-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PELcP99q9SexSn8ig9Hpm6htQiT5zNSGw7UpYQ+ji6B491H1JLmyAfxNwHxvhhcL xl/qBAbvBTKI1d78kqCyvw== 0000892569-97-002547.txt : 19970918 0000892569-97-002547.hdr.sgml : 19970918 ACCESSION NUMBER: 0000892569-97-002547 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19970912 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUIKSILVER INC CENTRAL INDEX KEY: 0000805305 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 330199426 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15131 FILM NUMBER: 97679698 BUSINESS ADDRESS: STREET 1: 1740 MONROVIA AVE CITY: COSTA MESA STATE: CA ZIP: 92627 BUSINESS PHONE: 7146451395 MAIL ADDRESS: STREET 1: 1740 MONROVIA AVE CITY: COSTA MESA STATE: CA ZIP: 92627 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED JULY 31, 1997 1 UNITED STATES 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 JULY 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-15131 QUIKSILVER, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (I.R.S. Employer (State or other jurisdiction of 33-0199426 incorporation or organization) Identification Number) 1740 MONROVIA AVENUE COSTA MESA, CALIFORNIA 92627 (Address of principal executive offices) (Zip Code) (714) 645-1395 (Registrant's telephone number, including area code) 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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The number of shares outstanding of issuer's Common Stock, par value $0.01 per share, at September 10, 1997 was 7,068,764 2 QUIKSILVER, INC. FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1. Financial Statements: Condensed Consolidated Balance Sheets July 31, 1997 and October 31, 1996............................................. 2 Condensed Consolidated Statements of Income Three Months Ended July 31, 1997 and 1996...................................... 3 Condensed Consolidated Statements of Income Nine Months Ended July 31, 1997 and 1996....................................... 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended July 31, 1997 and 1996....................................... 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 7 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8K................................................ 11 SIGNATURE............................................................................... 12
1 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements QUIKSILVER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 31, OCTOBER 31, 1997 1996 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ............................. $ 2,299,000 $ 3,429,000 Trade accounts receivable, less allowance for doubtful accounts of $2,913,000 (1997) and $2,873,000 (1996) .............................. 51,151,000 44,554,000 Other receivables .................................... 2,554,000 2,182,000 Inventories - Note 2 ................................. 46,841,000 35,668,000 Prepaid expenses and other current assets ............ 2,183,000 2,027,000 ------------- ------------- Total current assets ............................ 105,028,000 87,860,000 Property and equipment, less accumulated depreciation and amortization of $9,012,000 (1997) and $8,027,000 (1996) 13,555,000 9,655,000 Trademark, less accumulated amortization of $1,603,000 (1997) and $1,486,000 (1996) ............... 1,539,000 1,532,000 Goodwill, less accumulated amortization of $3,608,000 (1997) and $3,103,000 (1996) ............... 17,965,000 15,005,000 Other assets ............................................. 1,180,000 1,528,000 ------------- ------------- Total assets .................................... $ 139,267,000 $ 115,580,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit ....................................... $ 16,220,000 $ 8,211,000 Accounts payable ...................................... 15,621,000 12,823,000 Accrued liabilities ................................... 8,549,000 10,212,000 Current portion of long term debt ..................... 208,000 240,000 Income taxes payable .................................. 1,164,000 727,000 ------------- ------------- Total current liabilities ....................... 41,762,000 32,213,000 Long term debt ........................................... 9,426,000 2,640,000 ------------- ------------- Total liabilities ............................... 51,188,000 34,853,000 ------------- ------------- Stockholders' equity Preferred stock, $.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none ...................................... -- -- Common stock, $.01 par value, authorized shares - 30,000,000; issued and outstanding shares - 7,068,764 (1997) and 6,965,346 (1996) ..... 71,000 70,000 Additional paid-in-capital ............................ 20,247,000 18,971,000 Retained earnings ..................................... 73,870,000 64,399,000 Treasury stock, 130,000 shares ........................ (3,054,000) (3,054,000) Cumulative foreign currency translation adjustment .... (3,055,000) 341,000 ------------- ------------- Total stockholders' equity ...................... 88,079,000 80,727,000 ------------- ------------- Total liabilities and stockholders' equity ...... $ 139,267,000 $ 115,580,000 ============= =============
See notes to condensed consolidated financial statements. 2 4 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JULY 31, 1997 1996 ------------ ------------ Net sales .................................... $ 58,541,000 $ 49,008,000 Cost of goods sold ........................... 36,432,000 30,837,000 ------------ ------------ Gross profit .............................. 22,109,000 18,171,000 ------------ ------------ Operating expenses: Selling, general and administrative expense 16,100,000 13,445,000 Royalty income ............................ (393,000) (421,000) Royalty expense ........................... 731,000 665,000 ------------ ------------ Total operating expenses ............... 16,438,000 13,689,000 ------------ ------------ Operating income ............................. 5,671,000 4,482,000 Interest expense ............................. 526,000 186,000 Foreign currency gain ........................ (5,000) (15,000) Other expense ................................ 56,000 82,000 ------------ ------------ Income before provision for income taxes ..... 5,094,000 4,229,000 Provision for income taxes ................... 2,122,000 1,690,000 ------------ ------------ Net income ................................... $ 2,972,000 $ 2,539,000 ============ ============ Net income per common share .................. $ 0.42 $ 0.35 ============ ============ Weighted average common shares and equivalents outstanding ............... 7,107,000 7,268,000 ============ ============
See notes to condensed consolidated financial statements. 3 5 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JULY 31, 1997 1996 ------------- ------------- Net sales .................................... $ 165,266,000 $ 144,000,000 Cost of goods sold ........................... 101,388,000 88,221,000 ------------- ------------- Gross profit .............................. 63,878,000 55,779,000 ------------- ------------- Operating expenses: Selling, general and administrative expense 45,567,000 38,699,000 Royalty income ............................ (1,103,000) (812,000) Royalty expense ........................... 2,051,000 1,840,000 ------------- ------------- Total operating expenses ............... 46,515,000 39,727,000 ------------- ------------- Operating income ............................. 17,363,000 16,052,000 Interest expense ............................. 1,240,000 583,000 Foreign currency loss ........................ 75,000 33,000 Other expense ................................ 150,000 235,000 ------------- ------------- Income before provision for income taxes ..... 15,898,000 15,201,000 Provision for income taxes ................... 6,427,000 6,118,000 ------------- ------------- Net income ................................... $ 9,471,000 $ 9,083,000 ============= ============= Net income per common share .................. $ 1.34 $ 1.26 ============= ============= Weighted average common shares and equivalents outstanding ............... 7,063,000 7,216,000 ============= =============
See notes to condensed consolidated financial statements. 4 6 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 1997 1996 ------------ ------------ Cash flows from operating activities: Net income ....................................................... $ 9,471,000 $ 9,083,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization .............................. 2,709,000 1,924,000 Provision for doubtful accounts ............................ 1,104,000 1,904,000 Loss (gain) on sale of fixed assets ........................ 148,000 (15,000) Changes in operating assets and liabilities, net of effects of acquisition (Note 3): Trade accounts receivable ............................... (11,337,000) (10,005,000) Other receivables ....................................... 108,000 (831,000) Inventories ............................................. (11,137,000) (6,314,000) Prepaid expenses and other current assets ............... (180,000) 129,000 Other assets ............................................ 590,000 (425,000) Accounts payable ........................................ 2,692,000 3,983,000 Accrued liabilities ..................................... (1,263,000) 928,000 Income taxes payable .................................... 627,000 2,652,000 ------------ ------------ Net cash (used in) provided by operating activities .. (6,468,000) 3,013,000 Cash flows from investing activities: Proceeds from sales of fixed assets .............................. 83,000 30,000 Capital expenditures ............................................. (6,962,000) (3,309,000) Acquisition of business (Note 3) ................................. (1,750,000) -- ------------ ------------ Net cash used in investing activities ................ (8,629,000) (3,279,000) Cash flows from financing activities: Borrowings on lines of credit .................................... 30,734,000 18,756,000 Payments on lines of credit ...................................... (25,126,000) (20,143,000) Borrowings on long-term debt ..................................... 7,640,000 -- Payments on long-term debt ....................................... (351,000) (63,000) Proceeds from stock option exercises ............................. 1,277,000 2,586,000 ------------ ------------ Net cash provided by financing activities ........................... 14,174,000 1,136,000 Effect of exchange rate changes on cash ............................. (207,000) (27,000) ------------ ------------ Net (decrease) increase in cash and cash equivalents ................ (1,130,000) 843,000 Cash and cash equivalents, beginning of period ...................... 3,429,000 3,461,000 ------------ ------------ Cash and cash equivalents, end of period ............................ $ 2,299,000 $ 4,304,000 ============ ============ Supplementary cash flow information: Cash paid during the period for: Interest ...................................................... $ 1,071,000 $ 569,000 ============ ============ Income taxes .................................................. $ 5,930,000 $ 4,657,000 ============ ============ Non-cash financing activity - Bank debt assumed in acquisition (Note 3) ..................... $ 2,682,000 $ -- ============ ============
See notes to condensed consolidated financial statements. 5 7 QUIKSILVER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three and nine months ended July 31, 1997 and 1996. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 1996 included in the Company's Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors. 2. Inventories consist of the following:
JULY 31, OCTOBER 31, 1997 1996 ----------- ----------- Raw Materials .............................. $13,266,000 $11,686,000 Work-In-Process ............................ 3,441,000 3,673,000 Finished Goods ............................. 30,134,000 20,309,000 ----------- ----------- $46,841,000 $35,668,000 =========== ===========
3. Effective July 1, 1997, the Company acquired the operations of Mervin Manufacturing, Inc., ("Mervin") the maker of two snowboard labels, Lib Tech and Gnu, and Bent Metal bindings, a conventional snowboard binding system. The initial purchase price was $4,582,000, which includes a cash payment of $1,750,000, assumed bank debt of $2,682,000 and transaction costs of $150,000. Under the terms of the purchase agreement, additional consideration aggregating $2,600,000 will be paid if Mervin achieves certain earnings goals in the remainder of fiscal 1997 and in each of the three years through fiscal 2000. The acquisition has been recorded using the purchase method and resulted in goodwill of $3,344,000, which is being amortized over 30 years. 4. Effective July 1, 1997, the Company's revolving line of credit with a U.S. bank was amended and restated (the "Agreement"). The agreement provides for (i) a revolving line of credit of up to $38,000,000, including a $17,000,000 sublimit for letters of credit and (ii) a $7,000,000 seven-year term loan. This revolving line of credit expires on May 3, 1999 and bears interest at 0.5% below the bank's reference rate or at 1.5% above LIBOR for borrowings committed to be outstanding for 30 days or longer. The term loan expires on July 1, 2004 and bears interest generally at 1.5% above LIBOR. The agreement contains restrictive covenants, the most significant of which relates to the maintenance of minimum tangible net worth, dividend restrictions and debt to tangible net worth requirements. At July 31, 1997, the Company was in compliance with such covenants. 6 8 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THREE MONTHS ENDED JULY 31, 1996 Net sales for the three months ended July 31, 1997 increased 19.5% to $58,541,000 from $49,008,000 in the comparable period of the prior year. Domestic net sales for the three months ended July 31, 1997 increased 24.5% to $38,216,000 from $30,701,000 in the comparable period of the prior year, and European net sales increased 11.0% to $20,325,000 from $18,307,000 for those same periods. As measured in French Francs, Quiksilver Europe's functional currency, net sales in the current year's quarter increased 27.4% compared to the prior year. Domestic men's sales increased 16.7% to $27,608,000 from $23,659,000 in the comparable period of the prior year, while domestic women's sales increased 34.9% to $9,501,000 from $7,042,000. From the date of acquisition, Mervin sales amounted to $1,107,000 for the current year's quarter. The domestic sales increase in men's resulted primarily from increased sales of Quiksilver Young Men's product. Domestic women's sales increases in the Quiksilver Roxy division were offset somewhat by lower shipments in the Raisins division. In Europe, men's sales increased 9.7% to $19,723,000 from $17,987,000, while women's sales increased 88.1% to $602,000 from $320,000. The gross profit margin for the three months ended July 31, 1997 increased to 37.8% from 37.1% in the comparable period of the prior year. The domestic gross profit margin was unchanged at 35.3%, and the European gross profit margin increased to 42.4% from 40.1% for those same periods. In Europe, the gross profit margin increased primarily due to a lower level of markdowns in the current quarter compared to last year to reduce remaining Spring and Summer inventories. Selling, general and administrative expense ("SG&A") for the three months ended July 31, 1997 increased 19.7% to $16,100,000 from $13,445,000 in the comparable period of the prior year. Domestic SG&A increased 12.1% to $9,729,000 from $8,679,000 in the comparable period of the prior year, and European SG&A increased 33.7% to $6,371,000 from $4,766,000 for those same periods. The increase in domestic SG&A was primarily due to higher personnel and other costs related to increased sales volume. The increase in European SG&A was primarily due higher personnel and other costs related to increased sales volume, along with increased advertising and sales management expenses. Net royalty expense for the three months ended July 31, 1997 increased 38.5% to $338,000 from $244,000 in the comparable period of the prior year. This increase was due primarily to increased royalty expense related to European sales. The Company receives domestic royalty income from its Mexico, Japan, wetsuit, watch, sunglass, and outlet store licensees as well as Raisins international licensees, and Quiksilver Europe pays royalties on European sales under a trademark agreement with Quiksilver International. Interest expense for the three months ended July 31, 1997 increased 182.8% to $526,000 from $186,000 in the comparable period of the prior year. This increase was primarily due to higher outstanding balances on the Company's domestic line of credit that resulted from increased working capital needs, borrowings to repurchase shares of the Company's stock in the three months ended October 31, 1996, and borrowings for investments in computer equipment. The effective income tax rate for the three months ended July 31, 1997, which is based on current estimates of the annual effective income tax rate, increased to 41.7% from 40.0% in the comparable period of the prior year. Increased income tax rates in France were substantially offset by the favorable results of an income tax audit in France. As a result of the above factors, net income for the three months ended July 31, 1997 increased 17.1% to $2,972,000 or $0.42 per share from $2,539,000 or $0.35 per share in the comparable period of the prior year. 7 9 NINE MONTHS ENDED JULY 31, 1997 COMPARED TO NINE MONTHS ENDED JULY 31, 1996 Net sales for the nine months ended July 31, 1997 increased 14.8% to $165,266,000 from $144,000,000 in the comparable period of the prior year. Domestic net sales for the nine months ended July 31, 1997 increased 16.7% to $106,815,000 from $91,515,000 in the comparable period of the prior year, and European net sales increased 11.4% to $58,451,000 from $52,485,000 for those same periods. As measured in French Francs, Quiksilver Europe's net sales in the first nine months of the current year increased 23.8% compared to the prior year. Domestic men's sales increased 7.2% to $72,454,000 from $67,579,000 in the comparable period of the prior year, while domestic women's sales increased 38.9% to $33,254,000 from $23,936,000. The domestic sales increase in men's resulted primarily from increased sales in the Quiksilver Young Men's and Quiksilver Boys divisions, which were offset somewhat by lower sales of Pirate Surf and private label product. Domestic women's sales increased in both the Quiksilver Roxy and Raisins Divisions. In Europe, men's sales increased 10.8% to $55,979,000 from $50,518,000, while women's sales increased 25.7% to $2,472,000 from $1,967,000. The gross profit margin for the nine months ended July 31, 1997 was unchanged from the comparable period of the prior year at 38.7%. The domestic gross profit margin decreased to 35.3% from 35.9% in the comparable period of the prior year, and the European gross profit margin increased to 44.7% from 43.7% for those same periods. The decrease in the domestic gross profit margin resulted primarily from the impact of selling excess raw materials during the three months ended January 31, 1997 at margins that were less than normal wholesale and from markdowns taken during the three months ended April 30, 1997 to sell Pirate Surf product, which has been removed from future season production plans. In Europe, the gross profit margin increased primarily due to a lower level of markdowns in the three months ended July 31, 1997 in comparison to the prior year. Selling, general and administrative expense ("SG&A") for the nine months ended July 31, 1997 increased 17.7% to $45,567,000 from $38,699,000 in the comparable period of the prior year. Domestic SG&A increased 14.5% to $27,721,000 from $24,212,000 in the comparable period of the prior year, and European SG&A increased 23.2% to $17,846,000 from $14,487,000 for those same periods. The increase in domestic SG&A was primarily due to higher personnel and other costs related to increased sales volume. The increase in European SG&A was primarily due to higher personnel and other costs related to increased sales volume, along with increased advertising and sales management expenses in the three months ended July 31, 1997. Net royalty expense for the nine months ended July 31, 1997 decreased 7.8% to $948,000 from $1,028,000 in the comparable period of the prior year. This decrease was due primarily to increased domestic royalty income from increased sales by licensees, which was partially offset by increased royalty expense related to European sales. Interest expense for the nine months ended July 31, 1997 increased 112.7% to $1,240,000 from $583,000 in the comparable period of the prior year. This increase was primarily due to higher outstanding balances on the Company's domestic line of credit that resulted from increased working capital needs, borrowings to repurchase shares of the Company's stock in the three months ended October 31, 1996, and borrowings for investments in computer equipment. The effective income tax rate for the nine months ended July 31, 1997, which is based on current estimates of the annual effective income tax rate, increased to 40.4% from 40.2% in the comparable period of the prior year. Increased income tax rates in France were substantially offset by the favorable results of an income tax audit in France. As a result of the above factors, net income for the nine months ended July 31, 1997 increased 4.3% to $9,471,000 or $1.34 per share from $9,083,000 or $1.26 per share in the comparable period of the prior year. 8 10 FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY The Company finances its capital investments and seasonal working capital requirements with funds generated by operations and its bank revolving lines of credit. Net cash used in operating activities for the nine months ended July 31, 1997 was $6,468,000 compared to net cash provided by operating activities of $3,013,000 in the comparable period of the prior year. This $9,481,000 increase in cash used in operating activities was due primarily to the increase in inventories. Cash paid for inventories net of changes in accounts payable increased by $6,114,000 to support increased sales for the Fall and Holiday seasons of the current year, both domestically and in Europe, and from accelerated raw material purchases and finished goods production. The Company uses independent contractors for cutting, sewing and other manufacturing functions and intends to continue to use independent contractors in the foreseeable future. Accordingly, the Company has avoided capital expenditures for these manufacturing functions. For the nine months ended July 31, 1997, capital expenditures increased 110.4% to $6,962,000 from $3,309,000 in the comparable period of the prior year primarily from increased investment in computer systems both domestically and in Europe. As described in Note 3 to the Condensed Consolidated Financial Statements, effective July 1, 1997, the Company acquired the operations of Mervin Manufacturing, Inc., ("Mervin") the maker of two snowboard labels, Lib Tech and Gnu, and Bent Metal bindings, a conventional snowboard binding system. Cash paid during the three months ended July 31, 1997, amounted to $1,750,000. The Company also assumed bank debt of $2,682,000, which was repaid during the quarter with proceeds from the Company's existing domestic line of credit. Additional consideration of up to $2,600,000 will be paid if Mervin achieves certain earnings goals in the remainder of fiscal 1997 and in each of the three years through fiscal 2000. Effective July 1, 1997, the Company's revolving line of credit with a U.S. bank was amended and restated (the "Agreement"). The agreement provides for (i) a revolving line of credit of up to $38,000,000, including a $17,000,000 sublimit for letters of credit and (ii) a $7,000,000 seven-year term loan. This revolving line of credit expires on May 3, 1999 and bears interest at 0.5% below the bank's reference rate or at 1.5% above LIBOR for borrowings committed to be outstanding for 30 days or longer. The term loan expires on July 1, 2004 and bears interest generally at 1.5% above LIBOR. The agreement contains restrictive covenants, the most significant of which relates to the maintenance of minimum tangible net worth, dividend restrictions and debt to tangible net worth requirements. At July 31, 1997, the Company was in compliance with such covenants. The Company also has available lines of credit, both secured and unsecured, with banks in Europe that provide for maximum financing of approximately $22,000,000. During the nine months ended July 31, 1997, net cash provided by financing activities totaled $14,174,000 compared to $1,136,000 in the comparable period of the prior year. These additional borrowings during the first nine months of fiscal 1997 were used to fund the increase in inventories, capital expenditures and the acquisition of Mervin as discussed above. The net decrease in cash and cash equivalents for the nine months ended July 31, 1997 was $1,130,000 compared to an increase of $843,000 in the comparable period of the prior year. Cash and cash equivalents decreased $1,130,000 or 33.0% to $2,299,000 at July 31, 1997 from $3,429,000 at October 31, 1996, while working capital increased $7,619,000 or 13.7% to $63,266,000 from $55,647,000 for that same period. The Company believes its current lines of credit are adequate to cover its seasonal working capital and other requirements for the foreseeable future and that increases in its lines of credit can be obtained as needed to fund future growth. Accounts receivable increased 14.8% to $51,151,000 at July 31, 1997 from $44,554,000 at October 31, 1996. Domestic accounts receivable increased 19.0% to $33,654,000 at July 31, 1997 from $28,292,000 at October 31, 1996, and European accounts receivable increased 7.6% to $17,497,000 from $16,262,000 for that same period. These increases in accounts receivable are generally consistent with the increases in sales. 9 11 FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY (CONTINUED) Consolidated inventories increased 31.3% to $46,841,000 at July 31, 1997 from $35,668,000 at October 31, 1996. Domestic inventories increased 33.7% to $35,587,000 from $26,611,000 at October 31, 1996, and European inventories increased 24.3% to $11,254,000 from $9,057,000 for that same period. The increase in inventories occurred primarily to support increased sales for the Fall and Holiday seasons of the current year and from accelerated raw material purchases and finished goods production. In recent years, certain customers of the Company have experienced financial difficulties, including the filing of reorganization proceedings under bankruptcy laws. The Company has not incurred significant losses outside the normal course of business as a result of the financial difficulties of these customers. While management believes that allowances for doubtful accounts at July 31, 1997 are adequate, the Company carefully monitors developments regarding its major customers. Additional material financial difficulties encountered by these or other significant customers could have an adverse impact on the Company's financial position or results of operations. FOREIGN CURRENCY The functional currency of Quiksilver Europe is the French Franc. However, Quiksilver Europe sells in various European countries and collects at future dates in the customers' local currencies and purchases certain raw materials or product in currencies other than the French Franc. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. When considered appropriate, management purchases financial instruments, primarily forward exchange contracts, to reduce its exposure to these exchange rate fluctuations. For financial reporting purposes, Quiksilver Europe's statements of income are translated from French Francs into U.S. Dollars at average exchange rates in effect during the reporting period. When the French Franc strengthens compared to the U.S. Dollar there is a positive effect on Quiksilver Europe's results as reported in the Company's Consolidated Financial Statements. Conversely, when the U.S. Dollar strengthens, there is a negative effect. 10 12 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8K. (a) Exhibits 10.1 Amended and Restated to Loan Agreement dated as of July 1, 1997 27.0 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended July 31, 1997 11 13 SIGNATURE 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. QUIKSILVER, INC., a Delaware Corporation September 12, 1997 /s/ Steven L. Brink ------------------------------------------------- Steven L. Brink Chief Financial Officer, Secretary and Treasurer (Principal Accounting Officer) 12 14 EXHIBIT INDEX 10.1 Amended and Restated to Loan Agreement dated as of July 1, 1997 27.0 Financial Data Schedule EX-10.1 2 AMENDED AND RESTATED LOAN AGREEMENT DATED 7/1/97 1 EXHIBIT 10.1 [LOGO] AMENDED AND RESTATED LOAN AGREEMENT THIS AMENDED AND RESTATED LOAN AGREEMENT ("Agreement") is made and entered into as of July 1, 1997 by and between QUIKSILVER, INC., a Delaware corporation ("Borrower"), and UNION BANK of California, N.A. ("Bank"). This Agreement amends and restates in its entirety that certain loan agreement dated April 30, 1996, as amended September 5, 1996, October 22, 1996, November 29, 1996, and April 1, 1997, between Bank and Borrower. SECTION 1. THE LOAN 1.1 THE REVOLVING LOAN. Bank will loan to Borrower an amount not to exceed Thirty Eight Million Dollars ($38,000,000) outstanding in the aggregate at any one time (the "Revolving Loan"). Borrower may borrow, repay and reborrow all or part of the Revolving Loan in accordance with the terms of the Note as defined below. All borrowings of the Revolving Loan must be made before May 3, 1999 at which time all unpaid principal and interest of the Revolving Loan shall be due and payable. The Revolving Loan shall be evidenced by a promissory note (the "Note") on the standard form used by Bank for commercial loans. Bank shall enter each amount borrowed and repaid in Bank's records and such entries shall be deemed to be the amount of the Revolving Loan outstanding. Omission of Bank to make any such entries shall not discharge Borrower of its obligation to repay in full with interest all amounts borrowed. 1.1.1 THE COMMERCIAL LETTER OF CREDIT SUBLIMIT. As a sublimit to the Revolving Loan, Bank shall issue, for the account of Borrower, one or more irrevocable commercial letters of credit (individually, an "L/C" and collectively, the "L/Cs") and calling for drafts at sight covering the importation or purchase of material and finished goods. The aggregate amount available to be drawn under all outstanding L/Cs and the aggregate amount of unpaid reimbursement obligations under drawn L/Cs shall not exceed Seventeen Million Dollars ($17,000,000) and shall reduce, dollar for dollar, the maximum amount available under the Revolving Loan. All such commercial L/Cs shall be drawn on such terms and conditions as are acceptable to Bank and shall be governed by the terms of (and Borrower agrees to execute) Bank's standard form for commercial L/C applications and reimbursement agreement and shall not have an expiration date more than 240 days from its date of issuance. No letter of credit shall be issued after May 3, 1999 nor expire after October 1, 1999. 1.1.1.1 TERM LOAN. Bank will loan to Borrower an amount not to exceed Seven Million Dollars ($7,000,000), amortizing over seven years, (the "Term Loan"), to be fully disbursed no later than July 15, 1997. The Term Loan shall be evidenced by a promissory note (the "Note") on the standard form used by Bank for commercial loans. The proceeds will be used to repay an existing loan maturing July 1, 1997 in the amount of Four Million Dollars ($4,000,000) and pay for capital expenditures for a distribution center in Huntington Beach, CA. 1.2 INTEREST. The unpaid principal balance of the Revolving Loan and Term Loan shall bear interest at the rate or rates provided in the Note and as selected by Borrower. The Revolving Note and Term Loan Note may be prepaid in full or in part only in accordance with the terms of the Note and any such prepayment shall be subject to the prepayment fee provided for therein. 1.3 TERMINOLOGY 1.3.1 "FINANCIAL STATEMENTS" shall mean, with respect to any accounting period of Borrower, consolidated and consolidating statements of income and expense and of consolidated and consolidating statement of cash flows for such period, and consolidated and consolidating balance sheets of Borrower as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding annual audit, all prepared in reasonable detail and in -1- 2 accordance with generally accepted accounting principles ("GAAP"). Financial Statements shall include the notes and schedules thereto. 1.3.2 "LOAN" shall mean, collectively, all the credit facilities described above. 1.3.3 "LOAN DOCUMENTS" shall mean all documents executed in connection with this Agreement. 1.3.4 "NOTE" shall mean, collectively, all the promissory notes and reimbursement obligations described above. 1.3.5 "PRINCIPAL SUBSIDIARY/SUBSIDIARIES" shall mean Na Pali, S.A. 1.3.6 "SUBSIDIARY" shall mean any corporation, more than fifty percent (50%) of the outstanding voting stock of which is directly owned by Borrower. 1.4 PURPOSE OF LOAN. The proceeds of the Revolving Loan and Commercial Letter of Credit Facility shall be used for general working capital purposes. 1.5 LOAN COMMITMENT FEE. Borrower shall pay an annual commitment fee of Thirty Six Thousand Dollars ($36,000). $24,000 was paid on April 30, 1997 and the balance of $12,000 is due on July 1, 1997 and $36,000 is due July 1, 1998. No portion of this fee shall be reimbursable. 1.6 BALANCES. Borrower shall maintain its major depository accounts with Bank until the Note and all sums payable pursuant to this Agreement have been paid in full. 1.7 DISBURSEMENT. Upon execution hereof, Bank shall disburse the proceeds of the Loan as provided in Bank's standard form Authorization executed by Borrower. SECTION 2. CONDITIONS PRECEDENT Bank shall not be obligated to disburse all or any portion of the proceeds of the Loan unless at or prior to the time for the making of such disbursement, the following conditions have been fulfilled to Bank's satisfaction: 2.1 COMPLIANCE. Borrower shall have performed and complied in all material respects with all terms and conditions required by this Agreement to be performed or complied with by it prior to or at the date of the making of such disbursement and shall have executed and delivered to Bank the Note and other documents reasonably deemed necessary by Bank. 2.2 OTHER DOCUMENTS. Borrower shall provide Bank such Articles of Incorporation, Fictitious Business Names, Certificate of Good Standing and the Loan Documents and such additional original, duly executed documentation which Bank shall reasonably consider necessary or desirable in connection with the Loan. 2.3 BORROWING RESOLUTION. Borrower shall have provided Bank with certified copies of resolutions duly adopted by the Board of Directors of Borrower, authorizing this Agreement and the Loan Documents. Such resolutions shall also designate the persons who are authorized to act on Borrower's behalf in connection with this Agreement and to do the things required of Borrower pursuant to this Agreement. 2.4 CONTINUING COMPLIANCE. At the time any disbursement is to be made, there shall not exist any event, condition or act which constitutes an event of default under Section 6 hereof or any event, condition or act which with notice, lapse of time or both would constitute such event of default; nor shall there be any such event, condition, or act immediately after the disbursement were it to be made. SECTION 3. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants that: -2- 3 3.1 BUSINESS ACTIVITY. The principal business of Borrower is the manufacturing of outdoor sports apparel. 3.2 SUBSIDIARY. Each of Borrower's Subsidiaries and their addresses are as provided on a schedule delivered to Bank on or before the date of this Agreement. 3.3 AUTHORITY TO BORROW. The execution, delivery and performance of this Agreement, the Note and all other agreements and instruments required by Bank in connection with the Loan are not in contravention of any of the terms of any indenture, agreement or undertaking to which Borrower is a party or by which it or any of its property is bound or affected. 3.4 FINANCIAL STATEMENTS. The audited financial statements of Borrower, including both a balance sheet at October 31, 1996, together with supporting schedules, and an income statement for the twelve (12) months ended October 31, 1996, have heretofore been furnished to Bank, and have been prepared in conformity with GAAP applied on a consistent basis and fairly represent the financial condition of Borrower as at their respective dates and the results of operation for the periods then ended. Since October 31, 1996, there has been no material adverse change in the financial condition or operations of Borrower. 3.5 TITLE. Except for assets which may have been disposed of in the ordinary course of business, Borrower and each Principal Subsidiary has good and marketable title to all of the property reflected in its financial statements delivered to Bank and to all property acquired by Borrower and each Principal Subsidiary since the date of said financial statements, free and clear of all liens, encumbrances, security interests and adverse claims except those specifically referred to in said financial statements and except for purchase money security interests and other liens granted in the ordinary course of business. 3.6 LITIGATION. There is no litigation or proceeding pending or to the knowledge of Borrower threatened against Borrower or any Principal Subsidiary of Borrower of its property which is reasonably likely to affect the financial condition, property or business of Borrower or any Principal Subsidiary in a materially adverse manner or result in liability in excess of Borrower's insurance coverage or the insurance coverage of any such Subsidiary. 3.7 DEFAULT. Borrower and each Principal Subsidiary is not now in default in the payment of any of its material obligations, and there exists no event, condition or act which constitutes an event of default under Section 6 hereof and no condition, event or act which with notice or lapse of time, or both, would constitute an event of default. 3.8 ORGANIZATION. Borrower and each Principal Subsidiary of Borrower is duly organized and existing under the laws of the state of its organization, and has the power and authority to carry on the business in which it is engaged and/or proposes to engage. 3.9 POWER. Borrower has the power and authority to enter into this Agreement and to execute and deliver the Note and all of the other Loan Documents. 3.10 AUTHORIZATION. This Agreement and all things required by this Agreement have been duly authorized by all requisite action of Borrower and when executed will constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with the terms of the Loan Documents except as limited by bankruptcy, insolvency or other laws relating to or affecting the enforcement of creditors' rights and general principles of equity. 3.11 QUALIFICATION. Borrower is duly qualified and in good standing in any jurisdiction where the failure to qualify would have a material adverse effect on Borrower. 3.12 COMPLIANCE WITH LAWS. Borrower is not in violation with respect to any applicable laws, rules, ordinances or regulations which materially affect the operations or financial condition of Borrower. 3.13 STOCK. All stock of Borrower has been duly authorized, validly issued, fully paid and nonassessable. Borrower's authorized share capitalization and number of shares outstanding as of January 31, 1997 are:
Authorized Outstanding ---------- ----------- Preferred 5,000,000 0
-3- 4 Common 30,000,000 7,017,830
Except as therein set forth and as provided for in Borrower's Stock Option Plans, there are no other outstanding stock purchase warrants, subscriptions, options or other rights providing for the issuance of stock of Borrower. There is outstanding no security or other instrument convertible into or exchangeable for stock of Borrower. 3.14 SUBSIDIARIES. Listed below are each Subsidiary of Borrower and the jurisdiction of incorporation and proportionate ownership by Borrower. Borrower owns free and clear of all liens, charges and encumbrances, all the outstanding shares of each Subsidiary and all shares are validly issued, fully paid and nonassessable.
Name Jurisdiction Proportional Ownership ---- ------------ ---------------------- Na Pali, S.A. France 99.9% QS Retail, Inc. California 100%
3.15 PATENTS AND OTHER RIGHTS. Borrower and each Principal Subsidiary possesses or have the right to use all patents, licenses, trademarks, trade names, trade secrets, service marks, copyrights, and all rights with respect thereto, which are required to conduct their businesses as now conducted without known conflict with the rights of others which would materially affect such businesses. 3.16 OTHER CREDITORS. Except as provided for in Section 5.2 and trade payables arising in the ordinary course of Borrower's business and except as disclosed in Borrower's Financial Statements, Borrower does not have any obligation or liability which would materially adversely affect its business operations or assets, any indebtedness other than to Bank and any obligation under any guaranty or any obligations of any person or entity. 3.17 FULL DISCLOSURE. There is no fact, occurrence or circumstance which Borrower has not disclosed in writing to Bank which has or could reasonably be expected have, a material adverse effect on Borrower's ability to perform under this Agreement or Loan Document or pay any of its material obligations when due. 3.18 ERISA. Any defined benefit pension plans as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet, as of the date hereof, the minimum funding standards of Section 302 of ERISA, and no Reportable Event or Prohibited Transaction as defined in ERISA has occurred with respect to any such plan. 3.19 REGULATION U. No action has been taken or is currently planned by Borrower, or any agent acting on its behalf, which would cause this Agreement or the Note to violate Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities and Exchange Act of 1934, in each case as in effect now or as the same may hereafter be in effect. Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock as one of its important activities and none of the proceeds of the Loan will be used directly or indirectly for such purpose. 3.20 CONTINUING REPRESENTATIONS. These representations shall be considered to have been made again at and as of the date of each disbursement of the Loan and shall be true and correct in all material respects as of such date or dates. SECTION 4. AFFIRMATIVE COVENANTS Until the Note and all sums payable pursuant to this Agreement or any other of the Loan Documents have been paid in full, unless Bank waives compliance in writing, Borrower agrees that: 4.1 USE OF PROCEEDS. Borrower will use the proceeds of the Loan only as provided in subsection 1.4 and 1.1.1.1 above. 4.2 PAYMENT OF OBLIGATIONS. Borrower will pay and discharge promptly all taxes, assessments and other governmental charges and claims levied or imposed upon it or its property, or any part thereof, provided, however, that Borrower shall have the right in good faith to contest any such taxes, assessments, charges or claims and, pending the outcome of such contest, to delay or refuse -4- 5 payment thereof provided that adequately funded reserves are established by it to pay and discharge any such taxes, assessments, charges and claims. 4.3 MAINTENANCE OF EXISTENCE. Borrower will maintain and preserve its existence and assets and all rights, franchises, licenses and other authority necessary for the conduct of its business and will maintain and preserve its property, equipment and facilities in good order, condition and repair. Bank may, at reasonable times, visit and inspect any of the properties of Borrower. 4.4 RECORDS. Borrower will keep and maintain full and accurate accounts and records of its operations according to GAAP and will permit Bank to have access thereto, to make examination and photocopies thereof, and to make audits during regular business hours. 4.5 INFORMATION FURNISHED. Borrower will furnish to Bank: (a) Within Forty-Five (45) days after the close of each fiscal quarter, except for the final quarter of each fiscal year, its unaudited Financial Statements for such fiscal quarter and the 10Q filed with the Securities and Exchange Commission; (b) Within One Hundred Twenty (120) days after the close of each fiscal year, a copy of its Financial Statement as of the close of such fiscal year, examined and prepared on an audited basis by independent certified public accountants selected by Borrower and reasonably satisfactory to Bank, in accordance with GAAP applied on a basis consistent with that of the previous year and the 10K filed with the Securities and Exchange Commission; (c) Upon Bank request, as soon as available, copies of such Financial Statements and reports as Borrower may file with any state or federal agency, including all state and federal income tax returns; (d) Within Ninety (90) days after the close of each fiscal year, a copy of a projected monthly cash balance budget and letters of credit analysis for the following fiscal year. (e) Such other Financial Statements and information as Bank may reasonably request from time to time; (f) In connection with each Financial Statement provided hereunder, a statement executed by the president or chief financial officer of Borrower, certifying that to the best of his/her knowledge no default has occurred and no event exists which with notice or the lapse of time, or both, would result in a default hereunder; (g) In connection with each fiscal year-end Financial Statement required hereunder, any management letter of Borrower's certified public accountants; (h) Within Forty-Five (45) days after each fiscal quarter except for the final quarter of each fiscal quarter and with One Hundred Twenty (120) days after the close of each fiscal year, a certification of compliance with all covenants under this Agreement, executed by Borrower's president or chief financial officer, in form acceptable to Bank; (i) Prompt written notice to Bank of all events of default under any of the terms or provisions of this Agreement or of any other agreement, contract, document or instrument entered, or to be entered into with Bank; and of any litigation which, if decided adversely to Borrower, would have a material adverse effect on Borrower's financial condition; and of any other matter which has resulted in, or is likely to result in, a material adverse change in its financial condition or operations; (j) Prior written notice to Bank of any changes in Borrower's chief executive officer, president, or chief financial officer and or any other senior management; Borrower's name; and location of Borrower's assets, principal place of business or chief executive office. The financial covenants in sections 4.6 through 4.9 shall be measured by consolidating financial statements of Borrower excluding Principal Subsidiary. 4.6 QUICK RATIO. Borrower shall maintain at all times a ratio of cash, accounts receivable and marketable securities to current liabilities of not less than 1.0:1.0, as such terms are defined by GAAP. -5- 6 4.7 TANGIBLE NET WORTH. Until October 31, 1997, Borrower will at all times maintain Tangible Net Worth of not less than Forty-Five Million Dollars ($45,000,000). Thereafter, Borrower will at all times maintain a minimum Tangible Net Worth that increases on the first day of each of Borrower's successive quarter from the minimum as of the end of the fiscal quarter just ended by Ninety percent (90%) of Borrower's net profit after taxes for the quarter just ended plus One Hundred percent (100%) of any future equity additions. "Tangible Net Worth" shall mean net worth increased by indebtedness of Borrower subordinated to Bank and decreased by patents, licenses, trademarks, trade names, goodwill and other similar intangible assets, organizational expenses, and monies due from affiliates, including officers, shareholders and directors. Net profit after tax shall have the same meaning as set forth in GAAP. 4.8 DEBT TO TANGIBLE NET WORTH. Borrower will at all times maintain a ratio of total liabilities to tangible net worth of not greater than 1.10:1.0. "Tangible Net Worth" shall mean net worth increased by indebtedness of Borrower subordinated to Bank and decreased by patents, licenses, trademarks, trade names, goodwill and other similar intangible assets, organizational expenses, and monies due from affiliates (including officers, shareholders and directors). 4.9 MINIMUM PROFIT. Borrower will maintain a minimum net profit after taxes, as defined by GAAP, of Two Hundred Fifty Thousand Dollars ($250,000) for each quarter and Three Million Dollars ($3,000,000) for each fiscal year. 4.10 INSURANCE. Borrower will keep all of its insurable property, real, personal or mixed, insured by good and responsible companies against fire and such other risks as are customarily insured against by companies conducting similar business with respect to like properties. Borrower will maintain adequate worker's compensation insurance and adequate insurance against liability for damages to persons and property. 4.11 ADDITIONAL REQUIREMENTS. Borrower will promptly, upon demand by Bank, take such further action and execute all such additional documents and instruments in connection with this Agreement as Bank in its reasonable discretion deems necessary, and promptly supply Bank with such other information concerning its affairs as Bank may request from time to time. 4.12 LITIGATION AND ATTORNEYS' FEES. Borrower will pay promptly to Bank upon demand, reasonable attorneys' fees (including but not limited to the reasonable estimate of the allocated costs and expenses of in-house legal counsel and legal staff) and all costs and other expenses paid or incurred by Bank in collecting, modifying or compromising the Loan or in enforcing or exercising its rights or remedies created by, connected with or provided for in this Agreement or any of the Loan Documents, whether or not an arbitration, judicial action or other proceeding is commenced. If such proceeding is commenced, only the prevailing party shall be entitled to attorneys' fees and court costs. 4.13 BANK EXPENSES. Borrower will pay or reimburse Bank for all costs, expenses and fees incurred by Bank in preparing and documenting this Agreement and the Loan, and all amendments and modifications thereof, including but not limited to all filing and recording fees, costs of appraisals, insurance and attorneys' fees, including the reasonable estimate of the allocated costs and expenses of in-house legal counsel and legal staff. 4.14 REPORTS UNDER PENSION PLANS. Borrower will furnish to Bank, as soon as possible and in any event within 15 days after Borrower knows or has reason to know that any event or condition with respect to any defined benefit pension plans of Borrower described in Section 3 above has occurred, a statement of an authorized officer of Borrower describing such event or condition and the action, if any, which Borrower proposes to take with respect thereto. SECTION 5. NEGATIVE COVENANTS Until the Note and all other sums payable pursuant to this Agreement or any other of the Loan Documents have been paid in full, unless Bank waives compliance in writing, Borrower agrees that: 5.1 ENCUMBRANCES AND LIENS. Without prior consent of Bank, Borrower will not create, assume or suffer to exist any mortgage, pledge, security interest, encumbrance, or lien including without limitation the lien of an attachment, judgment or execution (other than in the ordinary course of business as now conducted and for taxes not delinquent and for taxes and other items being contested in good faith) on any of Borrower's United States property of any kind, whether real, personal -6- 7 or mixed, now owned or hereafter acquired, or upon the income or profits thereof, except property of any kind whether real, personal or mixed of Subsidiaries, in the ordinary course of business as now conducted. 5.2 BORROWINGS. Without consent of Bank, Borrower will not sell, discount or otherwise transfer any account receivable or any note, draft or other evidence of indebtedness, except to Bank or except to a financial institution at face value for deposit or collection purposes only and without any fee other than fees normally charged by the financial institution for deposit or collection services; provided, however, Borrower may sell/discount accounts receivable subject to collection. Borrower will not borrow any money, become contingently liable to borrow money, nor enter any agreement to directly or indirectly obtain borrowed money, except pursuant to agreements made with Bank and obligations currently shown on Borrower's Financial Statement and trade debt incurred in the ordinary course of business. 5.3 SALE OF ASSETS, LIQUIDATION OR MERGER. Borrower will neither liquidate nor dissolve nor enter into any consolidation, merger, partnership or other combination, nor convey, nor sell, nor lease all or the greater part of its assets or business, nor purchase or lease all or the greater part of the assets or business of another in excess of Five Million Dollars ($5,000,000) during the term of this agreement, without prior consent of Bank. 5.4 LOANS, ADVANCES AND GUARANTIES. Without prior consent of Bank, Borrower will not, make any loans or advances, become a guarantor or surety, pledge its credit or properties in any manner or extend credit or become directly or contingently liable for the obligations of another, except for the endorsement of negotiable instruments of deposit or collection in the ordinary and normal course of Borrower's business. 5.5 INVESTMENTS. Without prior consent of Bank, except as set forth in Section 5.3, Borrower will not purchase the debt or equity of another person or entity except for savings accounts and certificates of deposit of Bank, direct U.S. Government obligations and commercial paper issued by corporations with the top ratings of Moody's or Standard & Poor's, provided all such permitted investments shall mature within one year of purchase. 5.6 PAYMENT OF DIVIDENDS. Borrower will not declare or pay any dividends, other than a dividend payable in its own common stock, or authorize or make any other distribution with respect to any of its stock now or hereafter outstanding. 5.7 RETIREMENT OF STOCK. Without consent of Bank, until September 30, 1997, Borrower will not acquire, redeem, purchase, or retire more than Five Million dollars ($5,000,000) of its capital stock for value whether now or hereafter outstanding; or grant or issue any equity or security or any warrant, right or option pertaining thereto except as set forth in Section 3.13 and as approved by Bank in writing. From October 1, 1997, without consent of Bank, Borrower will not acquire, redeem, purchase, or retire any share of its capital stock for value whether now or hereafter outstanding; or grant or issue any equity or security or warrant, right, or option pertaining thereto except as set forth in Section 3.13 and as approved by Bank in writing. 5.8 BORROWER AND SUBSIDIARY PROPERTY. Borrower will not transfer, sell, lease or exchange any property to any Subsidiary, except for value received in the normal course of business as business would be conducted with an unrelated or unaffiliated entity without Bank's prior written approval. Without Bank's prior written consent, in no event shall management or maintenance fees or fees for services including downstreaming of funds, guaranty, comfort letter or the like be paid by Borrower to any Subsidiary . 5.9 NONRELATED BUSINESS ACTIVITIES. Borrower will not enter into any material contract, lease, indenture or other agreement except in the ordinary course of business as presently conducted; or engage in any business activity or operation substantially different from or unrelated to present business activities and operations; or make any substantial change in the character or manner of conduct of its business. SECTION 6. EVENTS OF DEFAULT The occurrence of any of the following events, each a "Default", shall permit Bank, at its option, to exercise all rights available to it under this Agreement and the other Loan Documents and under applicable law, including without limitation the right to (i) terminate any obligation of Bank to make further credit available hereunder; and (ii) declare all sums of interest and principal outstanding under -7- 8 this Agreement and of each other obligation of Borrower to Bank immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character, all of which Borrower hereby waives. Notwithstanding anything to the contrary contained herein, Bank shall have no duty to extend any credit to Borrower during any cure period which may be provided for hereunder. 6.1 PRINCIPAL AND INTEREST PAYMENT. Borrower shall default in the due and punctual payment of the principal of, or interest on the Note not paid within ten (10) days of the date due; or 6.2 MATURING OBLIGATIONS. Borrower shall default in the due and punctual payment of any obligations otherwise owed to Bank, whether of principal, interest, fees, taxes, reimbursement of Bank expenses or otherwise not paid within ten (10) days of the date due; or 6.3 DEFAULT UNDER OTHER AGREEMENTS. Borrower shall take or fail to take any action in contravention of the terms of any Loan Document or of any other agreement, document or instrument at any time executed by Borrower in connection with any material indebtedness which permits the holder to accelerate such indebtedness of Borrower; or 6.4 DEFAULT BY ANY SUBSIDIARY. Any Principal Subsidiary shall take or fail to take any action in contravention of the terms of any agreement, document or instrument executed, or to be executed by such Subsidiary, and concerning a financial obligation of such Subsidiary, and such default shall not have been cured within any applicable grace period, provided that during any such grace period there shall have been no acceleration of payment pursuant to such default; or 6.5 ADVERSE REGULATORY ACTION. Any governmental regulatory authority or environmental protection agency shall take or institute action which, in the reasonable opinion of Bank, may materially and adversely affect Borrower's condition, operations or ability to repay the obligations; or 6.6 BREACH OF ANY REPRESENTATION OR WARRANTY. Any representation or warranty made by Borrower in any Loan Document, or in any other instrument, certificate, report or financial or other statement heretofore or hereafter furnished by Borrower or its officers shall prove to be in any material respect untrue, incorrect, false, incomplete or misleading; or shall be withdrawn; or 6.7 VIOLATION OF COVENANTS. Borrower shall default in the due performance, compliance, or observance of any term, covenant, or condition of this Agreement or the Loan Documents (other than Section 6.1, 6.2, 6.6 which have no or different cure periods) and such default shall not within 30 days after Bank provided notice thereof, or Borrower has knowledge thereof, have been cured or waived. 6.8 INSOLVENCY. Borrower shall fail, be unable or be unwilling to pay its debts generally as they come due; or there shall be filed by Borrower any petition under the bankruptcy, reorganization, arrangement, insolvency or other debtor's relief laws, or there shall be filed against Borrower any such petition, and such filing shall not be dismissed within thirty (30) days thereafter, or a receiver, trustee or liquidator shall be appointed for all or a substantial part of Borrower's assets; or Borrower shall make a general assignment for the benefit of creditors; the foregoing shall also apply to any Subsidiary; or 6.9 ATTACHMENTS AND JUDGMENTS. Any final judgment or order for the payment of money against Borrower for an amount in excess of $500,000 shall be awarded by any court of competent jurisdiction, which shall not be either discharged, vacated or stayed within a period of thirty (30) days from its entry; or any notice of lien, levy or assessment, or any writ, judgment, attachment, execution or other like process in an amount in excess of $500,000 shall be issued or levied against any of Borrower's property or assets, and such writ, judgment, attachment, execution or process shall not be released, discharged, dismissed, bonded against or satisfied within ten (10) days thereafter; the foregoing shall also apply to any Subsidiary; or 6.10 SEIZURE OF PROPERTY. All, or such as in the opinion of Bank constitutes a substantial portion, of the property of Borrower or any Principal Subsidiary shall be condemned, seized or appropriated; or 6.11 SUSPENSION OF BUSINESS. Borrower or any Principal Subsidiary shall suspend its business; or 6.12 PENDING ACTION. Any action shall be pending against Borrower (other than an action fully covered by insurance) which, if adversely determined, would substantially impair the ability -8- 9 of Borrower to perform any or all of its obligations hereunder or under any of the other Loan Documents, unless Borrower's counsel, furnishes to Bank its opinion to the satisfaction of Bank and Bank's counsel that, in its judgment, the action is essentially without merit; the foregoing shall also apply to any Subsidiary; or 6.13 STOCK OWNERSHIP. Without the prior written consent of Bank, sell, transfer, pledge or otherwise dispose of all or any portion of the voting securities of Borrower; or 6.14 SALARIES AND WAGES. Borrower shall fail to pay salaries or wages when due, or fail to make timely payment or deposit of all F.I.C.A. payments and other withholding taxes required of it by applicable laws; or 6.15 MATERIAL ADVERSE CHANGE. Any other event or condition having a material adverse effect on Borrower's or any Principal Subsidiary's financial condition shall occur, such that Bank reasonably believes that the prospect of payment or performance by Borrower under this Agreement or any other Loan Document is impaired. 6.16 CROSS DEFAULT. Borrower shall commit to do, or fail to commit to do, any act or thing which would constitute an event of default under any of the terms of any other material agreement, document or instrument executed, or to be executed by it. SECTION 7. MISCELLANEOUS PROVISIONS 7.1 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 7.2 NONWAIVER. Any forbearance or failure or delay by Bank in exercising any right, power or remedy hereunder shall not be deemed a waiver thereof and any single or partial exercise of any right, power or remedy shall not preclude the further exercise thereof. No waiver shall be effective unless it is in writing and signed by an officer of Bank. 7.3 INUREMENT. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assignees of Borrower, and any assignment of Borrower without Bank's consent shall be null and void. 7.4 APPLICABLE LAW. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the State of California. 7.5 SEVERABILITY. Should any one or more provisions of this Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. 7.6 INTEGRATION CLAUSE. Except for documents and instruments specifically referenced herein, this Agreement constitutes the entire agreement between Bank and Borrower regarding the Loan and all prior communications verbal or written between Borrower and Bank shall be of no further effect or evidentiary value. 7.7 CONSTRUCTION. The section and subsection headings herein are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.8 AMENDMENTS. This Agreement may be amended only in writing signed by all parties hereto. 7.9 COUNTERPARTS. Borrower and Bank may execute one or more counterparts to this Agreement, each of which shall be deemed an original. SECTION 8. SERVICE OF NOTICES 8.1 Any notices or other communications provided for or allowed hereunder shall be effective only when given by one of the following methods and addressed to the respective party at its address given with the signatures at the end of this Agreement and shall be considered to have been -9- 10 validly given: (a) upon delivery, if delivered personally; (b) upon receipt, if mailed, first class postage prepaid, with the United States Postal Service; (c) on the next business day, if sent by overnight courier service of recognized standing; and (d) upon telephoned confirmation of receipt, if telecopied. 8.2 The addresses to which notices or demands are to be given may be changed from time to time by notice delivered as provided above. THIS AGREEMENT is executed on behalf of the parties by duly authorized officers as of the date first above written. UNION BANK OF CALIFORNIA, N.A. QUIKSILVER, INC., A DELAWARE CORPORATION By: By: --------------------------------------- ----------------------------- Rita Dailey, V.P. Steven L. Brink VP/CFO/SEC/TREA By: --------------------------------------- Margaret Furbank, V.P. Address: Orange County Regional Office Address: 1740 Monrovia 500 South Main Street, Suite 200 Costa Mesa, California 92627 Orange, California 92868 Attention: Rita Dailey, Vice President Attention: Steven L. Brink, CFO Fax: (714) 565-5725 Fax: (714)645-1395 Telephone: (714) 565-5665 Telephone: (714) 722-4261 -10- EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUIKSILVER, INC. JULY 31, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 3-MOS OCT-31-1997 JUL-31-1997 2,299,000 0 54,064,000 2,913,000 46,841,000 105,028,000 22,567,000 9,012,000 139,267,000 41,762,000 9,426,000 0 0 71,000 88,008,000 139,267,000 58,541,000 58,541,000 36,432,000 36,432,000 0 1,104,000 526,000 5,094,000 2,122,000 2,972,000 0 0 0 2,972,000 0.42 0.42
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