    )
    
    $
    (2,471
    )
 Our results from continuing operations for the thirty-nine week period
ended February 28, 2004, include pre-tax lease termination costs of $3.9
million, which relate to lease termination agreements reached during Fiscal
2004 for skateparks that we continued to operate as of February 28, 2004. Our
February 28, 2004 balance sheet included lease termination liabilities
aggregating $596,000 and liabilities held in connection with disposal
activities aggregating $84,000, representing the portion of skatepark lease
termination costs that had not yet been paid. 6. SEGMENT DISCLOSURES Our reportable segments are based on three distinct product sales
channels: retail, national and international. The retail segment consists of
U.S. retail operations, which include our domestic retail stores and
skateparks. The national segment consists of all domestic operations outside of
retail operations, which includes the domestic wholesale business, the VANS
Warped Tour® and the VANS High Cascade Snowboard Camp®. The international
segment includes the international wholesale business and European retail
operations. The Unallocated category below represents items necessary to
reconcile to the consolidated financial statements, which generally include
corporate activities and operating costs not directly attributable to any one
segment. Corporate activities are comprised of certain centralized selling and
distribution costs incurred in the worldwide distribution of our products as
well as corporate administrative costs. Such costs aggregated $12.6 million and
$10.1 million for the thirteen week periods ended February 28, 2004, and March
1, 2003, respectively, and $39.6 million and $34.1 million for the thirty-nine
week periods ended February 28, 2004, and March 1, 2003, respectively.
Unallocated operating costs are comprised of a substantial portion of our
marketing, advertising and promotional costs, which are incurred to promote
brand awareness and which are not directly associated with any one sales
channel. Our chief operating decision-maker evaluates the performance of our
segments based on gross margin and direct operating profit, excluding such
unallocated amounts. Summary information by segment follows: THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003(In thousands)Net sales:RetailSkateparks
    
    $
    4,076
    
    
    $
    4,004
    
    
    $
    11,203
    
    
    $
    11,930Retail stores
    
    
    27,084
    
    
    
    24,367
    
    
    
    80,435
    
    
    
    72,715NationalWholesale
    
    
    25,634
    
    
    
    22,498
    
    
    
    92,224
    
    
    
    86,954Other
    
    
    156
    
    
    
    68
    
    
    
    11,329
    
    
    
    10,424International
    
    
    31,622
    
    
    
    29,832
    
    
    
    87,251
    
    
    
    81,280Total net sales
    
    $
    88,572
    
    
    $
    80,769
    
    
    $
    282,442
    
    
    $
    263,303Gross profit:RetailSkateparks
    
    $
    2,932
    
    
    $
    2,843
    
    
    $
    8,005
    
    
    $
    8,722Retail stores
    
    
    15,120
    
    
    
    11,813
    
    
    
    44,161
    
    
    
    38,082NationalWholesale
    
    
    10,201
    
    
    
    8,253
    
    
    
    35,004
    
    
    
    31,685Other
    
    
    (90
    )
    
    
    (151
    )
    
    
    2,045
    
    
    
    427International
    
    
    18,336
    
    
    
    15,430
    
    
    
    47,495
    
    
    
    38,506Total gross profit
    
    $
    46,499
    
    
    $
    38,188
    
    
    $
    136,710
    
    
    $
    117,422Impairment charges:RetailSkateparks
    
    $
    
    
    
    $
    9,630
    
    
    $
    
    
    
    $
    9,630
 13




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##### Table of Contents



THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003(In thousands)Retail stores
    
    
    
    
    
    
    2,879
    
    
    
    
    
    
    
    2,879NationalWholesale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    International
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
impairment charges
    
    $
    
    
    
    $
    12,509
    
    
    $
    
    
    
    $
    12,509Income (loss) from operations:RetailSkateparks
    
    $
    65
    
    
    $
    (10,176
    )
    
    $
    (4,362
    )
    
    $
    (11,056
    )Retail stores
    
    
    2,181
    
    
    
    (4,143
    )
    
    
    4,004
    
    
    
    (4,196
    )NationalWholesale
    
    
    7,000
    
    
    
    4,076
    
    
    
    24,299
    
    
    
    19,692Other
    
    
    (222
    )
    
    
    (288
    )
    
    
    1,563
    
    
    
    (1
    )International
    
    
    11,554
    
    
    
    8,928
    
    
    
    30,456
    
    
    
    22,520Unallocated
    
    
    (12,614
    )
    
    
    (10,147
    )
    
    
    (39,587
    )
    
    
    (34,138
    )Total income (loss) from operations
    
    $
    7,964
    
    
    $
    (11,750
    )
    
    $
    16,373
    
    
    $
    (7,179
    )
 Included in skatepark income (loss) from operations for the thirty-nine
week period ended February 28, 2004, are lease termination costs of $3.9
million. 7. SUBSEQUENT EVENTS On March 6, 2004, we closed our skatepark in Houston, Texas. In the
future, all historical results of operations for this skatepark will be
presented within discontinued operations. 14




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION General We are a leading global action sports and lifestyle company that
merchandises, designs, sources and distributes VANS-branded active-casual and
performance footwear, apparel and accessories. Over the past eight years our
focus has been proprietary branding with the goal of creating a leadership
position for our brand and a strong emotional connection with our customers.
Our VANS brand targets 10 to 24 year-old participants, enthusiasts and
emulators of the action sports culture. Action sports, including skateboarding,
snowboarding, surfing, wakeboarding, BMX and motocross, are generally
recognized for the fun, creativity and individual achievement experienced while
attempting various tricks or maneuvers within these sports. We have implemented
a unique marketing plan to reach our customers through multiple points of
contact which include: owning and operating action sports entertainment events
and venues, such as the VANS Triple Crown Series and the VANS High Cascade
Snowboard Camp®; sponsoring professional and amateur athletes; and operating a
summer musical tour known as the VANS Warped Tour®. In 1998, we expanded our business and marketing plan to include the
operation of large-scale skateparks. Initially, this strategy was successful;
however, the subsequent proliferation of large, free public skateparks that
were constructed in close proximity to our skateparks adversely affected
attendance and revenues at the parks. As a consequence, in Fiscal 2003 we made
the decision to substantially exit the skatepark business. When the decision to substantially exit the skatepark business was made,
we operated 11 skateparks and were party to a lease for the construction of an
additional park to be opened in Sacramento, California in Fiscal 2004. Our
skatepark in Bakersfield, California was closed in February 2003, before we
made the decision to substantially exit the skatepark business. Through March 31, 2004, we have closed five skateparks: Bakersfield,
California; Denver, Colorado; Phoenix, Arizona; Atlanta, Georgia; and Houston,
Texas. Of those, the Denver, Phoenix and Atlanta parks closed in the first
quarter of Fiscal 2004 and the Houston skatepark closed in March 2004. The
Bakersfield park closed in Fiscal 2003. Of the seven skateparks that we
continue to operate, we have reached agreements with the landlords to close
four of the parks. Additionally, in the second quarter of Fiscal 2004 we
reached agreements to significantly reduce the future rent payments under the
leases for two of the three parks we expect to operate in the future. We
currently plan to keep open three skateparks primarily to promote brand
awareness, and we expect that all other parks will be closed generally over the
next four to eighteen months. The operating results for closed skateparks are
presented as discontinued operations in our financial statements beginning in
the period the skatepark is closed. Our operating results for the first nine
months of Fiscal 2004 include pre-tax lease termination costs of $3.9 million
related to two skateparks that we continued to operate as of February 28, 2004 We operate retail stores in the U.S. and Europe, and design, market and
distribute active-casual footwear, apparel and accessories, performance
footwear for action sports, snowboard boots, conventional snowboard boot
bindings under our AGENCY brand, step-in snowboard boot bindings under our
SWITCH® brand, and outerwear worldwide. We also offer the PRO-TEC® line of
protective helmets and pads through our wholly-owned subsidiary, Pro-tec, Inc. Key Management Considerations In analyzing and managing our business, our management team focuses on a
number of important metrics. We have three sales channels: U.S. retail,
National and International. U.S. retail sales consist of revenues from our
domestic retail stores and skateparks; National sales includes U.S. wholesale
revenue as well as revenue from the VANS Warped Tour, the High Cascade
Snowboard Camp, and revenue generated through our joint venture with Pacific
Sunwear; and International sales include all international wholesale revenue,
the largest portion of which is generated in Europe, income from our licensee
for Japan, and revenue generated through our eight European retail stores. We
frequently analyze gross margins and average selling prices within each of our
sales channels. We also closely track wholesale sell-throughs for important
wholesale customers; sell-throughs of new product in our retail stores;
year-over-year sales through our retail stores that have been open more than
one year (otherwise known as comparable store sales); and the impact of foreign
currency fluctuations on our international sales. With respect to operating expenses, we focus most heavily on controlling
costs associated with (i) our 155 retail stores, and (ii) marketing,
advertising and promotion expenses. The largest components of our retail
operating expenses are rent and labor. With 15




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respect to marketing, advertising and promotion expenses, the largest cost
components relate to media advertisements and costs associated with athlete
sponsorships and event promotions, including the operation of the VANS Triple
Crown Series. We manage working capital and liquidity largely through the close
monitoring of our inventory and accounts receivable. Inventory levels are
constantly analyzed to ensure that the appropriate mix of inventory is in
production and on hand and to ensure that slow-moving inventory is liquidated
in a timely fashion. With respect to accounts receivable, we analyze and
manage our accounts receivable aging to identify slow-paying and financially
distressed customers in a timely fashion. As further discussed under Critical
Accounting Policies, we provide allowances against inventories and accounts
receivable, as necessary, to reflect what we believe to be the net realizable
value of the underlying assets. We also routinely monitor the mix of forecasted and actual income or loss
by jurisdiction, as well as tax rates by jurisdiction, to ascertain any impact
they may have on our overall effective tax rate. RECENT DEVELOPMENTS IN OUR BUSINESS During the quarterly period ended February 28, 2004 (Q3 Fiscal 2004),
several putative federal securities class action lawsuits and two derivative
lawsuits were filed against us and certain of our current and former officers
and directors. The suits contain identical allegations. The federal suits
allege violations of the federal securities laws by us and one current and one
former officer of Vans, and the derivative suits allege violations of fiduciary
duties and the California Corporations Code by each of our current directors
and several of our former officers and directors. The suits are more fully
discussed under Part II  Other Information  Item 1. Legal Proceedings. In March 2004, we closed our Houston skatepark, bringing to five the total
number of parks we have closed through March 31, 2004. With the closure of the
Houston skatepark, we now operate seven skateparks, four of which will be
closed within the next four to eighteen months. SUMMARY OF OUR RESULTS OF OPERATIONS FOR Q3 FISCAL 2004 AND THE FISCAL 2004
NINE MONTHS - Net
sales for Q3 Fiscal 2004 were $88.6 million, a 9.7% increase versus
the same period last year. The increase was attributable to sales growth from
each of our three sales channels, U.S. Retail, National and International, of
9.8%, 14.3% and 6.0%, respectively. Net sales for the nine month period ended
February 28, 2004 (the Fiscal 2004 Nine Months) were $282.4 million, up 7.3%
versus the corresponding period a year ago. The increase was attributable to
sales growth from each of the companys three sales channels, U.S. Retail,
National and International, of 8.3%, 6.3% and 7.3%, respectively. - Gross profit for Q3 Fiscal 2004 was 52.5% of net sales, up from 47.3%
for Q3 Fiscal 2003. Gross profit for the Fiscal 2004 Nine Months was 48.4%, up
from 44.6% for the corresponding period a year ago. On a quarterly and
year-to-date basis, gross profit percentages were higher for all of our sales
channels. - Operating expenses, excluding impairment charges, for Q3 Fiscal 2004
increased $1.1 million to $38.5 million, and was 43.5% as a percentage of net
sales versus 46.3% for the same period a year ago. Operating expenses,
excluding impairment charges and lease termination costs, for the Fiscal 2004
Nine Months increased $4.4 million to $116.4 million, and was 41.2% as a
percentage of net sales versus 42.6% for the same period a year ago. - Income (loss) from continuing operations for Q3 Fiscal 2004 was $7.1
million versus a loss of $7.2 million for Q3 Fiscal 2003. Income from
continuing operations for the Fiscal 2004 Nine Months was $12.1 million versus
a loss of $5.0 million for the same period a year ago. The improvements for
the quarter and year-to-date periods were the result of increased sales,
improved profit margins, our ability to better leverage our operating
infrastructure, and impairment charges of $12.5 million in Q3
Fiscal 2003. - Net income (loss) for Q3 Fiscal 2004 was $7.1 million versus a net loss
of $9.2 million for Q3 Fiscal 2003. Net income (loss) for the Fiscal 2004 Nine
Months was $7.1 million of income versus a net loss of
$7.5 million during the same period a
year ago. A more detailed analysis of our financial results for Q3 Fiscal 2004 and
the Fiscal 2004 Nine Months is discussed below under Analysis of Our Quarterly
and Year-to-Date Results of Operations. 16




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RESULTS OF OPERATIONS The following table sets forth our operating results, expressed as a
percentage of net sales, for the periods indicated. VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THIRTEEN WEEKS ENDED
    
    THIRTY-NINE WEEKS ENDEDFEBRUARY 28,
    
    MARCH 1,
    
    FEBRUARY 28,
    
    MARCH 1,2004
    
    2003
    
    2004
    
    2003Retail sales
    
    
    35.2
    %
    
    
    35.1
    %
    
    
    32.4
    %
    
    
    32.1
    %National sales
    
    
    29.1
    
    
    
    28.0
    
    
    
    36.7
    
    
    
    37.0International sales
    
    
    35.7
    
    
    
    36.9
    
    
    
    30.9
    
    
    
    30.9Net sales
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of sales
    
    
    47.5
    
    
    
    52.7
    
    
    
    51.6
    
    
    
    55.4Gross profit
    
    
    52.5
    
    
    
    47.3
    
    
    
    48.4
    
    
    
    44.6Operating expenses:Retail
    
    
    17.5
    
    
    
    20.0
    
    
    
    16.8
    
    
    
    18.3Marketing, advertising and promotion
    
    
    7.2
    
    
    
    7.8
    
    
    
    7.8
    
    
    
    8.6Selling, distribution and
administrative
    
    
    18.7
    
    
    
    18.4
    
    
    
    16.5
    
    
    
    15.5Impairment charges
    
    
    0.0
    
    
    
    15.5
    
    
    
    0.0
    
    
    
    4.8Lease termination costs
    
    
    0.0
    
    
    
    0.0
    
    
    
    1.4
    
    
    
    0.0Amortization of intangibles
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.2Total operating expenses
    
    
    43.5
    
    
    
    61.8
    
    
    
    42.6
    
    
    
    47.3Income (loss) from operations
    
    
    9.0
    
    
    
    (14.5
    )
    
    
    5.8
    
    
    
    (2.7
    )Interest income, net
    
    
    (0.3
    )
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.3
    )Other (income) expense, net
    
    
    0.2
    
    
    
    1.0
    
    
    
    0.2
    
    
    
    0.4Income (loss) from continuing
operations before income taxes
and minority interest
    
    
    9.1
    
    
    
    (15.2
    )
    
    
    5.8
    
    
    
    (2.9
    )Income tax (benefit) expense
    
    
    0.9
    
    
    
    (5.8
    )
    
    
    0.9
    
    
    
    (1.2
    )Minority interest
    
    
    0.3
    
    
    
    (0.5
    )
    
    
    0.6
    
    
    
    0.2Income (loss) from continuing
operations
    
    
    8.0
    
    
    
    (9.0
    )
    
    
    4.3
    
    
    
    (1.9
    )Loss from discontinued operations,
net of tax
    
    
    0.0
    
    
    
    (2.4
    )
    
    
    (1.8
    )
    
    
    (0.9
    )Net income (loss)
    
    
    8.0
    %
    
    
    (11.4
    )%
    
    
    2.5
    %
    
    
    (2.8
    )%
 ANALYSIS OF OUR QUARTERLY AND YEAR-TO-DATE RESULTS OF OPERATIONS Net Sales Retail.Retail sales, which consist solely of sales through our U.S.
retail stores and skatepark sessions and concessions, increased 9.8% in Q3
Fiscal 2004 and 8.3% for the Fiscal 2004 Nine Months. The increase was driven
by a 14.4% and 13.6% year-over-year increase in comparable U.S. store sales,
respectively (excluding merchandise revenues from skateparks expected to be
closed and revenues from concessions and skate sessions at all of our
skateparks). The comparable store sales increase was fueled by growth in
womens and kids footwear, as well as apparel, with the largest percentage
increase from our womens footwear line. Comparable revenues from concessions
and skate sessions at our skateparks declined 11.0% and 24.7% year-over-year
for Q3 Fiscal 2004 and the Fiscal 2004 Nine Months, respectively. During Q3 Fiscal 2004, we reduced our U.S. retail store count to 148 total
stores as a result of closing one store. No skateparks were closed during Q3
Fiscal 2004. During the Fiscal 2004 Nine Months, we closed three skateparks
and had a net closing of six stores. As discussed above under the caption
Introduction  General, we currently plan to keep open three skateparks,
primarily to promote brand awareness, and we expect that all other parks will
be closed generally over the next four to eighteen months. 17




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National.National sales, which include all U.S. sales except sales
through our U.S. retail stores, increased 14.3% in Q3 Fiscal 2004 and 6.3% for
the Fiscal 2004 Nine Months. The Q3 Fiscal 2004 increase was primarily due to
a 1.5% increase in average selling prices year-over-year and a 15.0% increase
in units sold, which primarily resulted from increases in womens and kids
footwear. The increase was partially offset by a decline in our Pro-tec helmet
business primarily due to delays in the introduction of the SXP helmet line. The Fiscal 2004 Nine Months increase of 6.3% was primarily due to a 9.4%
increase in units sold, led by womens and kids footwear, partially offset by
a 3.1% decline in average selling prices and a decline in our Pro-tec helmet
business for the reasons described in the preceding paragraph. International.International sales, which include sales through our
European stores, increased 6.0% in Q3 Fiscal 2003 and 7.3% for the Fiscal 2004
Nine Months. The increase in Q3 Fiscal 2003 was primarily due to increased
European sales of $1.2 million, and increased sales to Canada and South America
of $200,000 and $500,000, respectively. The $1.2 million sales increase in
Europe resulted from a $3.8 million favorable variance in exchange rates
related to our direct operations in Europe and the opening of our full-price
retail store on Carnaby Street in London during Q3 Fiscal 2004, partially
offset by a $2.6 million sales decline on a constant-dollar basis. Sales by
such operations are made in euros and British sterling and benefited from the
continued weakening of the U.S. dollar during the quarter. The constant-dollar
sales decline in Europe resulted from a 2.3% decline in units sold, a 4.2%
decrease in local currency average selling prices, and an ongoing shift in
fashion trends in Europe from skate-oriented footwear to fashionable athletic
footwear. The Fiscal 2004 Nine Months increase of 7.3% was primarily due to a $5.2
million increase in European sales and a $900,000 increase in royalties from
our licensee for Japan, partially offset by an approximately $300,000 decrease
in sales in Central America. The $5.2 million sales increase in Europe resulted
from an $8.5 million favorable variance in exchange rates relating to our
direct operations in Europe, partially offset by a $3.3 million decrease in
sales on a constant-dollar basis. The constant-dollar sales decline resulted
from a 7.5% decrease in local currency average selling prices, partially offset
by a 1.7% increase in units sold. Gross Profit In Q3 Fiscal 2004, our gross profit percentage improved 520 basis points
versus the prior year, from 47.3% to 52.5%. For the Fiscal 2004 Nine Months,
our gross margin percentage improved 380 basis points versus the prior year,
from 44.6% to 48.4%. Each of our three sales channels experienced
year-over-year gross profit improvement. In the U.S., Retail gross margins
improved largely as a result of a higher proportion of sales at full margin due
in part to reductions in planned promotions and better inventory management.
Wholesale gross margins improved primarily due to improved average
selling prices and reduced
levels of markdowns. Both the Retail and National channels experienced
improved average selling prices for the quarter led by mens footwear and
womens footwear, respectively. Internationally, increases in gross profit
were driven primarily by favorable fluctuations in exchange rates between the
euro and U.S. dollar. The gross profit improvement for the Fiscal 2004 Nine Months was primarily
due to improved margins from all three sale channels. Domestically, National
margins improved largely due to increased margin contribution from the VANS
Warped Tour®, improved average selling prices for womens and kids footwear,
and a reduction in wholesale markdowns versus those taken for the same period a
year ago. Retail margins improved due to improved average selling prices for
apparel. Internationally, gross profit increased primarily due to favorable
fluctuations in exchange rates between the euro and U.S. dollar and increased
license income from Japan. Operating Expenses During Q3 Fiscal 2004 and the Fiscal 2004 Nine Months, operating expenses
decreased 22.8% and 3.4%, respectively, versus the comparable prior year
periods. Excluding impairment charges and lease termination costs, operating
expenses increased 3.0% and 3.9% during Q3 Fiscal 2004 and the Fiscal 2004 Nine
Months, respectively, as compared to the comparable prior year periods. As a percentage of net sales, operating expenses (excluding impairment
charges and lease termination costs) improved to 43.5% and 41.2% for Q3 Fiscal
2004 and the Fiscal 2004 Nine Months, respectively, from 46.3% and 42.6%,
respectively, in the same periods a year ago. The material components of
operating expenses are discussed below. 18




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Retail.Retail expenses decreased 3.9% in Q3 Fiscal 2004 and 1.2% for the
Fiscal 2004 Nine Months primarily due to the net reduction of eleven stores
since the same period a year ago, partially offset by an increase in labor and
related costs in order to support the increased retail sales volume discussed
above. Marketing, advertising and promotion.Marketing, advertising and promotion
expenses increased 1.4% in Q3 Fiscal 2004 and decreased 2.6% for the Fiscal
2004 Nine Months. The decrease for the Fiscal 2004 Nine Months was due to
planned decreases in trade show and advertising costs. Selling, distribution and administrative.Selling, distribution and
administrative expenses increased 11.9% and 14.1% in Q3 Fiscal 2004 and the
Fiscal 2004 Nine Months, respectively. The increases were primarily a result of
increases in bonus expense of $920,000 and $2.8 million due to the likely
achievement of performance targets for Fiscal 2004, and net increased costs of
approximately $1.2 million and $2.2 million related to our European business
during Q3 Fiscal 2004 and the Fiscal 2004 Nine Months, respectively. The
increase in expenses associated with our European business for Q3 Fiscal 2004
and the Fiscal 2004 Nine Months primarily related to changes in exchange rates
between European currencies, primarily the euro, and the U.S. dollar.
Additionally, we incurred approximately $500,000 in employee severance costs
for the Fiscal 2004 Nine Months. Lease termination costs.Please see the discussion of these costs under
the caption Introduction  General. Other Expense, Net Other expense, net, primarily consists of exchange rate losses, partially
offset by royalty payments received from the non-footwear related licensing of
our trademarks and rental income. Other expense, net, decreased $600,000 during
Q3 Fiscal 2004 and decreased $500,000 for the Fiscal 2004 Nine Months,
primarily due to decreased foreign currency losses. Income Tax Expense Income tax expense increased $5.4 million and $5.6 million for Q3 Fiscal
2004 and the Fiscal 2004 Nine Months, respectively. The increase is the result
of increased income from continuing operations, offset by a lower effective tax
rate. Our effective tax rate was approximately 9.6% for Q3 Fiscal 2004 versus
38.0% for Q3 Fiscal 2003, and 15.2% for the Fiscal 2004 Nine Months versus
41.8% for the same period a year ago. The decrease in our effective tax rate
for the Fiscal 2004 Nine Months and Q3 Fiscal 2003 was largely due to lower tax
rates internationally for these periods. Further, we have not recognized an
income tax benefit related to losses generated by our U.S. operations as we
expect such operations to generate a taxable loss for Fiscal 2004. We expect
our effective tax rate for Fiscal 2004 to be in the range of approximately 16%
to 19%.* In future periods, two factors could cause our effective tax rate to
materially fluctuate: (i) the extent to which the mix between taxable income or
loss generated in U.S. and foreign jurisdictions varies from our forecasted mix
of taxable income or loss; and (ii) the timing and amount of the release of
valuation allowances relating to our net operating loss carryforwards. With regard to the second factor, we expect our net operating loss
carryforwards, which primarily relate to the closure of our skateparks, to
reach approximately $30 million. In the future, if we believe the tax benefit
associated with our net operating losses will be realized, we would release all
or a portion of the remaining valuation allowance. This would create a tax
benefit in the quarter the valuation allowance is released and would cause our
effective tax rate for that quarter to be much lower than subsequent quarters.
Those subsequent quarters would then have an effective tax rate ranging from
approximately 20% to 30% depending on the mix of earnings between the U.S. and
foreign jurisdictions.* See Critical Accounting Policies  Taxes. The timing
and amount of valuation allowances that may be released in any year or quarter
depend on facts and circumstances existing at the time those decisions are made
and a number of variables, such as our history of recurring earnings, the
reliability of projections of future earnings, order backlogs and market
conditions. After our net operating losses are fully realized or expire, we expect to
have an effective tax rate of approximately 41% in the U.S. and approximately
15% internationally which on a blended basis would likely create a consolidated
effective tax rate ranging from approximately 20% to 30% depending on the mix
of earnings between the U.S. and foreign jurisdictions.* Minority Interest Minority interest increased approximately $600,000 in Q3 Fiscal 2004,
primarily as a result of smaller losses incurred by our Mexico subsidiary as
compared to the same period a year ago. During the Fiscal 2004 Nine Months,
minority interest increased $1.1 million, primarily as a result of increased
income produced by the VANS Warped Tour® and our Mexico subsidiary.   *
    
    Note: This is a forward-looking statement. Our actual effective tax rate,
net operating loss carryforwards and valuation allowances against
operating loss carryforwards could differ materially. Important factors
that could cause such differences include, but are 19




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not limited to: (i) changes or expected changes to U.S. or international tax
laws; and (ii) differences between our forecasted and actual operating
results. 20




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Loss from Discontinued Operations, Net of Tax As discussed more fully above under the caption Introduction  General,
in Fiscal 2003 we made the decision to substantially exit the skatepark
business. Discontinued operations for all periods presented include the results
of operations for the four skateparks that had been closed as of February 28,
2004, and the closure of one Triple Crown specialty retail store during Q2
Fiscal 2004. There were no losses from discontinued operations in Q3 Fiscal
2004 as there were no skatepark closures during the quarter. For the Fiscal
2004 Nine Months, losses from discontinued operations increased to $5.1
million, primarily as a result of lease termination charges of $4.7 million
incurred in connection with two of the three skateparks that were closed during
the Fiscal 2004 Nine Months. As we close additional skateparks in the future,
the related operating results will be recast as discontinued operations in the
consolidated statements of operations for all periods presented. Liquidity and Capital Resources Cash Flows We have historically financed our operations with a combination of cash
flows from operations, borrowings under credit facilities and the sale of
equity securities. We currently rely on cash flows from operations to fund our
operations, which we believe to be sufficient.* However, should a shortfall
occur, we believe we could obtain borrowings under credit facilities, factor
receivables or consider the sale of equity securities. At February 28, 2004,
we had $121.6 million in working capital and $64.5 million in cash and cash
equivalents. This compares to working capital of $106.1 million and cash and
cash equivalents of $52.8 million at May 31, 2003. Our working capital
increased during the Fiscal 2004 Nine Months primarily as a result of improved
income from operations and the receipt of $5.1 million in full payment of a
note receivable held in connection with the sale of our former Orange,
California manufacturing facility, partially offset by lease
termination payments for certain of our skateparks. Included in our cash and cash equivalents
at February 28, 2004, is approximately $35.6 million
currently deemed permanently
invested in our international subsidiaries. Should these amounts be
repatriated to the U.S., they would be subject to U.S. Federal and state income
taxes. During the Fiscal 2004 Nine Months operating activities provided $12.0
million of cash, including a usage of $6.8 million of cash in connection with
discontinued operations, versus $7.0 million of cash provided by operating
activities in the Fiscal 2003 Nine Months, which included $700,000 of cash
provided from discontinued operations. The net increase in operating cash flow
from continuing operations was the result of a $17.1 million increase in income
from continuing operations, a higher reduction in inventory and prepaid
balances for the Fiscal 2004 Nine Months compared to the same period last year,
offset by a larger increase in accounts receivable, a reduction in accounts
payable, and a reduction in lease termination liabilities for the Fiscal 2004
Nine Months compared to the same period last year. Accounts receivable increased $20.9 million during the Fiscal 2004 Nine
Months, and inventory levels decreased $18.8 million at February 28, 2004,
primarily due to the seasonal nature of our U.S. wholesale business in
connection with the spring and back-to-school selling seasons. Compared to a
year ago, our inventory levels have decreased 9.8%. This decrease was the
result of improved management of inventory levels and increased sales in our
National and Retail business. In connection with our exiting the skatepark business, as more fully
discussed under the caption Introduction  General, for the Fiscal 2004 Nine
Months we had a net reduction of $7.7 million in lease termination liabilities
as a result of the payment of lease termination costs for skateparks that we
will be closing. In total, we paid $17.3 million during the Fiscal 2004 Nine
Months in connection with lease termination costs to exit the skatepark
business. Of the amounts paid, $6.3 million related to skateparks classified as
discontinued operations in the accompanying condensed consolidated financial
statements. At February 28, 2004, our balance sheet included lease termination
liabilities of $596,000 and liabilities held in connection with disposal
activities aggregating $84,000, which represents lease termination liabilities
related to skateparks classified as discontinued operations.   *
    
    Note: This is a forward-looking statement. Our actual cash requirements
could differ materially. Important factors that could cause our need for
additional capital to change include: (i) the aggregate amount of cash we
spend in connection with terminations and/or restructuring of leases for
our skateparks; (ii) our rate of growth; (iii) the number of new stores we
decide to open and the number of store remodels we undertake; (iv) the
amount of stock we repurchase under our repurchase program; (v) our
ability to effectively manage our inventory levels; (vi) timing
differences in payment for our foreign-sourced product; (vii) slowing in
the U.S., California or global economies which could materially impact our
business; and (viii) the ability to repatriate cash held in our European
subsidiaries to the United States without paying a significant amount of
U.S. taxes thereon. 21




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Investing activities had cash usage of $77,000 in the Fiscal 2004 Nine
Months primarily as a result of $4.5 million in capital expenditures and
approximately $730,000 paid in connection with the purchase of certain of the
assets and liabilities of our former sales agent for Germany, Max MadHouse
Gmbh. This was partially offset by the repayment of the $5.1 million note
receivable described above. Cash used in financing activities was $2.7 million in the Fiscal 2004 Nine
Months, which was primarily the net result of cash outflows of $1.3 million for
net repayments of debt and $1.6 million in dividends paid to a minority
shareholder of one of our subsidiaries, partially offset by $222,000 in
proceeds from the issuance of common stock. The following table summarizes our contractual payment obligations and
commitments as of February 28, 2004: PAYMENT OBLIGATIONS BY FISCAL YEAR (IN THOUSANDS)2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    THEREAFTER
    
    TOTALOperating leases
    
    $
    3,280
    
    
    $
    12,138
    
    
    $
    11,046
    
    
    $
    10,173
    
    
    $
    7,974
    
    
    $
    19,718
    
    
    $
    64,329Long-term debt
    
    
    104
    
    
    
    820
    
    
    
    5
    
    
    
    5
    
    
    
    5
    
    
    
    250
    
    
    
    1,189Athlete license agreements
    
    
    450
    
    
    
    1,142
    
    
    
    564
    
    
    
    240
    
    
    
    
    
    
    
    
    
    
    
    2,396Total
    
    $
    3,834
    
    
    $
    14,100
    
    
    $
    11,615
    
    
    $
    10,418
    
    
    $
    7,979
    
    
    $
    19,968
    
    
    $
    67,914
 At February 28, 2004, we had firm commitments to purchase inventory in the
amount of $54.3 million during the third and fourth quarters of Fiscal 2004.
These commitments included contingent liabilities under open letters of credit
with foreign suppliers aggregating $1.4 million. In connection with the renegotiated facility lease for one of the
skateparks we expect to continue to operate in the future, we are required to
pay up to $1.8 million if the landlord terminates the revised lease agreement
prior to June 1, 2005. The amount of this lease termination payment decreases
to $600,000 on a straight-line basis over the fifteen month period ending on
May 31, 2005. If the landlord does not terminate the lease agreement by May
31, 2005, no amounts will be required to be paid. Borrowings We maintain a $20.0 million credit facility, which enables us to obtain
advances for the issuance of commercial letters of credit and standby letters
of credit. Outstanding letters of credit are secured by our cash balances. This
facility matures on May 1, 2004. As of February 28, 2004, $1.4 million in open
commercial letters of credit were outstanding under this facility. Vans Latinoamericana, our subsidiary for Mexico, maintains a note payable
to Tavistock Holdings A.G., a 49.99% owner of Vans Latinoamericana. 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 February 28, 2004, the
aggregate outstanding balance under the note was $815,000. Capital Expenditures Our future commitments for capital expenditures are primarily related to
the remodeling of retail stores. We estimate the aggregate cost of retail store
remodelings for the remainder of Fiscal 2004 to be approximately $500,000. Share Repurchase Program On September 21, 2001, we adopted a 1.0 million share repurchase program.
Through the date of this report, we have repurchased 555,700 shares under the
program for an aggregate of $3.3 million. We did not repurchase any stock under
the program in the Fiscal 2004 Nine Months. 22




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##### Table of Contents



SEASONALITY The following table contains unaudited selected quarterly financial data
for the eight quarters ended February 28, 2004, and this data as a percentage of
net sales. In the opinion of management, this unaudited information has been
prepared on the same basis as the audited information and includes all
adjustments necessary to fairly present the information set forth therein.
Results of a particular quarter are not necessarily indicative of the results
for any subsequent quarter. UNAUDITED CONSOLIDATED QUARTERLY RESULTS
(DOLLARS IN THOUSANDS) QUARTER ENDED
    
    QUARTER ENDEDFEBRUARY 28,
    
    NOVEMBER 29,
    
    AUGUST 30,
    
    MAY 31,
    
    MARCH 1,
    
    NOVEMBER 30,
    
    AUGUST 31,
    
    MAY 31,2004
    
    2003
    
    2003
    
    2003
    
    2003
    
    2002
    
    2002
    
    2002STATEMENT OF OPERATIONS DATA:Net sales
    
    $
    88,572
    
    
    $
    65,183
    
    
    $
    128,687
    
    
    $
    62,373
    
    
    $
    80,769
    
    
    $
    59,503
    
    
    $
    123,031
    
    
    $
    62,464Gross profit
    
    
    46,499
    
    
    
    31,446
    
    
    
    58,765
    
    
    
    29,224
    
    
    
    38,188
    
    
    
    28,263
    
    
    
    50,971
    
    
    
    25,073Asset impairment charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,213
    
    
    
    12,509
    
    
    
    
    
    
    
    
    
    
    
    1,612Goodwill impairment charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,550
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Lease termination charges
    
    
    
    
    
    
    1,921
    
    
    
    1,971
    
    
    
    7,893
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from
continuing operations
    
    
    7,093
    
    
    
    (6,526
    )
    
    
    11,553
    
    
    
    (19,542
    )
    
    
    (7,245
    )
    
    
    (3,304
    )
    
    
    5,569
    
    
    
    (11,023
    )Income (loss) from
discontinued operations,
net of tax
    
    
    
    
    
    
    (163
    )
    
    
    (4,925
    )
    
    
    (3,034
    )
    
    
    (1,961
    )
    
    
    (362
    )
    
    
    (148
    )
    
    
    (3,911
    )Net income (loss)
    
    $
    7,093
    
    
    $
    (6,689
    )
    
    $
    6,628
    
    
    $
    (22,576
    )
    
    $
    (9,206
    )
    
    $
    (3,666
    )
    
    $
    5,421
    
    
    $
    (14,934
    )AS A PERCENTAGE OF NET SALES:Net sales
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Gross profit
    
    
    52
    
    
    
    48
    
    
    
    46
    
    
    
    47
    
    
    
    47
    
    
    
    47
    
    
    
    41
    
    
    
    40Asset impairment charges
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    2
    
    
    
    15
    
    
    
    0
    
    
    
    0
    
    
    
    3Goodwill impairment charges
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    7
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Lease termination charges
    
    
    0
    
    
    
    3
    
    
    
    2
    
    
    
    13
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Income (loss) from
continuing operations
    
    
    8
    
    
    
    (10
    )
    
    
    9
    
    
    
    (31
    )
    
    
    (9
    )
    
    
    (6
    )
    
    
    5
    
    
    
    (18
    )Income (loss) from
discontinued operations,
net of tax
    
    
    0
    
    
    
    0
    
    
    
    (4
    )
    
    
    (5
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    0
    
    
    
    (6
    )Net income
    
    
    8
    
    
    
    (10
    )
    
    
    5
    
    
    
    (36
    )
    
    
    (11
    )
    
    
    (6
    )
    
    
    4
    
    
    
    (24
    )Comparable store sales
Increase (decrease)
    
    
    14.4
    %
    
    
    15.2
    %
    
    
    13.7
    %
    
    
    9.0
    %
    
    
    (6.6
    )%
    
    
    (9.3
    )%
    
    
    (4.9
    )%
    
    
    (7.4
    )%
 Our business is seasonal, with the largest percentage of net income and
U.S. sales realized in the first fiscal quarter (June through August), the
back to school selling months. In addition to seasonal fluctuations, our
operating results fluctuate quarter-to-quarter as a result of the timing of
marketing expenditures and 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 our future results
will be consistent with past results or the projections of securities analysts. RECENT ACCOUNTING PRONOUNCEMENTS In July 2002, the FASB issued SFAS No. 146, Accounting For Costs
Associated With Exit or Disposal Activities (SFAS 146), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) (EITF 94-3). SFAS 146
is effective for exit or disposal activities that are initiated after December
31, 2002. As a result of the implementation of SFAS 146, the accounting for amounts
recorded in connection with our decision to substantially exit the skatepark
business was materially impacted. Under the guidance of EITF 94-3, we would
have recorded as an expense during the year ended May 31, 2003 (the period in
which management committed to an exit plan for the skateparks), an estimate of
certain costs that would be directly incurred in connection with skatepark
closures. The most significant element of these costs is lease termination
charges. With the implementation of SFAS 146, costs associated with exit
activities are to be recorded in the period in which they are incurred. In the
case of lease termination costs, this is the period in which we enter into an
agreement with the landlord. Accordingly, our consolidated results of
operations include lease termination charges in the periods in which we entered
into 23




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an agreement. Additionally, other direct costs associated with closing
skateparks will be expensed in future periods as they are incurred. In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS 148), which
permits two additional transition methods for companies that elect to adopt the
fair-value-based method of accounting for stock-based employee compensation.
The statement also expands the disclosure requirements for stock-based
compensation. The provisions of this statement apply to financial statements
for fiscal years ending after December 15, 2002. The adoption of SFAS 148 had
no material financial impact to our consolidated financial statements. We have
provided the additional disclosures required by SFAS 148 for the thirteen and
thirty-nine week periods ended February 28, 2004, and March 1, 2003, in Note 1
to the Condensed Consolidated Financial Statements. In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 requires a company to consolidate a
variable interest entity if it is designated as the primary beneficiary of that
entity even if the company does not have a majority of voting interests. A
variable interest entity is generally defined as an entity that has
insufficient equity to finance its activities or the owners of the entity lack
the risk and rewards of ownership. The provisions of this statement apply at
inception for any entity created after January 31, 2003. For an entity created
before February 1, 2003, the provisions of this Interpretation must be applied
at the beginning of the first interim or annual period beginning after December
15, 2003. In December 2003, the FASB revised FIN 46 (FIN
46-R) to exempt certain entities from its requirements and to
clarify certain issues arising during the initial implementation of
FIN 46. The provisions of FIN 46-R were adopted in the
third quarter ended February 28, 2004; however, since we do not
currently have any variable interest entities, the adoption of
FIN 46-R did not have a material impact on our financial
position or results of operations. CRITICAL ACCOUNTING POLICIES Our financial condition and results of operations are impacted by the
methods, assumptions and estimates used in the application of critical
accounting policies. Changes in the estimates or other judgements of matters
inherently uncertain that are included within these accounting policies could
result in a significant change to the information presented in the financial
statements. We believe our most critical accounting policies relate to: Revenue Recognition.We recognize product, skatepark, royalty, event and
other revenue upon concluding that all of the fundamental criteria for revenue
recognition have been met. We record wholesale revenues when title passes and
the risks and rewards of ownership have passed to the customer. Retail store
revenues are recorded at the time of sale. As part of our revenue recognition
policy, we record estimated returns and miscellaneous claims from customers as
reductions to revenues at the time revenues are recorded. We base our estimates
on historical rates of product returns and claims as well as specific
identification of outstanding claims and returns not yet received from
customers. Actual returns and claims in any future period are inherently
uncertain and thus may differ from our estimates. Accounts Receivable.We provide allowances for doubtful accounts based on
a number of factors including historical experience and past due status as well
as individual customer circumstances such as ability to pay, bankruptcy, credit
ratings and payment history. If actual market conditions are less favorable
than those projected by us, additional provisions for doubtful accounts may be
required. Inventory.Inventories are valued at the lower of cost or market. Finished
goods inventories are valued using the first-in, first-out method (FIFO). We
provide reserves for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. These
reserves become permanent reductions in the carrying value of inventory until
sold. If actual market conditions are less favorable than those projected by
us, additional inventory write-downs may be required. Impairment of Property, Plant and Equipment.We evaluate the carrying
value of property, plant and equipment assets for impairment when the assets
experience a negative event (i.e., significant downturn in operations, losses
from operating units, natural disaster, etc.). When these events are
identified, we evaluate future undiscounted cash flows related to the relevant
assets. If the projected undiscounted cash flows do not exceed the carrying
value of the assets, we write-down the assets to fair value based on discounted
projected future cash flows. The most significant assumptions we use in this
analysis are those made in estimating future discounted cash flows. In
estimating cash flows, we generally use the financial assumptions in our
current budget and our strategic plan and modify them on a store-by-store basis
if other factors should be considered. The discount rate applied is based upon
our weighted average cost of capital adjusted for the risks associated with the
operations being analyzed. 24




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Goodwill.Goodwill is tested for impairment annually as of March 31 at the
reporting unit level unless a change in circumstances indicates more frequent
impairment analysis is required. Impairment, if any, is measured in part based
on the estimated fair value of the reporting units with the recorded goodwill.
Fair value is determined by using a combination of techniques, such as the
traditional present value approach, the expected cash flow approach, and the
multiple of earnings approach. The most significant assumptions we use in this
analysis are those made in estimating future cash flows. In estimating future
cash flows, we generally use the financial assumptions in our current budget
and our strategic plan, subject to modification as considered necessary,
including sales and expense growth rates and the discount rate we estimate to
represent our cost of funds. Goodwill is comprised of $12.7 million associated
with the acquisition of our predecessor company; $6.2 million associated with
the acquisition of Pro-tec; $5.8 million related to the acquisition of Global
Accessories Limited (now known as Vans Inc. Limited); $4.9 million associated
with our acquisition of a majority interest in the VANS Warped Tour;
$2.3 million associated with our acquisition of Sunspot; and $400,000 associated
with the acquisition of certain assets and liabilities of Max MadHouse. Taxes.We record valuation allowances to reduce our deferred tax assets to
amounts that we believe are more likely than not to be realized. Realization of
deferred tax assets (such as net operating loss carryforwards) is dependent on
future taxable earnings and is therefore uncertain. On a quarterly basis, we
assess the likelihood that our deferred tax asset balance will be recovered
from future taxable income. To the extent we believe that recovery is not
likely, we establish a valuation allowance against our deferred tax asset,
increasing our income tax expense in the period such determination is made. We have not recorded U.S. income tax expense for foreign earnings that we
have determined to be indefinitely reinvested offshore, thus reducing our
overall income tax expense. The amount of earnings designated as indefinitely
reinvested offshore is based upon the actual deployment of such earnings in our
offshore assets. Income tax considerations are also a factor in determining the
amount of foreign earnings to be repatriated. In the event actual cash needs of
our U.S. entities exceed our current expectations, we may need to repatriate
foreign earnings which have been designated as indefinitely reinvested
offshore. This would result in additional income tax expense being recorded.
Because the determination of foreign earnings as indefinitely reinvested
offshore involves future plans and expectations, there is a possibility that
amounts determined to be indefinitely reinvested offshore may vary from our
current expectations, thereby affecting future income tax expense. On an interim basis, we estimate what our anticipated annual effective tax
rate will be and record a quarterly income tax provision in accordance with
this anticipated rate. As the fiscal year progresses, we refine our estimates
based upon actual events and earnings by jurisdiction during the year. This
estimation process can result in significant changes to our expected effective
tax rate. When this occurs, we adjust the income tax provision during the
quarter in which the change in estimate occurs so that the year-to-date
provision reflects the expected domestic and international annual
rates. The changes described in the preceding sentence and the recording of valuation allowances may create fluctuations in our overall
effective tax rate from quarter to quarter. NOTE REGARDING FORWARD-LOOKING STATEMENTS The foregoing discussion of our business contains forward-looking
statements about our 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. Our 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 the text and footnotes accompanying certain forward-looking
statements, as well as those discussed under the caption Risk Factors on page
14 of our Annual Report on Form 10-K for the year ended May 31, 2003, which is
filed with the Securities and Exchange Commission, and in our press release
dated March 24, 2004. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our exposure to market risk associated with changes in interest rates
relates primarily to our cash and cash equivalents. At February 28, 2004, we
held $64.5 million in cash and cash equivalents. Cash equivalents consist of
highly liquid investments in federal treasury securities, commercial paper and
money market time deposits with original maturities of three months or less.
Due to the relatively short-term nature of our cash equivalents, cost
approximates fair value. We do not use derivative or other financial
instruments to hedge interest rate risk. A 1% decline in the annual yield on
cash and cash equivalents held at February 24, 2004, would decrease our
interest income by approximately $645,000. 25




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Foreign Currency Risk We operate our business and sell our products in a number of countries
throughout the world and, as a consequence, we are exposed to movements in
foreign currency exchange rates between the local currencies of the foreign
markets in which we operate and the U.S. dollar. Our foreign currency exposure
is generally related to Europe, Mexico and Japan. Our primary foreign exchange risk arises from purchases of inventory in
U.S. dollars by our European subsidiaries, whose functional currencies are the
euro and British sterling. To hedge this risk, we utilize forward foreign
exchange contracts and/or foreign currency options with durations of generally
from three to 12 months. We generally hedge a substantial portion of our
projected exposure from inventory purchases for the coming six to 12 months. As
of February 28, 2004, we had $11.9 million outstanding in foreign exchange
forward contracts to hedge the euro against the U.S. dollar, at an average
contract rate of $1.14 per euro. During the period from February 29, 2004,
through April 2, 2004, we entered into additional forward contracts aggregating
$10.7 million to hedge the U.S. dollar against the euro, at an average contract
rate of $1.21 per euro. These additional contracts are to hedge a portion of
projected inventory purchases that will occur during the third and fourth
quarters of Fiscal 2005. At February 28, 2004, we also had $785,000 outstanding in foreign currency
forward contracts to purchase U.S. dollars using Japanese yen at an average
contract rate of 110 yen per U.S. dollar. These forward contracts were entered
into to hedge projected future cash flows in connection with certain royalty
payments to be received from our licensee for Japan during the remainder of
Fiscal 2004. Net unrealized gains/losses on foreign exchange contracts at February 28,
2004, aggregated a loss of $910,000, all of which is included in
accumulated other comprehensive income and is expected to be reclassified into
earnings within the next 12 months as the related inventory is sold and royalty
revenues are recognized. In addition to hedging inventory purchases and royalties, we may also
hedge other foreign currency cash flow and balance sheet exposures as they are
identified. We do not hold or issue derivative instruments for trading
purposes. Our financial performance can be affected by fluctuations in the value of
the euro and British sterling when translating the financial statements of our
European subsidiaries into U.S. dollars. Revenues from euro-sourced and
sterling-sourced operations aggregated $21.1 million and $5.5 million,
respectively, for Q3 Fiscal 2004 and $51.7 million and $16.4 million,
respectively for the 2004 Fiscal Nine Months. 
 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities and
Exchange Act of 1934, as amended (the Exchange Act), is recorded, summarized
and processed within time periods specified in the SECs rules and forms. As of
the end of the period covered by this report (the Evaluation Date), we
carried out an evaluation, under the supervision and with the participation of
management, including our President and Chief Executive Officer and our Vice
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-14
under the Exchange Act. Based upon this evaluation, our President and Chief
Executive Officer and our Vice President and Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective under Rule 13a-14. There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting. 26




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##### Table of Contents



PART II
OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS Vans, Inc. vs. Scott Brabson, Gordana Brabson, Jay Rosendahl, Heidi
Rosendahl, et al, Superior Court for the County of Los Angeles, Case No.
BC27031.The allegations we have made in this case, the companion arbitration,
and the resulting arbitration award are described in our Annual Report on Form
10-K for Fiscal 2003, which is filed with the Securities and Exchange
Commission. Recently, the District Court for the Central District of California
entered a default judgment against the interests of certain of the defendants
in this matter with respect to certain shoes, apparel and accessories (the
goods) seized by the federal government in connection with the allegations we
made in this case. The government granted our petition to obtain ownership of
the goods. We plan to liquidate them as part of our effort to recover monies
in this matter. Additionally, in Q3 Fiscal 2004, we entered into an agreement
with the trustee of the bankruptcy estate of Scott Brabson (the Estate)
whereby the Estate assigned any rights it may have had in certain bank accounts
and other property that were subject to the preliminary injunction previously
obtained in this case in exchange for the assignment by us of any rights we may
have had in certain U.S. bank accounts and the payment of additional monies to
the Estate. The agreement is subject to approval by the U.S. bankruptcy court.
A hearing on the motion to approve the agreement will be held on April 6,
2004. No amounts have been recorded in our condensed consolidated financial
statements in connection with the outcome of this matter. Gordana Brabson vs. Vans, Inc. et. al, Superior Court of California,
County of Santa Barbara, Case No. 01110315. This lawsuit was filed against
Vans, one of Vans current executive officers, one of its former executive
officers, and certain other individuals and entities on December 6, 2002, in
connection with the lawsuit filed by us against the plaintiff, her husband and
other individuals described above. The allegations are set forth in our
Quarterly Report on Form 10-Q for the period ended November 29, 2003. An
agreement to settle this case was reached in Q1 Fiscal 2004, and during Q3
Fiscal 2004, a settlement agreement was executed by the various parties to the
case. The agreement is subject to certain conditions, and the terms of the
settlement are confidential. The settlement of this case will not have a
material adverse impact on our future results of operations or financial
condition. City of Dearborn Heights ACT 345 Police & Fire Retirement System, on
behalf of Itself and all others similarly situated vs. Vans, Inc., Andrew J.
Greenebaum and Gary Schoenfeld, United States District Court, Central District
of California, Case No. CV04-0431.This putative class action lawsuit was
filed against Vans, and one current and one former officer of Vans, on January
23, 2004. The complaint alleges that Vans and those individuals violated the
federal securities laws by improperly inflating revenue and earnings during
each fiscal quarter in the period from March 1998 through May 2001, and issuing
false and misleading statements to the public about its business. Two
additional putative class action lawsuits containing identical allegations have
also been filed in the United States District Court for the Central District of
California (Robert Lechter vs. Vans, Inc., Andrew J. Greenebaum and Gary H.
Schoenfeld, Case No. CV04-0707, and Mary Ann Mason vs. Vans, Inc., Andrew J.
Greenebaum and Gary H. Schoenfeld, Case No. 2:04CV01578). Additionally, on
January 29, 2004, a shareholder derivative complaint containing allegations
identical to the above federal lawsuits was filed in the Superior Court for the
County of Los Angeles against Vans, as a nominal defendant, and the current
members of the Board of Directors and certain former officers and directors of
Vans alleging breaches of fiduciary duty and violations of the California
Corporations Code. (Sherryl Halpern, derivatively on behalf of Vans, Inc. vs.
Walter E. Schoenfeld, et al, Case No. BC309805). This case was subsequently
consolidated with a second derivative complaint (Anne Ratnofsky, derivatively
on behalf of Vans, Inc. vs. Walter E. Schoenfeld, et al, Case No. BC310782),
and a consolidated complaint was filed. Discovery has commenced in the
derivative case, but is stayed in the federal lawsuits pending a motion to
consolidate the cases, the appointment of a lead plaintiff, and the filing of a
motion to dismiss by Vans. Franklin C. Ferrana a/k/a Nikki Sixx vs. Vans, Inc., High Speed
Productions, Inc. d/b/a Thrasher Magazine, Superior Court for the County of Los
Angeles, Case No. BC303262.The allegations made by the plaintiff in this case
were disclosed in our quarterly report on Form 10-Q for the period ended August
30, 2003, and are further described in Note 4 to the Condensed Consolidated
Financial Statements. Recently, we were advised that Thrasher Magazine will be
dismissed from the case. In addition to the foregoing, from time to time we are the subject of
claims in the ordinary course of our business. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits. 10.1
    
    Summary of the Vans, Inc. Fiscal 2004 Bonus Plan
 27




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10.2
    
    Summary of the Vans, Inc. Long-Term Executive Bonus Plan10.3
    
    Employment Agreement, dated as of June 16, 2003, between Vans, Inc. and Steven J. Van Doren10.4
    
    Third Amendment to Vans, Inc. Deferred Compensation Agreement for Walter E. Schoenfeld10.5
    
    Third Amendment to Appendix B, Agreement Schedule, Trust Under Vans, Inc. Deferred Compensation Plan31.1
    
    Certification of Scott J. Blechman Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended31.2
    
    Certification of Gary H. Schoenfeld Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended32.1
    
    Certification of Scott J. Blechman Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Gary H. Schoenfeld Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
  (b)
    
    Reports on Form 8-K. We filed four reports on Form 8-K during the
quarterly period ended February 28, 2004. The first report was dated
December 19, 2003, and disclosed our financial results for the period
ended November 29, 2003. The second report was dated January 14, 2004, and
disclosed new guidance for our projected financial results for Q3 Fiscal
2004. The third report was dated January 26, 2004, and disclosed the
first putative class action securities lawsuit discussed above, and the
fourth report was dated February 3, 2004, and disclosed the filing of the
first derivative lawsuit discussed above. 28




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities 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)Date: April 5, 2004
    
    By:
    
    /s/ Gary H. SchoenfeldGARY H. SCHOENFELDPresident and ChiefExecutive OfficerDate: April 5, 2004
    
    By:
    
    /s/ Scott J. BlechmanSCOTT J. BLECHMANVice President and ChiefFinancial Officer(Principal Financial andAccounting Officer)
 29