SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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 November 29, 2003 or

[ ]		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission File Number 0-19402

VANS, INC.

(Exact Name of Registrant as Specified in its Charter)


DELAWARE		33-0272893
(State or Other Jurisdiction		(I.R.S. Employer
of Incorporation or Organization)		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. YES [X] NO [ ]

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:17,935,109 shares of Common Stock, $.001 par value, as of January 7, 2004.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

VANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(AMOUNTS IN THOUSANDS)


					NOVEMBER 29,			MAY 31,
					2003			2003

				ASSETS
Current assets:
	Cash and cash equivalents				$	63,872		$	52,844
	Accounts receivable, net of allowance for doubtful accounts of $2,569 and $2,297 at November 29, 2003, and May 31, 2003, respectively					34,306			25,596
	Inventories					42,554			63,955
	Deferred income taxes					2,603			3,055
	Prepaid expenses and other					10,658			11,617

		Total current assets				153,993			157,067
	Property, plant and equipment, net					24,432			25,120
	Trademarks and patents, net of accumulated amortization of $1,637 and $1,378 at November 29, 2003, and May 31, 2003, respectively					15,286			15,533
	Goodwill					32,089			31,702
	Other assets					3,680			8,362

		Total assets			$	229,480		$	237,784

			LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	16,193		$	24,484
	Lease termination liabilities					3,836			8,338
	Accrued liabilities					14,780			13,307
	Income taxes payable					6,927			3,296
	Liabilities held in connection with disposal activities					108			1,543

		Total current liabilities				41,844			50,968
Deferred income taxes						2,186			2,383
Long-term debt						1,614			2,523

		Total liabilities				45,644			55,874

Minority interest						2,404			1,735
Stockholders’ equity:
Common stock, $.001 par value, 40,000 shares authorized, 17,872 and 17,826 shares issued and outstanding at November 29, 2003, and May 31, 2003, respectively						18			18
Additional paid-in capital						188,470			188,275
Deferred compensation						(835	)		(976	)
Retained deficit						(12,917	)		(12,856	)
Accumulated other comprehensive income						6,696			5,714

		Total stockholders’ equity				181,432			180,175

Total liabilities and stockholders’ equity					$	229,480		$	237,784

See accompanying notes to condensed consolidated financial statements.

VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)


			THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED

			NOVEMBER 29,			NOVEMBER 30,			NOVEMBER 29,			NOVEMBER 30,
			2003			2002			2003			2002

Retail sales			$	23,681		$	21,872		$	60,478		$	56,274
National sales				23,872			19,243			77,763			74,812
International sales				17,630			18,388			55,629			51,448

	Net sales			65,183			59,503			193,870			182,534
Cost of sales				33,737			31,240			103,659			103,300

	Gross profit			31,446			28,263			90,211			79,234
Operating Expenses:
	Retail			15,439			15,681			32,078			32,044
	Marketing, advertising and promotion			5,851			5,702			15,695			16,365
	Selling, distribution and administrative			13,526			11,147			29,879			25,889
	Lease termination costs			1,921			—			3,892			—
	Amortization of intangible assets			92			177			258			365

Total operating expenses				36,829			32,707			81,802			74,663
Income (loss) from operations				(5,383	)		(4,444	)		8,409			4,571
Interest (income), net				(126	)		(157	)		(185	)		(425	)
Other (income) expense, net				453			(502	)		376			260

Income (loss) from continuing operations before income taxes and minority interest				(5,710	)		(3,785	)		8,218			4,736
Income tax (benefit) expense				399			(1,075	)		1,708			1,506
Minority interest				417			594			1,483			965

Income (loss) from continuing operations				(6,526	)		(3,304	)		5,027			2,265
Loss from discontinued operations, net of tax				(163	)		(362	)		(5,088	)		(510	)

Net income (loss)			$	(6,689	)	$	(3,666	)	$	(61	)	$	1,755

Earnings (loss) per share information:
	Basic:
		Income (loss) from continuing operations	$	(0.36	)	$	(0.18	)	$	0.28		$	0.13
		Loss from discontinued operations		(0.01	)		(0.02	)		(0.28	)		(0.03	)

		Net income (loss)	$	(0.37	)	$	(0.20	)	$	0.00		$	0.10

		Basic weighted average common shares outstanding		17,852			17,910			17,840			18,038
	Diluted:
		Income (loss) from continuing operations	$	(0.36	)	$	(0.18	)	$	0.28		$	0.13
		Loss from discontinued operations		(0.01	)		(0.02	)		(0.28	)		(0.03	)

		Net income (loss)	$	(0.37	)	$	(0.20	)	$	0.00		$	0.10

		Diluted weighted average common shares outstanding		17,852			17,910			17,840			18,184

See accompanying notes to condensed consolidated financial statements

VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)


				TWENTY-SIX WEEKS ENDED

				NOVEMBER 29,			NOVEMBER 30,
				2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations				$	5,027		$	2,265
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
	Depreciation and amortization				3,873			5,039
	Stock-based compensation expense				141			139
	Net loss on disposal of equipment				22			26
	Non-cash lease termination costs				(177	)		—
	Minority share of income				1,483			965
	Provision for losses on accounts receivable				309			661
	Changes in assets and liabilities, net of effects of business acquisitions:
		Accounts receivable			(8,828	)		(3,551	)
		Inventories			21,581			3,557
		Deferred income taxes			255			1,016
		Prepaid expenses			959			5,708
		Other assets			(432	)		(24	)
		Accounts payable			(8,291	)		(5,306	)
		Accrued liabilities			1,796			(3,124	)
		Lease termination liabilities			(4,502	)		—
		Income taxes payable			3,631			3,855

		Net cash provided by continuing operations			16,847			11,226
		Net cash used in discontinued operations			(6,816	)		(131	)

		Net cash provided by operating activities			10,031			11,095

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment					(2,839	)		(6,372	)
Investments in other companies					(497	)		(1,043	)
Purchases of marketable debt securities					—			(1,006	)
Maturities of marketable debt securities					—			2,746
Sales of marketable debt securities					—			22,232
Proceeds from repayment of note receivable					5,103			18
Proceeds from sale of investments					—			75

			Net cash provided by investing activities		1,767			16,650

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long term debt					(909	)		(178	)
Consolidated subsidiary dividends paid to minority shareholders					(814	)		(734	)
Proceeds from issuance of common stock					195			18
Repurchases of common stock					—			(2,184	)

			Net cash used in financing activities		(1,528	)		(3,078	)
Effect of exchange rate changes on cash and cash equivalents					758			956

			Net increase (decrease) in cash and cash equivalents		11,028			25,623
Cash and cash equivalents, beginning of period					52,844			28,447

Cash and cash equivalents, end of period				$	63,872		$	54,070

SUPPLEMENTAL CASH FLOW INFORMATION:
		Interest paid		$	130		$	215
		Income taxes paid (refund)		$	(1,964	)	$	(3,012	)

See accompanying notes to condensed consolidated financial statements

VANS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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. 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. 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. 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, VANS skateparks and the VANS High Cascade Snowboard Camp®, sponsoring professional and amateur athletes and the VANS Warped Tour®, as well as advertising in targeted print and television media.

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 the 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 the seven European stores we operated through the end of the second quarter of Fiscal 2004.

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.

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 2003

Expected life (in years)		5			5
Volatility		0.74			0.75
Risk-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						TWENTY-SIX WEEKS ENDED

	NOVEMBER 29,			NOVEMBER 30,			NOVEMBER 29,			NOVEMBER 30,
	2003			2002			2003			2002

Net income (loss) – as reported	$	(6,689	)	$	(3,666	)	$	(61	)	$	1,755
Add: Stock-based compensation expense included in net income – as reported		—			—			—			—
Deduct: Stock-based compensation expense determined under fair value method		(454	)		(261	)		(895	)		(471	)

Net income (loss) – pro forma	$	(7,143	)	$	(3,927	)	$	(956	)	$	1,284

Basic earnings (loss) per share – as reported	$	(0.37	)	$	(0.20	)	$	0.00		$	0.10

Basic earnings (loss) per share – pro forma	$	(0.40	)	$	(0.22	)	$	(0.05	)	$	0.07

Diluted earnings (loss) per share – as reported	$	(0.37	)	$	(0.20	)	$	0.00		$	0.10

Diluted earnings (loss) per share – pro forma	$	(0.40	)	$	(0.22	)	$	(0.05	)	$	0.07

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 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 twenty-six week periods ended November 29, 2003, and November 30, 2002, 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. We will adopt the provisions of FIN 46 in the quarter ending February 28, 2004, for existing entities that are within the scope of this Interpretation. The statement also has disclosure requirements, some of which are required to be included in financial statements issued after January 31, 2003. Since we do not currently have any variable interest entities, the adoption of the provisions of FIN 46 is not expected to 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 November 29, 2003, and May 31, 2003:


			NOVEMBER 29, 2003					MAY 31, 2003

			Gross					Gross
			Carrying		Accumulated			Carrying		Accumulated
			Amount		Amortization			Amount		Amortization

			(In thousands)
Intangible assets subject to amortization:
	Trademarks and patents		$	5,152	$	(1,141	)	$	5,140	$	(938	)
	Other			886		(496	)		886		(440	)

		Total	$	6,038	$	(1,637	)	$	6,026	$	(1,378	)


			NOVEMBER		MAY
			29, 2003		31, 2003

			(In thousands)
Carrying amount of intangible assets not subject to amortization:
	Goodwill		$	32,089	$	31,702
	Trademarks			10,885		10,885

		Total	$	42,974	$	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 majority interest in the VANS Warped Tour®; $2.1 million associated with the acquisition of Compagnie Sunspot SA (“Sunspot”),

our 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 $177,000 for the thirteen week periods ended November 29, 2003, and November 30, 2002, respectively and $258,000 and $365,000 for the twenty-six week periods ended November 29, 2003, and November 30, 2002, 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		$	186
2005			446
2006			446
2007			439
2008			366
	Thereafter		2,518

		$	4,401

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				TWENTY-SIX WEEKS ENDED

	NOVEMBER 29,		NOVEMBER 30,		NOVEMBER 29,		NOVEMBER 30,
	2003		2002		2003		2002

	(In thousands)
Weighted average shares used in basic computation		17,852		17,910		17,840		18,038
Restricted stock grant		—		—		—		87
Dilutive stock options		—		—		—		59

Weighted average shares used for dilutive computation		17,852		17,910		17,840		18,184

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

TWENTY-SIX WEEKS ENDED

NOVEMBER 29,

NOVEMBER 30,

NOVEMBER 29,

NOVEMBER 30,

2003

2002

2003

2002

(In thousands)

Restricted stock grants

—

Stock options

2,095

2,204

2,133

1,370

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 twenty-six week periods ended November 29, 2003, and November 30, 2002, were as follows:


			THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED

			NOVEMBER 29,			NOVEMBER 30,			NOVEMBER 29,			NOVEMBER 30,
			2003			2002			2003			2002

			(In thousands)
Net income (loss)			$	(6,689	)	$	(3,666	)	$	(61	)	$	1,755
Other comprehensive income:
	Derivatives qualifying as hedges, net of tax:
		Net derivative loss		(1,226	)		(65	)		(600	)		(455	)
		Reclassifications to expense		116			208			453			146
	Foreign currency translation adjustments			4,637			302			1,128			2,133

Total comprehensive income (loss)			$	(3,162	)	$	(3,221	)	$	920		$	3,579

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 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 $873,000 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 $2.1 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 $4.4 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 twenty-six week periods ended November 29, 2003, and November 30, 2002, 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. No material changes in the status of these matters have occurred since the filing of our Form 10-K for Fiscal 2003, and no amounts have been recorded in our condensed consolidated financial statements in connection with this matter.

investigation conducted in connection with that litigation. An agreement to settle this case was reached in the first quarter of Fiscal 2004, and settlement documents are still being finalized. The terms of the settlement are confidential; however, no amounts have been recorded in the accompanying condensed consolidated financial statements in connection with this matter. The settlement of this case will not have a material adverse impact on our results of operations or financial condition.

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. 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 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 November 29, 2003, our subsidiaries hedged approximately 70% of forecasted inventory purchases through the first quarter of Fiscal 2005.

At November 29, 2003, 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 November 29, 2003 (in thousands, except contract rates):


				AGGREGATE FAIR			NET UNREALIZED
CURRENCY	AGGREGATE		AVERAGE	VALUE OF FORWARD			LOSSES IN OTHER
HEDGED	NOTIONAL VALUE		CONTRACT RATE	CONTRACT LIABILITY			COMPREHENSIVE INCOME

Euro	$	17,700	1.14 dollars per euro	$	(903	)	$	765
Yen	$	1,490	110.88 yen per dollar	$	(22	)	$	24

	$	19,190		$	(925	)	$	789

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 November 29, 2003, 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 November 29, 2003, we had firm commitments to purchase inventory in the amount of $28.7 million. These commitments included contingent liabilities under open letters of credit with foreign suppliers aggregating $637,000.

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 November 29, 2003, we have closed four skateparks: Bakersfield, California; Denver, Colorado; Phoenix, Arizona; and Atlanta, Georgia. The Denver, Phoenix and Atlanta parks closed during the first quarter of Fiscal 2004. Of the eight skateparks that we continue to operate, we have reached agreements with the landlords to close five of the parks generally over the next six 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 have closed through November 29, 2003, are presented as discontinued operations in the accompanying condensed consolidated statements of operations.

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 thirteen and twenty-six week periods ended November 29, 2003.

Summarized operating results for our discontinued operations were as follows:


	THIRTEEN WEEKS ENDED						TWENTY-SIX WEEKS ENDED

	NOVEMBER 29, 2003			NOVEMBER 30, 2002			NOVEMBER 29, 2003			NOVEMBER 30, 2002

				(In thousands)
Net sales	$	141		$	1,103		$	1,325		$	2,705
Gross profit		85			775			733			1,915
Lease termination costs		134			—			4,822			—
Net loss	$	(163	)	$	(362	)	$	(5,088	)	$	(510	)

Our results from continuing operations for the thirteen and twenty-six week periods ended November 29, 2003, include pre-tax lease termination costs of $1.9 million and $3.9 million, respectively, which relate to lease termination agreements reached during Fiscal 2004 for skateparks that we continued to operate as of November 29, 2003. Our November 29, 2003 balance sheet included lease termination liabilities aggregating $3.8 million and liabilities held in connection with disposal activities aggregating $108,000, 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 $11.5 million and $9.0 million for the thirteen week periods ended November 29, 2003, and November 30, 2002, respectively, and $27.0 million and $24.0 million for the twenty-six week periods ended November 29, 2003, and November 30, 2002, 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						TWENTY-SIX WEEKS ENDED

			NOVEMBER 29,			NOVEMBER 30,			NOVEMBER 29,			NOVEMBER 30,
			2003			2002			2003			2002

						(In thousands)
Net sales:
	Retail
		Skateparks	$	3,152		$	3,393		$	7,127		$	7,926
		Retail stores		20,529			18,479			53,351			48,348
	National
		Wholesale		23,727			19,098			66,590			64,456
		Other		145			145			11,173			10,356
	International			17,630			18,388			55,629			51,448

Total net sales			$	65,183		$	59,503		$	193,870		$	182,534

Gross profit:
	Retail
		Skateparks	$	2,314		$	2,480		$	5,073		$	5,878
		Retail stores		11,002			10,102			29,041			26,270
	National
		Wholesale		9,759			7,534			24,803			23,432
		Other		(32	)		(20	)		2,135			578
	International			8,403			8,167			29,159			23,076

Total gross profit			$	31,446		$	28,263		$	90,211		$	79,234

Income (loss) from operations:
	Retail
		Skateparks	$	(2,416	)	$	(967	)	$	(4,427	)	$	(881	)
		Retail stores		(1,918	)		(2,521	)		1,823			(52	)
	National
		Wholesale		6,503			3,765			17,299			15,616
		Other		(138	)		(148	)		1,785			287
	International			4,113			4,463			18,902			13,592
	Unallocated			(11,527	)		(9,036	)		(26,973	)		(23,991	)

Total income (loss) from operations			$	(5,383	)	$	(4,444	)	$	8,409		$	4,571

Included in skatepark income (loss) from operations for the thirteen week and twenty-six week periods ended November 29, 2003, are lease termination costs of $1.9 million and $3.9 million, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion 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 December 19, 2003.

GENERAL OVERVIEW

RECENT DEVELOPMENTS IN OUR EXIT FROM THE SKATEPARK BUSINESS

As previously disclosed by us, 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 November 29, 2003, we have closed four skateparks: Bakersfield, California; Denver, Colorado; Phoenix, Arizona; and Atlanta, Georgia. The Denver, Phoenix and Atlanta parks closed in the first quarter of Fiscal 2004. Of the eight skateparks that we continue to operate, we have reached agreements with the landlords to close five 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 six to eighteen months.

Our operating results for the second quarter of Fiscal 2004 include pre-tax lease termination costs of $1.9 million related to two skatepark lease termination agreements that were reached during the quarter for parks that we continued to operate as of November 29, 2003; and our operating results for the first six months of Fiscal 2004 include pre-tax lease termination costs of $3.9 million related to three lease termination agreements that were reached during such period for parks that we continued to operate as of November 29, 2003. As discussed further in Note 5 to the Condensed Consolidated Financial Statements, the operating results for closed skateparks are presented as discontinued operations beginning in the period the skatepark is closed.

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.

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; $2.1 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 separately estimate what our effective tax rate will be domestically and internationally for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate for each of these jurisdictions. As the fiscal year progresses, we refine our estimate 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.

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						TWENTY-SIX WEEKS ENDED

				NOVEMBER 29,			NOVEMBER 30,			NOVEMBER 29,			NOVEMBER 30,
				2003			2002			2003			2002

Retail sales					36.3	%		36.8	%		31.2	%		30.8	%
National sales					36.6			32.3			40.1			41.0
International sales					27.1			30.9			28.7			28.2

Net sales					100.0			100.0			100.0			100.0
Cost of sales					51.8			52.5			53.5			56.6

Gross profit					48.2			47.5			46.5			43.4
Operating expenses:
	Retail				23.7			26.4			16.5			17.6
	Marketing, advertising and promotion				9.0			9.6			8.1			9.0
	Selling, distribution and administrative				20.8			18.7			15.4			14.2
	Lease termination costs				2.9			0.0			2.0			0.0
	Amortization of intangibles				0.1			0.3			0.1			0.2

			Total operating expenses		56.5			55.0			42.2			40.9

		Income (loss) from operations			(8.3	)		(7.5	)		4.3			2.5
Interest (income), net					(0.2	)		(0.3	)		(0.1	)		(0.2	)
Other (income) expense, net					0.7			(0.8	)		0.2			0.1

		Income (loss) from continuing operations before income taxes and minority interest			(8.8	)		(6.4	)		4.2			2.6
Income tax (benefit) expense					0.6			(1.8	)		0.9			0.8
Minority interest					0.6			1.0			0.7			0.5

Income (loss) from continuing operations					(10.0	)		(5.6	)		2.6			1.3
Loss from discontinued operations, net of tax					(0.3	)		(0.6	)		(2.6	)		(0.3	)
Net income (loss)					(10.3	)%		(6.2	)%		0.0	%		1.0	%

QUARTERLY PERIOD ENDED NOVEMBER 29, 2003 (“Q2 FISCAL 2004”), AS COMPARED TO QUARTERLY PERIOD ENDED NOVEMBER 30, 2002 (“Q2 FISCAL 2003”)

Net Sales

Net sales for Q2 Fiscal 2004 increased 9.5% to $65.2 million from $59.5 million for Q2 Fiscal 2003 and included a 15.2% year-over-year increase in comparable store sales worldwide (excluding merchandise revenues from skateparks expected to be closed and revenues from concessions and skate sessions at all of our skateparks). The sales increase was the net effect of increases in National and Retail sales, favorable variances in foreign exchange rates partially offset by a decrease in International sales, as discussed below.

Retail. Retail sales, which consist solely of sales through our U.S. retail stores and skatepark sessions and concessions, increased 8.3% to $23.7 million in Q2 Fiscal 2004 from $21.9 million in Q2 Fiscal 2003. This increase was driven by a 14.0% year-over-year increase in comparable U.S. store sales (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 footware line. Comparable revenues from concessions and skate sessions at our skateparks declined 21.9% year-over-year.

During Q2 Fiscal 2004, we reduced our U.S. retail store count to 149 total stores as a result of the closing of four stores. No skateparks were closed during Q2 Fiscal 2004. As discussed above under the caption “Recent Developments In Our Exit from the Skatepark Business,” 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 six to eighteen months.

National. National sales, which include all U.S. sales except sales through our U.S. retail stores, increased 24.1% to $23.9 million in Q2 Fiscal 2004 from $19.2 million in Q2 Fiscal 2003. This increase was primarily due to a 3.2% increase in average selling prices year-over-year and an 18.9% increase in units sold, which resulted from a greater-than-expected level of at-once orders for the quarter. The strongest increases in unit sales were in our women’s footwear business.

International. International sales, which include sales through our European stores, decreased 4.1% to $17.6 million in Q2 Fiscal 2004 from $18.4 million in Q2 Fiscal 2003. This decrease was primarily due to a $400,000 decrease in European sales and an approximately $600,000 decrease in sales in Mexico and South America, partially offset by a $200,000 increase in Canadian sales. The $400,000 sales decrease in Europe resulted from a $1.7 million decrease in sales on a constant-dollar basis, partially offset by a $1.3 million favorable variance in exchange rates relating to our direct operations in Europe. Sales by such operations are made in euros and British sterling and benefited from the weakening U.S. dollar during the quarter. The sales decline in Europe resulted from a 32.4% decrease in units sold, primarily due to a shift in shipments from Q2 Fiscal 2004 to Q1 Fiscal 2004 as compared to the comparable periods in the prior year, and an ongoing shift in fashion trends in Europe from skate-oriented footwear to fashionable athletic footwear.

Gross Profit

Gross profit increased 11.3% to $31.4 million in Q2 Fiscal 2004 from $28.3 million in Q2 Fiscal 2003. As a percentage of net sales, gross profit increased to 48.2% for Q2 Fiscal 2004, versus 47.5% for Q2 Fiscal 2003 as a result of improved gross margins in the national and international sales channels, partly offset by decreased retail gross margins. Domestically, retail gross profit decreased as a percentage of sales from 57.6% in Q2 Fiscal 2003 to 56.2% in Q2 Fiscal 2004 as a result of decreased skatepark session revenues and decreased average selling prices, primarily due to the turnover of slow-moving inventory. National gross profits increased as a percentage of sales from 39.0% in Q2 Fiscal 2003 to 40.7% in Q2 Fiscal 2004 largely due to increased average selling prices in Q2 Fiscal 2004 and a reduction in wholesale markdowns versus those taken in Q2 Fiscal 2003. Internationally, gross profit increased as a percentage of sales from 44.4% in Q2 Fiscal 2003 to 47.7% in Q2 Fiscal 2004 driven primarily by favorable fluctuations in exchange rates between the euro and U.S. dollar.

Loss from Operations

We incurred a loss from operations of $5.4 million in Q2 Fiscal 2004 versus $4.4 million in Q2 Fiscal 2003. Operating expenses in Q2 Fiscal 2004 increased 12.6% to $36.8 million versus $32.7 million in Q2 Fiscal 2003 largely due to $1.9 million of skatepark lease termination costs incurred in Q2 Fiscal 2004. See “Recent Developments in Our Exit from the Skatepark Business,” above. As a percentage of sales, operating expenses, excluding lease termination costs, decreased to 53.6% versus 55.0% a year ago. The material components of the decrease in operating expenses are discussed below.

Retail. Retail expenses decreased slightly to $15.4 million in Q2 Fiscal 2004 versus $15.7 million in Q2 Fiscal 2003 primarily due to the net reduction of nine 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 2.6% to $5.9 million in Q2 Fiscal 2004 from $5.7 million in Q2 Fiscal 2003, primarily due to increases in athlete sponsorships.

Selling, distribution and administrative. Selling, distribution and administrative expenses increased 21.3% to $13.5 million in Q2 Fiscal 2004 from $11.1 million in Q2 Fiscal 2003, primarily as a result of an increase in bonus expense of $1.2 million due to the likely achievement of performance targets for Fiscal 2004, and net increased costs of approximately $700,000 related to our European business. The net increase in costs related to our European business was a result of an approximately $500,000 increase related to changes in exchange rates between European currencies, primarily the euro, and the U.S. dollar and by approximately $200,000 in increased costs on a constant-dollar basis, which was primarily a result of the acquisition of Max MadHouse.

Lease termination costs. Please see the discussion of these costs under the caption “Recent Developments in Our Exit from the Skatepark Business.”

Amortization of intangibles. Amortization of intangibles decreased slightly to $92,000 in Q2 Fiscal 2004 compared to $177,000 in Q2 Fiscal 2003, as a result of certain assets acquired in the Pro-tec transaction being completely amortized in Fiscal 2003.

Interest (Income), Net

Interest (income), net decreased to $126,000 in Q2 Fiscal 2004 from $157,000 in Q2 Fiscal 2003, primarily due to lower interest rates received on monies invested.

Other (Income) Expense, Net

Other (income) expense, net, primarily consists of royalty payments received from the non-footwear related licensing of our trademarks, exchange rate gains and losses, and rental income. Other (income) expense, net, decreased to $453,000 of expense for Q2 Fiscal 2004 from $502,000 of income for Q2 Fiscal 2003, primarily due to unfavorable fluctuations in foreign currency exchange rates in Europe and Mexico.

Income Tax Expense

Income tax expense increased to $399,000 in Q2 Fiscal 2004 from a $1.1 million benefit in Q2 Fiscal 2003. The increase in income tax expense and related effect on our effective tax rate are attributable to no tax benefit being recognized against losses sustained by our U.S. operations in Q2 Fiscal 2004 offset by income tax expense provided against profits generated offshore. 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.

In future periods, we expect our effective tax rate to fluctuate as the mix between taxable income or loss generated in the U.S. and foreign jurisdictions changes. In that regard, we expect our effective tax rate for Fiscal 2004 to be in the range of approximately 26% to 29%.* Additionally, due primarily to the closure of skateparks, we expect our net operating loss carryforwards to reach approximately $30 million. Since we anticipate providing a full valuation allowance against these net operating loss carryforwards, we expect our federal tax rate for U.S. earnings, if any, to be zero for the next few years, and our state tax rate for U.S. earnings, if any, to be seven percent.* See “Critical Accounting Policies – Taxes.”

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 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.

Minority Interest

Minority interest decreased to $417,000 in Q2 Fiscal 2004 from $594,000 in Q2 Fiscal 2003, primarily as a result of decreased earnings from our Mexico subsidiary in Q2 Fiscal 2004.

Loss from Discontinued Operations, Net of Tax

As discussed more fully above under the caption “Recent Developments in Our Exit from the Skatepark Business,” 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 August 30, 2003, and the closure of one Triple Crown specialty retail store during Q2 Fiscal 2004. Losses from discontinued operations decreased to $163,000 in Q2 Fiscal 2004 from $362,000 in Q2 Fiscal 2003 primarily as a result of losses incurred in Q2 Fiscal 2003 by the four skateparks that were closed prior to Q2 Fiscal 2004. 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.

TWENTY-SIX WEEK PERIOD ENDED NOVEMBER 29, 2003 (“FISCAL 2004 SIX MONTHS”), AS COMPARED TO TWENTY-SIX WEEK PERIOD ENDED NOVEMBER 30, 2002 (“FISCAL 2003 SIX MONTHS”).

Net Sales

Net sales for the Fiscal 2004 Six Months increased 6.2% to $193.9 million from $182.5 million for the Fiscal 2003 Six Months and included a 14.3% year-over-year increase in comparable store sales worldwide (excluding merchandise revenues from skateparks expected to be closed and revenues from concessions and skate sessions at all of our skateparks). The sales increase was the net effect of increases in Retail, National and International sales and favorable variances in foreign exchange rates as discussed below.

Retail. Retail sales, which consist solely of sales through our U.S. retail stores and skatepark sessions and concessions, increased 7.5% to $60.5 million in the Fiscal 2004 Six Months from $56.3 million in the Fiscal 2003 Six Months. This increase was driven by a year-over-year increase in comparable U.S. store sales (excluding merchandise revenues from skateparks expected to be closed and revenues from concessions and skate sessions at all of our skateparks) of 13.3%. The comparable store sales increase was fueled by growth in our women’s and kids footwear lines as well as apparel. Comparable revenues from concessions and skate sessions at our eight skateparks declined 30.6% year-over-year.

During the Fiscal 2004 Six Months, we reduced our U.S. retail store count to 149 total stores as a result of closing three skateparks and the net closing of five stores. As discussed above under the caption “Recent Developments In Our Exit from the Skatepark Business,” 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 six to eighteen months.

National. National sales, which include all U.S. sales except sales through our U.S. retail stores, increased 3.9% to $77.8 million in the Fiscal 2004 Six Months from $74.8 million in the Fiscal 2003 Six Months. This increase was primarily due to a 7.2% increase in units sold, partially offset by a 4.7% decrease in average selling prices year-over-year. The strongest increases in unit sales were in our women’s and kids footwear business. Additionally, we had an approximately $1.0 million or 11.6% year-over-year increase in revenues from the VANS Warped Tour®.

International. International sales, which include sales through our European stores, increased 8.1% to $55.6 million in the Fiscal 2004 Six Months from $51.4 million in the Fiscal 2003 Six Months. This increase was primarily due to a $4.0 million increase in European sales and a $1.0 million increase in royalties from our licensee for Japan, partially offset by an approximately $700,000 decrease in sales in Central America. The $4.0 million sales increase in Europe resulted from a $4.7 million favorable variance in exchange rates relating to our direct operations in Europe, partially offset by a $700,000 decrease in sales on a constant-dollar basis. The sales decline resulted from a 3.6% decrease in units sold and a 6.0% decrease in local currency average selling prices.

Gross Profit

Gross profit increased 13.9% to $90.2 million in the Fiscal 2004 Six Months from $79.2 million in the Fiscal 2003 Six Months. As a percentage of net sales, gross profit increased to 46.5% for the Fiscal 2004 Six Months, versus 43.4% for the Fiscal 2003 Six Months as a result of improved gross margins in the National and International sales channels. Domestically, retail gross profit as a percentage of sales was relatively flat at approximately 56.4% on a period-to-period basis. National gross profits increased as a percentage of sales from 32.6% in the Fiscal 2003 Six Months to 34.7% in the Fiscal 2004 Six Months largely due to increased margin contribution from the VANS Warped Tour® in the Fiscal 2004 Six Months and a reduction in wholesale markdowns versus those taken in the

Fiscal 2003 Six Months. Internationally, gross profit increased as a percentage of sales from 44.8% in the Fiscal 2003 Six Months to 52.3% in the Fiscal 2004 Six Months driven primarily by favorable fluctuations in exchange rates between the euro and U.S. dollar and increased license income from Japan.

Income from Operations

We had income from operations of $8.4 million in the Fiscal 2004 Six Months versus $4.6 million in the Fiscal 2003 Six Months. Operating expenses in the Fiscal 2004 Six Months increased 9.6% to $81.8 million versus $74.7 million in the Fiscal 2003 Six Months largely due to $3.9 million of skatepark lease termination costs incurred in the Fiscal 2004 Six Months. See “Recent Developments in Our Exit from the Skatepark Business,” above. As a percentage of sales, operating expenses, excluding lease termination costs, decreased to 40.2% versus 40.9% a year ago. The material components of the decrease in operating expenses are discussed below.

Retail. Retail expenses increased slightly to $32.1 million in the Fiscal 2004 Six Months versus $32.0 million in the Fiscal 2003 Six Months, primarily due to increased labor and related costs in order to support the increased retail stales volume discussed above, partially offset by cost savings resulting from the net closing of two stores since the beginning of Fiscal 2003.

Marketing, advertising and promotion. Marketing, advertising and promotion expenses decreased 4.1% to $15.7 million in the Fiscal 2004 Six Months from $16.4 million in the Fiscal 2003 Six Months, primarily due to planned decreases in promotional activities related to trade shows and advertising costs.

Selling, distribution and administrative. Selling, distribution and administrative expenses increased 15.4% to $29.9 million in the Fiscal 2004 Six Months from $25.9 million in the Fiscal 2003 Six Months, primarily due to (i) net increased costs of approximately $1.2 million related to our European business, (ii) a $1.9 million increase in bonus expense due to the likely achievement of performance targets for Fiscal 2004, and (iii) $500,000 of employee severance costs incurred in Q1 Fiscal 2004 . The net increase in costs related to our European business was a result of an approximately $1.3 million increase related to changes in exchange rates between European currencies, primarily the euro, and the U.S. dollar.

Lease termination costs. Please see the discussion of these costs under the caption “Recent Developments in Our Exit from the Skatepark Business.”

Amortization of intangibles. Amortization of intangibles decreased slightly to $258,000 in the Fiscal 2004 Six Months compared to $365,000 in the Fiscal 2003 Six Months, as a result of certain assets acquired in the Pro-tec transaction being completely amortized in Fiscal 2003.

Interest (Income), Net

Interest (income), net decreased to $185,000 in the Fiscal 2004 Six Months from $425,000 in the Fiscal 2003 Six Months, primarily due to lower interest rates received on monies invested.

Other (Income) Expense, Net

Other (income) expense, net, primarily consists of royalty payments received from the non-footwear related licensing of our trademarks, exchange rate gains and losses, and rental income. Other (income) expense, net, increased to $376,000 of expense for the Fiscal 2004 Six Months from $260,000 of expense for the Fiscal 2003 Six Months, primarily due to unfavorable fluctuations in foreign currency exchange rates in Europe and Mexico and the non-recurrence of foreign currency transaction losses that occurred in Q1 Fiscal 2003 related to our business in Brazil and Argentina.

Income Tax Expense

Income tax expense increased to $1.7 million in the Fiscal 2004 Six Months from $1.5 million in the Fiscal 2003 Six Months, as a result of increased income from continuing operations, offset by a lower effective tax rate. Our effective tax rate was 20.8% in the Fiscal 2004 Six Months versus 31.8% in the Fiscal 2003 Six Months. The decrease in our effective tax rate was due to the absence of U.S. taxes in the Fiscal 2004 Six Months and the impact of lower tax rates internationally in the Fiscal 2004 Six Months versus the Fiscal 2003 Six Months. 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.

In future periods, we expect our effective tax rate to fluctuate as the mix between taxable income or loss generated in U.S. and foreign jurisdictions changes. In that regard, we expect our effective tax rate for Fiscal 2004 to be in the range of approximately 26% to 29%.* Additionally, due primarily to the closure of skateparks, we expect our net operating loss carryforwards to reach approximately $30 million. Since we anticipate providing a full valuation allowance against these net operating loss carryforwards, we expect our federal tax rate for U.S. earnings, if any, to be zero for the next few years, and our state tax rate for U.S. earnings, if any, to be seven percent.* See “Critical Accounting Policies – Taxes.”

Minority Interest

Minority interest increased to $1.5 million in the Fiscal 2004 Six Months from $1.0 in the Fiscal 2003 Six Months, primarily as a result of increased income produced by the VANS Warped Tour®.

Loss from Discontinued Operations, Net of Tax

As discussed more fully above under the caption “Recent Developments in Our Exit from the Skatepark Business,” 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 August 30, 2003, and the closure of a Triple Crown specialty retail store during Q2 Fiscal 2004. Losses from discontinued operations increased to $5.1 million in the Fiscal 2004 Six Months from $510,000 in the Fiscal 2003 Six Months primarily as a result of lease termination charges of $4.7 million incurred in connection with two of the three skateparks that were closed in the Fiscal 2004 Six 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. At November 29, 2003, we had $112.1 million in working capital and $63.9 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 Six Months primarily as a result of 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.

During the Fiscal 2004 Six Months operating activities provided $10.0 million of cash, including a usage of $6.8 million of cash in connection with discontinued operations, versus $11.0 million of cash provided by operating activities in the Fiscal 2003 Six Months, which included cash usage of $131,000 from discontinued operations. The net increase in operating cash flow from continuing operations was the result of a $2.8 million increase in income from continuing operations, a higher reduction in inventory balances in the Fiscal 2004 Six Months compared to the same period last year, offset by a larger increase in accounts receivable, a smaller increase in prepaid expenses, and a reduction in lease termination liabilities in the Fiscal 2004 Six Months compared to the same period last year.

Accounts receivable increased $8.7 million to $34.3 million during the Fiscal 2004 Six Months, and inventory levels decreased from $64.0 million at May 31, 2003, to $42.6 million at November 29, 2003, primarily due to the seasonal increase in our U.S. wholesale business in connection with the back-to-school selling season. Compared to a year ago, our inventory levels have decreased 7.2%. 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 “Recent Developments in Our Exit from the Skatepark Business,” in the Fiscal 2004 Six Months we had a net reduction of $4.5 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 $14.1 million during the Fiscal 2004 Six Months in connection with lease termination costs to exit the skatepark business. Of the amounts paid, $6.4 million

related to skateparks classified as discontinued operations in the accompanying condensed consolidated financial statements. At November 29, 2003, our balance sheet included lease termination liabilities of $3.8 million and liabilities held in connection with disposal activities aggregating $108,000, which represents lease termination liabilities related to skateparks classified as discontinued operations.

Investing activities provided cash of $1.8 million in the Fiscal 2004 Six Months primarily as a result of the repayment of the $5.1 million note receivable described above. This was partially offset by $2.8 million in capital expenditures and approximately $497,000 paid in connection with the purchase of certain of the assets and liabilities of Max MadHouse. In the Fiscal 2003 Six Months, investing activities provided $16.7 million, due mainly to net sales of marketable debt securities of $24.0 million, offset by capital expenditures of $6.4 million and approximately $1.0 million paid in connection with the acquisition of Sunspot. Capital expenditures were higher in the Fiscal 2003 Six Months than in the Fiscal 2004 Six Months as a result of new retail store and skatepark openings.

Cash used in financing activities was $1.5 million in the Fiscal 2004 Six Months, which was primarily the net result of cash outflows of $909,000 for net repayments of long-term debt and $814,000 in dividends paid to a minority shareholder of one of our subsidiaries, partially offset by $195,000 in proceeds from the issuance of common stock. In the Fiscal 2003 Six Months, financing activities used $3.1 million in cash, primarily consisting of $2.2 million in net cash outflows to purchase common stock pursuant to our stock repurchase program, $178,000 in net repayments of long-term debt, and $734,000 in dividends paid to the minority shareholder of one of our subsidiaries.

The following table summarizes our contractual payment obligations and commitments as of November 29, 2003:


		PAYMENT OBLIGATIONS BY FISCAL YEAR (IN THOUSANDS)

		2004		2005		2006		2007		2008		THEREAFTER		TOTAL

Operating leases		$	6,455	$	11,808	$	10,578	$	10,078	$	7,933	$	20,445	$	67,297
Long-term debt			109		1,240		5		5		5		250		1,614
Athlete license agreements			1,032		916		399		142		—		—		2,489

	Total	$	7,596	$	13,964	$	10,982	$	10,225	$	7,938	$	20,695	$	71,400

At November 29, 2003, we had firm commitments to purchase inventory in the amount of $28.7 million during the third and fourth quarters of Fiscal 2004. These commitments included contingent liabilities under open letters of credit with foreign suppliers aggregating $637,000.

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 November 29, 2003, $637,000 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 November 29, 2003, the aggregate outstanding balance under the note was $1.2 million.

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 Six Months.

Capital Expenditures

Our future commitments for capital expenditures are primarily related to the opening and remodeling of retail stores. We plan to open three stores and remodel, re-size or relocate eight existing stores during the remainder of Fiscal 2004. We estimate the aggregate cost of these openings, remodels and relocations to be approximately $1.9 million.

Capital Resources

Our liquid asset position at November 29, 2003, consisted of cash and cash equivalents of $63.9 million. This compares to cash and cash equivalents of $52.8 million at May 31, 2003. We believe our capital resources will be sufficient to fund our operations and capital expenditures and anticipated growth plan for the foreseeable future.* Approximately $36.6 million of our liquid asset position as of November 29, 2003, is held by European subsidiaries of Vans and could be subject to U.S. income taxes if it is repatriated to Vans.

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 an agreement. Additionally, other direct costs associated with closing skateparks will be expensed in future periods as they are incurred.

SEASONALITY

The following table contains unaudited selected quarterly financial data for the eight quarters ended November 29, 2003, 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

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.

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 ENDED

		NOVEMBER 29,			AUGUST 30,			MAY 31,			MARCH 1,			NOVEMBER 30,			AUGUST 31,			MAY 31,			MARCH 2,
		2003			2003			2003			2003			2002			2002			2002			2002

STATEMENT OF OPERATIONS DATA:
	Net sales	$	65,183		$	128,687		$	62,373		$	80,769		$	59,503		$	123,031		$	62,464		$	80,253
	Gross profit		31,446			58,765			29,224			38,188			28,263			50,971			25,073			36,392
	Asset impairment charges		—			—			1,213			12,509			—			—			1,612			—
	Goodwill impairment charges		—			—			4,550			—			—			—			—			—
	Lease termination charges		1,921			1,971			7,893			—			—			—			—			—
	Income (loss) from continuing operations		(6,526	)		11,553			(19,542	)		(7,245	)		(3,304	)		5,569			(11,023	)		600
	Income (loss) from discontinued operations, net of tax		(163	)		(4,925	)		(3,034	)		(1,961	)		(362	)		(148	)		(3,911	)		(117	)
	Net income (loss)	$	(6,689	)	$	6,628		$	(22,576	)	$	(9,206	)	$	(3,666	)	$	5,421		$	(14,934	)	$	483
AS A PERCENTAGE OF NET SALES:
	Net sales		100	%		100	%		100	%		100	%		100	%		100	%		100	%		100	%
	Gross profit		48			46			47			47			47			41			40			45
	Asset impairment charges		0			0			2			15			0			0			3			0
	Goodwill impairment charges		0			0			7			0			0			0			0			0
	Lease termination charges		3			2			13			0			0			0			0			0
	Income (loss) from continuing operations		(10	)		9			(31	)		(9	)		(6	)		5			(18	)		1
	Income (loss) from discontinued operations, net of tax		0			(4	)		(5	)		(2	)		(1	)		0			(6	)		0
	Net income		(10	)		5			(36	)		(11	)		(6	)		4			(24	)		1
	Comparable store sales Increase (decrease)		15.2	%		13.7	%		9.0	%		(6.6	)%		(9.3	)%		(4.9	)%		(7.4	)%		(5.1	)%

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.

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 November 29, 2003, we held $63.9 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 risks. A 1% decline in the annual yield on cash and cash equivalents would decrease our interest income by approximately $639,000.

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 November 29, 2003, we had $17.7 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.

At November 29, 2003, we also had $1.5 million outstanding in foreign currency forward contracts to purchase U.S. dollars using Japanese yen at an average contract rate of 110.9 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 November 29, 2003, aggregated a loss of $789,000, 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 inventory related to the foreign exchange contacts is sold.

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 $7.6 million and $4.8 million, respectively, for Q2 Fiscal 2004 and $30.6 million and $10.8 million, respectively for the 2004 Fiscal Six 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.

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. No material changes in the status of these matters have occurred since the filing of our Form 10-K for Fiscal 2003, and no amounts have been recorded in our condensed consolidated financial statements in connection with 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 a lawsuit filed by us against the plaintiff, her husband and other individuals and entities in which we alleged that they engaged in a conspiracy to obtain unauthorized payments from certain of our factories in China. Mrs. Brabson alleged causes of action for invasion of privacy, trespass, and intentional infliction of emotional distress relating to the investigation conducted in connection with that litigation. An agreement to settle this case was reached in Q1 Fiscal 2004, and settlement documents are still being finalized. 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.

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. The complaint seeks compensatory damages in excess of $1.0 million, disgorgement of profits, and punitive damages. In Q2 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.

In addition to the foregoing, from time to time we are the subject of claims in the ordinary course of our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On October 28, 2003, we held our 2003 Annual Meeting of Stockholders. The following matters were voted on at the meeting: (i) the election of directors; (ii) the approval of Amendment No. 3 to the Vans, Inc. 2000 Long-Term Incentive Plan; (iii) the approval of a non-binding resolution to re-ratify and re-approve the Vans, Inc. Stockholder Rights Plan; and (iv) the ratification and approval of KPMG LLP as the Company’s independent auditors for Fiscal 2004.

The results of the voting on these matters (including the names of all persons elected as directors) are set forth below:


			VOTES
PROPOSAL	VOTES FOR		AGAINST/WITHHELD		ABSTENTIONS		BROKER NON-VOTES

Proposal No. 1
Election of Directors
Nominees:
Walter E. Schoenfeld		15,554,928		297,137		0		0
Gary H. Schoenfeld		15,707,228		144,837		0		0
Wilbur J. Fix		15,591,792		1,260,273		0		0
Gerald Grinstein		15,709,230		142,835		0		0
James R. Sulat		15,683,122		168,943		0		0
Kathleen M. Gardarian		14,620,124		1,231,941		0		0
Lisa M. Douglas		14,619,424		1,232,641		0		0
Charles G. Armstrong		15,682,020		170,045		0		0
Leonard R. Wilkens		14,620,132		1,231,933		0		0


			VOTES
PROPOSAL	VOTES FOR		AGAINST/WITHHELD		ABSTENTIONS		BROKER NON-VOTES

Approval of Proposal No. 2
Amendment No. 3 to 2000 Long-Term Incentive Plan		8,986,610		3,618,879		3,213,303		33,273
Proposal No. 3
Approval of Stockholder Rights Plan		8,823,880		3,822,534		3,200,403		5,248
Proposal No. 4
Ratification of KPMG LLP as Independent Auditors for Fiscal 2004		15,852,065		35,957		1,394		0

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.


10.1		Employment Agreement between Vans, Inc. and Craig E. Gosselin, dated September 18, 2003

10.2		Employment Agreement between Vans, Inc, and Dana M. Guidice, dated October 10, 2003

31.1		Certification of Scott J. Blechman Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

31.2		Certification of Gary H. Schoenfeld Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

32.1		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 2002

32.2		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 two reports on Form 8-K during the quarterly period ended November 29, 2003. The first report was dated September 17, 2003, and disclosed our pre-announcement of financial results for Q1 Fiscal 2004. The second report was dated September 25, 2003, and disclosed our actual Q1 Fiscal 2004 financial results.

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: January 8, 2004	By:	/s/ Gary H. Schoenfeld

		GARY H. SCHOENFELD
		President and Chief Executive Officer

Date: January 8, 2004	By:	/s/ Scott J. Blechman

		SCOTT J. BLECHMAN
		Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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VANS INC 10-Q