-----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, BatKo4v2wy25BOhUu1d4YkBlrsb5/17jTEIiTWAuPallgWy68z2Q54A/gasl3EPe eAP9x5p1dbLzvYcLQw78ig== 0000892569-02-000154.txt : 20020414 0000892569-02-000154.hdr.sgml : 20020414 ACCESSION NUMBER: 0000892569-02-000154 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20020129 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14229 FILM NUMBER: 02519628 BUSINESS ADDRESS: STREET 1: 15202 GRAHAM STREET CITY: HUNTINGTON BEACH STATE: CA ZIP: 92649 BUSINESS PHONE: 714-889-2200 MAIL ADDRESS: STREET 1: 15202 GRAHAM STREET CITY: HUNTINGTON BEACH STATE: CA ZIP: 92649 10-K 1 a78631e10-k.txt FORM 10-K FOR FISCAL YEAR ENDED 10/31/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001 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 33-0199426 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 15202 GRAHAM STREET HUNTINGTON BEACH, CALIFORNIA 92649 (Address of principal executive offices) (Zip Code) (714) 889-2200 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: Title of Name of each exchange each class on which registered ---------- ------------------- COMMON STOCK NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE (Title of class) 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant as of January 18, 2002 was approximately $410,000,000 based on the number of shares outstanding on such date and the last sale price for the Common Stock on such date of $17.70 as reported by the New York Stock Exchange. As of January 18, 2002, there were 23,218,903 shares of the Registrant's Common Stock issued and outstanding. PART III is incorporated by reference from the Registrant's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders to be filed with the Commission within 120 days of October 31, 2001. ================================================================================ TABLE OF CONTENTS
Page ---- PART I Item 1. BUSINESS Introduction...................................................... 1 Forward-Looking Statements........................................ 1 Products and Brands............................................... 2 Product Design.................................................... 3 Promotion and Advertising......................................... 3 Customers and Sales............................................... 4 Retail Concepts................................................... 6 Seasonality....................................................... 7 Production and Raw Materials...................................... 7 Imports and Import Restrictions................................... 8 Trademark License Agreements...................................... 9 Competition....................................................... 9 Employees......................................................... 10 Research and Development.......................................... 10 Environmental Matters............................................. 10 Acquisitions...................................................... 10 Item 2. PROPERTIES........................................................ 11 Item 3. LEGAL PROCEEDINGS................................................. 11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 11 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................... 12 Item 6. SELECTED FINANCIAL DATA........................................... 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 14 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS....... 21 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 22 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................... 22 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 23 Item 11. EXECUTIVE COMPENSATION............................................ 23 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................... 23 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 23 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................................................... 24 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. 25 SIGNATURES................................................................. 44
PART I ITEM 1. BUSINESS References to the "Registrant" or the "Company" are to Quiksilver, Inc., a Delaware corporation, and its wholly-owned subsidiaries unless the context indicates otherwise. INTRODUCTION The Company designs, produces and distributes clothing, accessories and related products for active-minded people and develops brands that represent a casual lifestyle--driven from a boardriding heritage. Quiksilver's primary focus is apparel for young men and young women under the Quiksilver, Roxy, Raisins, Radio Fiji, Hawk Clothing and Gotcha (Europe) labels. Quiksilver also manufactures apparel for boys (Quiksilver Boys and Hawk Clothing), girls (Teenie Wahine and Raisins Girls), men (Quiksilveredition) and women (Leilani swimwear), as well as snowboards, snowboard boots and bindings under the Lib Technologies, Gnu, Supernatural Manufacturing and Bent Metal labels. The Company generates sales primarily in the United States and Europe and collects royalties from various licensees around the world. Distribution is based in surf shops and specialty stores that provide an outstanding retail experience for their customers. The Company's account base is different depending on the brand and demographic group being served. Just over half of the Company's domestic products are manufactured in the United States. The balance is imported. The majority of the Company's European products are manufactured in Asia. Sales are included as either domestic or European based on which division produced and shipped the product. Since acquiring Quiksilver International Pty Ltd, an Australian company ("Quiksilver International"), in July 2000 (See "Acquisitions" on page 10), the Company owns all international rights to use the Quiksilver trademarks. Prior to this acquisition, the Company owned these intellectual property rights in the United States and Mexico only, and operated under license agreements with Quiksilver International to use the Quiksilver trademarks in other countries and territories. The Company collects royalties from licensees that manufacture and distribute approved clothing, accessories and related products in various countries and territories around the world using the Quiksilver and Roxy trademarks. These licensees also can buy products from the Company. Certain licensees have been granted rights to particular product groups or markets only, such as watches, eyewear and outlet stores. The Company was incorporated in 1976 and was reincorporated in Delaware in 1986. With a fiscal year that ends on October 31, references to fiscal 2001, fiscal 2000 or fiscal 1999 refer to the years ended October 31, 2001, 2000 or 1999, respectively. FORWARD-LOOKING STATEMENTS When used in this Annual Report on Form 10-K, the words "believes", "anticipates", "expects", "estimates" and similar expressions are intended to identify, in certain cases, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from the predicted results. Such factors include, among others, the following: - General economic and business conditions - The acceptance in the marketplace of new products - The availability of outside contractors at prices favorable to the Company - The ability to source raw materials at prices favorable to the Company - Currency fluctuations - Changes in business strategy or development plans - Availability of qualified personnel 1 - Changes in political, social and economic conditions and local regulations, particularly in Europe and Asia - Other factors outlined in the Company's previously filed public documents, copies of which may be obtained without cost from the Company Given these uncertainties, investors are cautioned not to place undue reliance on such statements. The Company also undertakes no obligation to update these forward-looking statements. PRODUCTS AND BRANDS The Company's domestic business began by selling Quiksilver boardshorts to surfers in the United States in the 1970's. Since that time, the Company's product lines have been greatly expanded, and the Company has added many brands to its portfolio to address a wide variety of consumers. The Company's Quiksilver product line now includes shirts, walkshorts, t-shirts, fleece, pants, jackets, snowboardwear, footwear, hats, backpacks and other accessories. Watches and eyewear are produced by licensees. Quiksilver has also expanded demographically and currently includes Young Mens, Boys and Toddlers. Quiksilveredition is the Company's brand targeted at men. Roxy was introduced in fiscal 1991 and includes a full range of sportswear, swimwear, footwear, backpacks, fragrance, beauty care, bedroom furnishings and other accessories for young women. Through fiscal 1997, Roxy included Juniors sizes only, but was then expanded as Teenie Wahine and in 2001 as Roxy Girl into the Girls categories. The swimwear labels Raisins, Radio Fiji and Leilani were added in fiscal 1994 when the Company acquired The Raisin Company, Inc. Raisins and Radio Fiji are labels in the Juniors category, while Leilani is a contemporary label. The Raisins division also produces private label swimwear. The Company entered the snowboard market through its acquisition of Mervin Manufacturing, Inc. ("Mervin") effective July 1, 1997. Mervin manufactures the Lib Technologies, Gnu and Supernatural Manufacturing brands of snowboards and accessories, and makes Bent Metal snowboard bindings. Mervin introduced Gnu snowboard boots and bindings in fiscal 1999 and Supernatural Manufacturing in fiscal 2001. The Hawk Clothing brand was added to the Company's portfolio in fiscal 2000 with the acquisition of Hawk Designs, Inc. The Company owns the rights to use Tony Hawk, a skateboarding icon, with apparel, related accessories and retail stores. Also in fiscal 2000, the Company added Gotcha to its European labels through its acquisition of Freestyle, S.A., the European licensee of the Gotcha trademark. A new license agreement, which continues through 2015, was negotiated as part of the acquisition. The Company entered the golf apparel business in fiscal 2000 with a new brand, Fidra. Fidra was a startup business that the Company acquired from its originator, John Ashworth. Initial shipments began in the third quarter of fiscal 2001. The following table shows the approximate percentage of sales attributable to each of the Company's major product categories during the last three fiscal years. 2
PERCENTAGE OF SALES ---------------------- PRODUCTS 2001 2000 1999 -------- ---- ---- ---- T-Shirts ............................................... 21% 20% 18% Accessories ............................................ 13 14 13 Shirts ................................................. 10 11 13 Pants .................................................. 10 9 9 Jackets and sweaters ................................... 10 8 9 Swimwear, excluding boardshorts ........................ 9 9 9 Fleece ................................................. 6 7 8 Shorts ................................................. 6 6 7 Boardshorts ............................................ 4 6 6 Tops and dresses ....................................... 4 4 5 Snowboards, snowboard boots, bindings and accessories .. 2 3 3 Other .................................................. 5 3 0 --- --- --- Total ............................................... 100% 100% 100% === === ===
Although the Company's products are generally available throughout the year, demand for different categories of product changes in the different seasons of the year. Sales of shorts, short-sleeve shirts, t-shirts and swimwear are higher during the spring and summer seasons, and sales of pants, long-sleeve shirts, fleece, jackets, snowboardwear and snowboards are higher during the fall and holiday seasons. The Company believes that the domestic retail prices for its apparel products range from approximately $18 for a t-shirt and $42 to $47 for a typical short to $200 for a typical snowboard jacket. For its Quiksilver Europe products, retail prices range from approximately $26 for a t-shirt and about $50 for a typical short to $140 for a typical snowboard jacket. Additionally, the Company believes that domestic retail prices for its snowboards range from approximately $250 to $475 and in Europe up to approximately $500. PRODUCT DESIGN The Company's products are designed for active-minded people who live a casual lifestyle. Innovative design, active fabrics and quality of workmanship are emphasized. The vast majority of the Company's products are designed by the Company, with the Company's management actively involved in product design. Design concepts are primarily based on the Company's own research, development and design activities in the U.S. and Europe. With the acquisition of Quiksilver International, the Company and its international licensees have formalized a process whereby they share designs, art, fabrics, samples and patterns for new products sold under the Quiksilver and Roxy names. PROMOTION AND ADVERTISING The Company's history is in the sport of surfing and the beach culture, and it has developed brands that represent a casual lifestyle that is driven from a boardsports heritage. Throughout its history, the Company has always maintained a strong marketing, advertising and distribution presence in the surfing world as well as other youth boardriding marketplaces. The Company's strategy is to continue to promote its core image associated with surfing and other boardriding activities. The Company believes the Quiksilver image, innovation and reputation for quality and style has facilitated, and will continue to facilitate, the introduction and acceptance of new products. The Company's three-decade history of authenticity, product and core marketing at the grass-roots level are the foundations of the Quiksilver label. The Company believes that continued product diversification, development of other labels and strong core distribution allow the Company to reach other markets beyond its roots. The Company currently reaches into the youth, active, outdoor and individual sports markets. These markets include males and females, young people (4 - 20 years of age) and older people (20 - 50 years of age). Many of the Company's managers, employees and independent sales representatives are involved in surfing, snowboarding, skateboarding and other sporting activities just like retail consumers in the Company's core market. The Company believes this increases its understanding of the end users of its products, while enhancing the Quiksilver image and providing valuable insights into product design. 3 An important marketing vehicle for the Company is the sponsorship of high profile athletes in outdoor, individual sports, including surfing, snowboarding, skateboarding and windsurfing. Many of these athletes have achieved world champion status in their respective sports and are used in the Company's print images, which adds to its authentic image. The Company advertises in core magazines such as Surfer, Surfing, Skateboard and Transworld Snowboarding in the United States and Wind, Snowboard and Surf Session in Europe. The ad campaign also includes national publications in the United States, such as Spin, Seventeen and Teen People, and mainstream publications in various European countries such as L'Equipe, GQ, Viajes N.G. and Focus. The Company also participates in trade shows, which are held throughout the United States and Europe. In addition to print media, the Company's core marketing includes surf, snowboard and skateboard contests in the markets where it distributes product. The Company believes that these events reinforce the Company's image as an authentic, core brand among surfers and nonsurfers alike. Each winter, if surfing conditions are appropriate, the Quiksilver in Memory of Eddie Aikau big wave contest is held at Waimea Bay in Hawaii, and the Mavericks Men Who Ride Mountains Big Wave Contest is held at Half Moon Bay in California. The Roxy Pro is held annually at Sunset Beach in Hawaii. In Europe, the Company produces the Quiksilver Masters surfing event in France, the Bowlriders skateboarding event, also in France, and is one of the sponsors of the Air & Style snowboard jumping event in Austria. Other regional and local events are also sponsored such as surf camps and skate park tours. Through Quiksilver International, the Company also operates an international promotional fund that is funded by Quiksilver International licensees. This fund is used to sponsor an international team of leading athletes, produce promotional movies and videos featuring athletes wearing and/or using Quiksilver products, and organize surfing contests and other events that have international significance. An example of one such contest is the Quiksilver Pro that is generally held annually in the Fijian Islands. Another example is The Crossing, which is a continuing voyage of the Indies Trader, a surf exploration vessel, that is criss-crossing the equator to explore new surfing regions and document the state of the environment under a team of marine biologists. Co-branding arrangements with independent companies are also used to promote the Company's brands. For example, Peugeot and Toyota produce cars branded with Quiksilver and Roxy, and the Tony Hawk Pro Skater 3 video game is cross-promoted by both the Company and Activision. The Company believes that its future success in advertising and promoting its products will be dependent, among other things, on its ability to respond to, and anticipate, changing consumer demands and tastes. At the same time, it must promote products consistent with its image. CUSTOMERS AND SALES The Company's policy is to sell to retailers who provide an outstanding in-store experience for their customers and who merchandise the Company's products in a manner consistent with the Company's image and the quality of its products. For many years, the Company's customer base has included surf shops, specialty stores, national specialty chains and select department stores. The Company's account base is different depending on the brand and demographic group. The Company's domestic Quiksilver products are sold to customers that have approximately 6,900 store locations combined. Likewise, Roxy products are sold to customers with approximately 5,900 store locations. It's estimated that approximately 5,100 of these Roxy locations also carry Quiksilver product. The Company's swimwear brands (Raisins, Leilani and Radio Fiji) are found in 9,900 stores, including many small, specialty swim locations, while the Company's wintersports hardgoods products are found in approximately 600 stores, including primarily snowboard shops in the United States and Canada. The Company's European products are found in approximately 5,300 store locations in Europe. Excluding licensees, the Company's products are distributed in approximately 20,400 retail locations. 4 The foundation of the Company's business is distribution of product through surf shops, Boardriders Clubs, and specialty stores where there is a Quiksville. This core distribution channel serves as a base of marketing legitimacy for the Company. (Boardriders Clubs and Quiksvilles are discussed below under "Retail Concepts".) Approximately 30% of the Company's sales were to this channel of distribution in fiscal 2001. Most of these stores stand alone or are part of small chains. Independent specialty or active lifestyle stores and specialty chains not specifically characterized as surf shops or Quiksvilles represent 48% of the Company's sales. This category includes chains such as Pacific Sunwear, Nordstrom, Duty Free Shops, Pacific Eyes and T's, Zumiez, Chicks Sporting Goods and the Buckle, as well as many independent active lifestyle stores, snowboard shops and sports shops. The Company also sells its products to a limited number of department stores, including Macy's, Robinson's/May, Dillards, The Bon Marche and Burdines in the United States; Le Printemps and Galeries Lafayette in France; and Harrods and Lillywhites in Great Britain. Sales to the department store channel totaled 12% of consolidated net sales in fiscal 2001. Approximately 3% of the Company's business is done through distributors in certain European countries. Na Pali, S.A.S., the Company's wholly-owned European subsidiary ("Quiksilver Europe"), accounted for approximately 36% of the Company's consolidated net sales during fiscal 2001, which is up slightly compared to fiscal 2000. Fiscal 2001 foreign sales from the U.S. (primarily to Canada, Japan, Central and South America) were approximately 7% of consolidated net sales. The following table summarizes the approximate percentages of the Company's fiscal 2001 sales by distribution channel: PERCENTAGE OF SALES -------------------------------- DISTRIBUTION CHANNEL DOMESTIC EUROPE CONSOLIDATED -------------------- -------- ------ ------------ Boardriders Clubs, surf shops and specialty Quiksvilles .. 24% 39% 30% Specialty stores ......................................... 52 44 48 Department stores ........................................ 14 8 12 Domestic exports ......................................... 10 -- 7 European distributors .................................... -- 9 3 --- --- --- Total ............................................... 100% 100% 100% === === === Total Division ........................................... 64% 36% 100% === === ===
The Company's sales are spread over a large wholesale customer base. During fiscal 2001, approximately 22% of the Company's consolidated net sales were made to the Company's ten largest customers. No single customer accounted for more than 7% of the Company's consolidated net sales during fiscal 2001. Sales of the Company's products are made by 210 independent sales representatives in the United States and Europe and 61 distributors in Europe. The Company's sales representatives are generally compensated on a commission basis. The Company's sales are geographically diversified. The following table summarizes the approximate percentages of the Company's fiscal 2001 sales by geographic region (excluding licensees): 5
PERCENTAGE OF SALES -------------------------------- GEOGRAPHIC REGION DOMESTIC EUROPE CONSOLIDATED ----------------- -------- ------ ------------ United States West Coast......................... 46% --% 30% United States East Coast......................... 21 -- 13 Hawaii........................................... 5 -- 3 Other United States.............................. 18 -- 11 France........................................... -- 46 17 United Kingdom and Spain......................... -- 32 12 Other European countries......................... -- 22 7 Other International.............................. 10 -- 7 --- --- --- Total........................................ 100% 100% 100% === === ===
The Company generally sells its products to domestic customers on a net-30 to net-60 day basis in the United States, and in Europe on a net-30 to net-90 day basis depending on the country and whether the Company sells directly to retailers in the country or to a distributor. The Company has a limited number of cooperative advertising programs with its customers and generally does not reimburse its customers for marketing expenses. The Company generally does not participate in markdown programs with its customers nor does it offer goods on consignment. For additional information regarding the Company's revenues, operating profits and identifiable assets attributable to the Company's domestic and foreign operations, see Note 13 of the "Notes to Consolidated Financial Statements". RETAIL CONCEPTS The Company participates in the building of dedicated Quiksilver selling space in the retail stores of selected customers. These concept shops (referred to as Quiksvilles) have grown steadily since their inception. During fiscal 2001, the number of Quiksvilles increased by 203, resulting in 1,321 shops at October 31, 2001. This total includes 930 domestic shops and 391 shops in Europe. The Company employs retail merchandise coordinators who travel between specified retail locations in metro market areas to further improve the presentation of the Company's product and build its image at the retail level. Stand-alone Quiksilver concept stores (Boardriders Clubs) are another part of the Company's retail strategy. These stores are stocked primarily with Quiksilver product, and their design demonstrates the Company's history, authenticity and commitment to surfing and other boardriding sports. Also included in this category are Roxy stores, which are dedicated to the Juniors customer, a Quiksilver Youth store, a Hawk Clothing store, a Gotcha store in Europe and multibrand stores in Europe. The majority of the stores are owned by independent retailers, while the Company owns stores in selected markets that provide enhanced brand-building opportunities. In territories where the Company operates its wholesale businesses, there are 126 stores that independent retailers operate under license. The Company does not receive royalty income from these stores. Rather, the Company provides the independent retailer with its retail expertise and store design concepts in exchange for the independent retailer agreeing to maintain the Company's brands at a minimum of 80% of the store's inventory. Certain minimum purchase obligations are also required. In addition to these independent stores, the Company owns 42 stores that operates in these territories. In licensed territories, such as Australia, Asia and Turkey, the Company's licensees operate 98 Boardriders Clubs. The Company receives royalty income from sales in these stores based on wholesale volume. The total number of stores open at October 31, 2001 was 266. 6 The following table summarizes the unit count of both Company-owned and licensed stores at October 31, 2001:
NUMBER OF STORES -------------------------------------------------------------------- DOMESTIC EUROPE COMBINED -------------------- -------------------- -------------------- COMPANY- COMPANY- COMPANY- STORE CONCEPT OWNED LICENSED OWNED LICENSED OWNED LICENSED ------------- -------- -------- -------- -------- -------- -------- Boardriders Clubs ..... 13 16 18 70 31 86 Roxy stores ........... 3 2 1 7 4 9 Multibrand stores ..... -- -- -- 2 -- 2 Gotcha stores ......... -- -- 1 1 1 1 Hawk store ............ 1 -- -- -- 1 -- Youth store ........... -- 1 -- -- -- 1 Outlet stores ......... 2 27 3 -- 5 27 --- --- --- --- --- --- 19 46 23 80 42 126 Licensed territories .. -- 98 -- -- -- 98 --- --- --- --- --- --- Total ................. 19 144 23 80 42 224 === === === === === ===
SEASONALITY The Company's net sales fluctuate from quarter to quarter primarily due to seasonal consumer demand patterns for different categories of the Company's products, and due to the effect that the Christmas season has on the buying patterns of the Company's customers.
CONSOLIDATED NET SALES ---------------------------------------------------------- 2001 2000 1999 ----------------- ----------------- ---------------- QUARTER ENDING AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------------- ------ ------- ------ ------- ------ ------- (DOLLAR AMOUNTS IN THOUSANDS) January 31.................. $121,833 19.8% $ 99,929 19.4% $ 85,947 19.4% April 30.................... 168,198 27.3 142,139 27.5 128,128 28.9 July 31..................... 155,259 25.2 122,011 23.7 105,160 23.7 October 31.................. 170,162 27.7 151,610 29.4 124,499 28.0 -------- ----- -------- ----- -------- ----- Total................... $615,452 100.0% $515,689 100.0% $443,734 100.0% ======== ===== ======== ===== ======== =====
PRODUCTION AND RAW MATERIALS The Company's products are sourced separately for its domestic and European operations. Just over half of the Company's domestic apparel products are manufactured by independent contractors from raw materials provided by the Company, while the remainder are imported as finished goods. The Company manufactures its snowboards in company-owned factories. Substantially all of the European apparel products are purchased or imported as finished goods. For the year ended October 31, 2001, approximately 53% of the Company's domestic apparel products were manufactured by independent contractors and approximately 47% were imported as finished goods. Products are manufactured based on design specifications provided by the Company whether they are produced from raw materials provided by the Company or if they are purchased or imported as finished goods. Domestically, the Company hires independent contractors located primarily in Southern California to perform many of the manufacturing functions required to produce its clothing and accessories. In some cases, raw materials are sent outside of the United States for production by independent contractors. During fiscal 2001, such offshore production accounted for approximately 6% of products manufactured by independent contractors. In Europe, the Company hires independent contractors located primarily in China, Vietnam, North Africa and Portugal to manufacture the majority of its clothing and accessories. Historically, the Company has provided patterns and fabric to independent cutting contractors to begin the production process. At the end of fiscal 1997, the Company acquired certain assets from two domestic 7 cutting contractors. Since that time, the Company's domestic cutting has been performed in-house and will be for the foreseeable future. At peak production periods, outside cutting contractors are still used. After the fabric is cut, it passes through various processes, which may include sewing, washing, dyeing, embroidering and screening. These processes occur in different orders based on the design and style of the product. The Company's quality control inspectors and production managers monitor the sizing and quality of the goods from the initial receiving of raw materials through the various processing stages until the completed garment is delivered to the Company's distribution centers. Goods are generally manufactured and processed on an order-by-order basis. During fiscal 2001, no single contractor or finished goods supplier accounted for more than 6% of the Company's consolidated production. The Company believes that numerous qualified contractors and finished goods suppliers are available to provide additional capacity on an as-needed basis, and that it enjoys favorable ongoing relationships with these contractors and suppliers. During fiscal 2001, approximately 70% of the Company's consolidated raw material fabric/trim purchases, and 89% of its domestic raw material fabric/trim purchases, were of materials made in the United States. The remaining raw material fabric/trim was purchased either directly from sources in Morocco, France, Portugal, China and Canada, or from suppliers located in the United States who had acquired some of their products from foreign sources. No single fabric supplier accounted for more than approximately 8% of the Company's consolidated expenditures for raw material purchases during fiscal 2001, while the Company's primary supplier of t-shirt blanks accounted for approximately 25% of raw material purchases. Although the Company does not have any formal long-term arrangements with its suppliers, it believes it has established solid working relationships over many years with vendors that the Company believes are financially stable and reputable. As the Company has grown, it believes that appropriate and sufficient planning has been performed to ensure that current suppliers can provide increased levels of raw materials as required by production demands. In addition, alternate and/or backup suppliers are researched, tested, and added as needed. To date, the Company has not experienced, nor does it anticipate any significant difficulties in satisfying its raw materials requirements. However, in the event of any unanticipated substantial disruption of the Company's relationship with its key existing raw materials suppliers, there could be a short-term adverse effect on the Company's operations. The Company generally attempts to keep only enough finished product in stock to meet sales commitments and anticipated orders and reorders on a seasonal basis. In the United States, the Company believes that it is capable of being responsive to its customers' continually changing needs because it utilizes a substantial number of local contractors that can produce garments in six to eight weeks versus non-domestic contractors who typically require between eight and fourteen weeks. While Quiksilver Europe produces a higher percentage of garments outside of France, the Company believes it has sufficient production facilities and contractors in Europe to respond to customers' needs. IMPORTS AND IMPORT RESTRICTIONS The Company has for some time imported finished goods and raw materials for its domestic operations under multilateral and bilateral trade agreements between the United States and a number of foreign countries, including Hong Kong, India, China and Japan. These agreements impose quotas on the amount and type of textile and apparel products that can be imported into the United States from the affected countries. The Company does not anticipate that these restrictions will materially or adversely affect its operations since it would be able to meet its needs domestically or from countries not affected by the restrictions on an annual basis. Quiksilver Europe operates in the European Union ("EU"), within which there are few trade barriers. Quiksilver Europe also sells to six other countries belonging to a trade union, which has some restrictions on imports of textile products and their sources. For production, Quiksilver Europe operates under constraints imposed on imports of finished goods and raw materials from outside the EU including quotas and duty charges. The Company does not anticipate that these restrictions will materially or adversely impact its operations since it has always operated under such constraints and the trend in Europe is continuing toward unification. 8 TRADEMARK LICENSE AGREEMENTS Since acquiring Quiksilver International Pty Ltd in July 2000 (See "Acquisitions" below), the Company owns the international rights to use the Quiksilver trademark in substantially all of its product classifications. Prior to this acquisition, the Company owned these intellectual property rights in the United States and Mexico only, and operated under license agreements with Quiksilver International to use the Quiksilver trademark in other countries and territories. Other than the Gotcha trademark in Europe, the Company owns the worldwide rights or has developed its other labels internally. The Company believes that trademark protection of its names and logos is an important component of its business. The Company and Quiksilver International entered into an agreement in January 1996 that required, among other things, the Company to pay a fee of approximately $400,000 per year for advertising and promotion. From a consolidated perspective, this agreement was eliminated effective with the acquisition of Quiksilver International during fiscal 2000. Quiksilver Europe has a European trademark license and manufacturing agreement (the "Trademark Agreement") with Quiksilver International (now a related entity). The Trademark Agreement provides that Quiksilver Europe can sell products under the Quiksilver trademark and tradename through 2012 in the territories covered by the Trademark Agreement (primarily Western Europe). In consideration of the rights granted under the Trademark Agreement, Quiksilver Europe pays to Quiksilver International a royalty on a monthly basis amounting to 3% of Quiksilver Europe's net sales of Quiksilver product. The Trademark Agreement also requires Quiksilver Europe to pay a promotional fee of 1% of net sales. From a consolidated perspective, these payments were eliminated effective with the acquisition of Quiksilver International during fiscal 2000. Quiksilver Europe also has a license agreement with Gotcha International, L.P., which provides that Quiksilver Europe can sell products primarily in Western Europe under the Gotcha trademark. The Company licensed the use of the Quiksilver and Roxy trademarks in Mexico, and for use on watches and sunglasses in the United States. The Company also licensed a chain of domestic outlet stores. Effective with the acquisition of Quiksilver International during fiscal 2000, the Company acquired control of licenses of the Quiksilver and Roxy trademarks in various other countries and territories around the world. The licensees are headquartered in Australia, Japan, Turkey, South Africa, Brazil, Indonesia, Korea, Argentina, Chile and Mauritius. COMPETITION The market for beachwear, snowboardwear, skate apparel, casual sportswear and snowboards is highly competitive. Direct competitors in the United States are different depending on the distribution channel. In the Company's core markets in the United States, the principal competitors include companies such as Billabong, Hurley, O'Neill and Volcom. In the department store and specialty store channels, the Company's competitors also include brands such as Tommy Hilfiger, Abercrombie and Fitch, Nautica and Calvin Klein. In Europe, the Company's principal competitors in the core market include O'Neill, Billabong, Rip Curl, Oxbow and Chimsee. In broader European distribution, the Company's competitors also include brands such as Nike, Adidas and Levis. The Company believes that it has revenues and capital resources approximately equal to, or greater than, most of its competitors in this market, with the exception of Tommy Hilfiger, Abercrombie and Fitch, Nautica, Calvin Klein, Nike and Adidas. In the snowboardwear and snowboard market, the Company's principal competitors are Burton, K-2 and Morrow along with a host of smaller manufacturers. The Company believes its revenues from snowboardwear and snowboards are less than these principal competitors in the market, but more than the smaller manufacturers. The Company's ability to evaluate and respond to changing consumer demands and tastes is critical to its success. The Company believes that consumer acceptance depends on product, image, design, fit and quality. Consequently, it has developed an experienced team of designers, artists, merchandisers, pattern makers, and cutting and sewing contractors that it believes has helped the Company remain in the forefront of design in the areas in which it competes. The Company believes, however, that its continued 9 success will depend on its ability to promote its image and to design products acceptable to the marketplace. EMPLOYEES On October 31, 2001, the Company employed approximately 1,950 persons, including approximately 1,180 in production, operations and shipping functions, approximately 730 in sales, administrative or clerical capacities, and approximately 40 in executive capacities. None of the Company's domestic employees are represented by a union, and less than ten of its European employees are represented by a union. The Company has never experienced a work stoppage and considers its working relationships with its employees to be good. RESEARCH AND DEVELOPMENT During the last three fiscal years, the Company did not incur any material research and development expenses. ENVIRONMENTAL MATTERS During the last three fiscal years, compliance with environmental laws and regulations did not have a significant impact on the Company's capital expenditures, earnings or competitive position. ACQUISITIONS Effective July 1, 2000, the Company acquired Quiksilver International, an Australian company that owns the worldwide trademark rights to the Quiksilver brand name (other than in the United States and Mexico where those rights were already owned by the Company). The initial acquisition payment was $23,564,000, which includes cash consideration of $23,101,000 and transaction costs, net of imputed interest, of $463,000. Under the terms of the purchase agreements, two additional payments will be made, one at the end of fiscal 2002 and one at the end of fiscal 2005. Such deferred purchase price payments, which are denominated in Australian dollars, are contingent on the computed earnings of Quiksilver International through June 20, 2005, subject to specified minimums. The deferred minimum purchase price payments, which were discounted to present value, totaled $17,294,000 at the date of the acquisition, and are included as a component of the purchase price recorded at July 1, 2000. The deferred purchase price payment due at the end of fiscal 2002 was increased by $4,267,000, with a corresponding increase to Trademarks, as a result of Quiksilver International's operations for the 12 months ended June 30, 2001. The obligation related to these deferred purchase price payments is reflected in the Consolidated Balance Sheet as a component of debt. The Company's management believes that the Company has benefited and will continue to benefit from unified ownership of the Quiksilver brand worldwide. Global product decisions can be controlled by the Company, and the opportunities for coordinated global sourcing and marketing programs are enhanced. Effective May 1, 2000, the Company acquired the operations of Freestyle, S. A., a French company that is the European licensee of Gotcha International ("Gotcha Europe"). The Company's management believes that the Gotcha brand in Europe satisfies a certain niche not previously filled by the Company, and that the Company's existing infrastructure can be leveraged to grow the Gotcha business in Europe. Effective March 1, 2000, the Company acquired the operations of Hawk Designs, Inc., the owner of the intellectual property rights to the name Tony Hawk for apparel and related accessories. Management of the Company believes that its ownership of the Hawk trademark for apparel, and its association with Tony Hawk has and will continue to enhance its image in the skateboard apparel market. The Company acquired Fidra Golf as of August 1, 2000. Fidra is a startup business that the Company acquired from its originator, John Ashworth. Initial shipments began in the third quarter of fiscal 2001. 10 ITEM 2. PROPERTIES The Company's executive offices, merchandising and design, production and warehouse facilities occupy approximately 565,000 square feet of space in multiple buildings located in Huntington Beach, California, approximately 250,000 square feet of space in three buildings in France, and approximately 50,000 square feet of space in two facilities in the state of Washington. The Company also maintains a sales office in New York and an Australian office in Avalon, New South Wales. The lease for the Company's main domestic warehouse facility, including raw materials, cutting and finished goods distribution, expires in 2007 with two, five-year extensions available. The lease for the Company's domestic executive offices, merchandising and design and production facilities expires in 2013, with two, five-year extensions available. The Company's supplemental domestic warehouse space is operated under leases that expire in 2004 and 2007. The majority of the buildings in France are leased under agreements that expire on various dates through 2009. The Company's Washington facilities, which are used for the production of snowboards and snowboard bindings and accessories, are leased under two separate agreements that expire in 2004 and 2006 with certain renewal options. The Company also leases various retail locations in the United States and Europe. The aggregate monthly rental payment for rented facilities is approximately $900,000. The Company believes that its present facilities will be adequate for its immediately foreseeable business needs. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock trades on the New York Stock Exchange ("NYSE") under the symbol "ZQK." The following table shows the high and low sales prices of the Company's Common Stock, as reported by the NYSE for the two most recent fiscal years.
HIGH LOW ---- --- Fiscal 2001 4th quarter ended October 31, 2001.................. $23.20 $ 11.60 3rd quarter ended July 31, 2001..................... 28.20 20.70 2nd quarter ended April 30, 2001.................... 28.15 22.69 1st quarter ended January 31, 2001.................. 24.91 16.13 Fiscal 2000 4th quarter ended October 31, 2000.................. $23.00 $ 12.75 3rd quarter ended July 31, 2000..................... 19.19 10.75 2nd quarter ended April 30, 2000.................... 21.00 9.25 1st quarter ended January 31, 2000.................. 19.00 12.06
The Company has reinvested earnings in its business and has never paid a cash dividend. At the present time, no change to this practice is being considered. The payment of cash dividends in the future will be determined by the Board of Directors, considering conditions existing at that time, including the Company's earnings, financial requirements and condition, opportunities for reinvesting earnings, business conditions and other factors. In addition, under the Company's domestic credit agreement with its bank group, the Company must obtain the bank group's prior consent to pay dividends. The number of holders of record of the Company's Common Stock was approximately 400 on January 18, 2002. The number of beneficial shareholders on that date is estimated to be approximately 5,000. 12 ITEM 6. SELECTED FINANCIAL DATA The table below should be read together with the Company's fiscal 2001 financial statements and notes along with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. The statement of income and balance sheet data shown below were derived from the Company's consolidated financial statements. The Company's consolidated financial statements as of October 31, 2001 and 2000 and for each of the three years in the period ended October 31, 2001 have been audited by Deloitte & Touche LLP, the Company's independent auditors. Their report is included on page 26.
YEARS ENDED OCTOBER 31, -------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) Statement of Income Data Net sales ................................... $615,452 $515,689 $443,734 $316,115 $231,783 Income before provision for income taxes .... 45,412 51,862 44,867 30,768 21,283 Net income .................................. 28,021 31,836 26,584 17,963 12,644 Net income per share(1) ..................... 1.22 1.42 1.20 0.85 0.61 Net income per share, assuming dilution(1) .. 1.17 1.37 1.14 0.82 0.60 Weighted average common shares outstanding(1) ........................... 22,952 22,406 22,096 21,144 20,723 Weighted average common shares outstanding, assuming dilution(1) ........ 24,049 23,232 23,284 21,820 21,111 Balance Sheet Data Total assets ................................ $418,738 $358,742 $259,673 $213,071 $149,650 Working capital ............................. 132,416 119,529 109,823 92,321 67,293 Lines of credit ............................. 66,228 49,203 28,619 17,465 18,671 Long-term debt .............................. 70,464 66,712 28,184 30,962 11,652 Stockholders' equity ........................ 216,594 177,614 151,753 117,659 95,008 Current ratio ............................... 1.85 1.97 2.32 2.36 2.51 Return on average stockholders' equity ...... 14.22 19.33 19.73 16.89 14.39
(1) Per share amounts and shares outstanding have been adjusted to reflect a three-for-two stock split effected on April 23, 1999 and a two-for-one stock split effected on April 24, 1998. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below should be read together with the Company's fiscal 2001 financial statements and notes. RESULTS OF OPERATIONS -- FISCAL 2001 COMPARED TO FISCAL 2000 Net Sales Net sales for fiscal 2001 increased 19.3% to $615,452,000 from $515,689,000 in fiscal 2000. Of those totals, domestic net sales increased 17.6% to $391,575,000 from $333,075,000, and Quiksilver Europe's net sales increased 22.6% to $223,877,000 from $182,614,000. Domestic net sales in the men's category, which includes Quiksilver Young Men's, Boys, Toddlers, Wintersports, Quiksilveredition, and Hawk Clothing, increased 8.3% to $214,353,000 for fiscal 2001 from $197,843,000 the year before. Domestic women's net sales, including Roxy, Roxy Girl, Teenie Wahine, Raisins, Leilani and Radio Fiji, increased 34.4% to $165,938,000 from $123,487,000 for those same periods. Wintersports hardgoods are sold under the Lib Technologies, Gnu, Supernatural Manufacturing and Bent Metal brands and totaled $11,285,000 in fiscal 2001 compared to $11,745,000 in the previous year. Sales in the domestic men's category increased generally across all divisions, more than offsetting a slight decline in the Young Men's division that occurred in the last 2 months of the Company's fiscal year. The women's increase came from both the Roxy and Raisins divisions. The Company believes that its product design and marketing efforts are resulting in increased consumer demand for the Company's products. Quiksilver Europe's net sales were approximately 36% of the consolidated total in fiscal 2001. Revenue growth was the largest in France, the United Kingdom and Spain. In U.S. dollars, net sales in the men's category increased 14.8% to $175,180,000 for fiscal 2001 from $152,530,000 in the previous year. Women's net sales increased 61.9% to $48,696,000 from $30,084,000 for those same periods. To understand Quiksilver Europe's fiscal 2001 growth, it's important to look at sales in French francs (or euros), which is the currency that Quiksilver Europe operates in. Competitive performance and market share gains are best measured in the operating currency. For consolidated financial statement reporting, French franc (or euro) results must be translated into U.S. dollar amounts at average exchange rates. But this can distort performance when exchange rates change from year to year. In French francs (or euros), net sales grew 28.8% in fiscal 2001. This is higher than the 22.6% growth rate in U.S. dollars because the U.S. dollar was worth more French francs (or euros) in fiscal 2001 compared to fiscal 2000. Gross Profit The consolidated gross profit margin for fiscal 2001 decreased to 37.8% from 38.7% in the previous year. The domestic gross profit margin decreased to 34.8% from 36.2%, while Quiksilver Europe's gross profit margin decreased slightly to 43.2% from 43.3%. The domestic gross profit margin decreased primarily as a result of a $6,000,000 writedown in the carrying value of the Company's inventory. This writedown was required primarily as a result of the aftermath of September 11, 2001, when the market for consumer products, including casual lifestyle apparel, experienced a dramatic falloff in demand and resulted in a substantial amount of customer order cancellations. This phenomenon created an industry wide glut of excess product available to the traditional off-price channel thereby driving the price of certain seasonal product below cost. Selling, General and Administrative Expense Selling, general and administrative expense ("SG&A") increased 26.8% in fiscal 2001 to $181,220,000 from $142,888,000 in the previous year. Domestic SG&A increased 29.1% to $116,370,000 from $90,174,000, and Quiksilver Europe's SG&A increased 23.0% to $64,850,000 from $52,714,000 in those same periods. Higher personnel costs and other costs related to increased sales volume were the primary reasons for these increases. As a percentage of sales, SG&A increased to 29.4% in fiscal 2001 from 27.7% in fiscal 2000. SG&A increased as a percentage of sales primarily due to the incremental 14 operating costs of new Company-owned retail stores and to the operating costs of Quiksilver International, which was acquired in the third quarter of fiscal 2000. Royalty Income and Expense In July 2000, the Company acquired Quiksilver International, the owner of the Quiksilver trademarks in all countries except the U.S. and Mexico. Historically, the Company paid royalties to Quiksilver International on sales in Europe, Canada, Asia and various countries in Central and South America. As a result of this acquisition, however, royalty expense on sales of Quiksilver products has been eliminated. In terms of royalty income, the Company has historically received royalties from its watch, sunglass, Mexican and outlet store licensees. Again, as a result of the Quiksilver International acquisition, the Company now also receives royalties from various Quiksilver licensees around the world. These licensees do business in many countries and territories around the world, with headquarters in Australia, Japan, Turkey, South Africa, Brazil, Indonesia, South Korea, Argentina, Chile and Mauritius. As a result, royalty income totaled $5,169,000 in fiscal 2001, reflecting ownership of Quiksilver International for the full fiscal year. In fiscal 2000, royalty income of $3,681,000 was almost entirely offset by royalty expense of $3,449,000. Interest Expense and Income Taxes Interest expense in fiscal 2001 increased 69.0% to $10,873,000 from $6,435,000 in the previous year. Of that increase, approximately $2,200,000 was related to debt resulting from the Quiksilver International acquisition. The rest of the increase came primarily from additional borrowings to provide working capital to support the Company's growth and to continued investments in retail stores. The Company's income tax rate for fiscal 2001 decreased to 38.3% from 38.6% in fiscal 2000. This reduction resulted primarily because a higher percentage of the Company's profits were generated in countries with lower tax rates. Net Income Net income in fiscal 2001 totaled $28,021,000 or $1.17 per share on a diluted basis. In the previous year, net income was $31,836,000 or $1.37 per share on a diluted basis. Basic earnings per share amounted to $1.22 for fiscal 2001 compared to $1.42 for fiscal 2000. RESULTS OF OPERATIONS -- FISCAL 2000 COMPARED TO FISCAL 1999 Net Sales Net sales for fiscal 2000 increased 16.2% to $515,689,000 from $443,734,000 in fiscal 1999. Of those totals, domestic net sales increased 14.7% to $333,075,000 from $290,363,000, and Quiksilver Europe's net sales increased 19.1% to $182,614,000 from $153,371,000. Domestic net sales in the men's category increased 15.9% to $197,843,000 for fiscal 2000 from $170,717,000 the year before. Domestic women's net sales increased 13.6% to $123,487,000 from $108,722,000 for those same periods. Wintersports hardgoods sales totaled $11,745,000 in fiscal 2000, up 7.5% from the previous year's amount of $10,924,000. All divisions in the domestic men's and women's categories contributed to the increase. The Company continued to benefit from increased consumer demand for its products. The Company believes that this increased demand came primarily from the Company's product design and marketing efforts. Quiksilver Europe's net sales also increased across all divisions and accounted for approximately 35% of the consolidated total. Revenue growth was the largest in France, Spain and the United Kingdom. In U.S. dollars, net sales in the men's category increased 14.0% to $152,530,000 for fiscal 2000 from $133,835,000 in the previous year. Women's net sales increased 54.0% to $30,084,000 from $19,536,000 for those same periods. In French francs, net sales grew 37.8% in fiscal 2000. This is much 15 higher than the 19.1% growth rate in U.S. dollars because the U.S. dollar was worth more French francs in fiscal 2000 compared to fiscal 1999. Gross Profit The consolidated gross profit margin for fiscal 2000 decreased to 38.7% from 39.6% in the previous year. The domestic gross profit margin decreased to 36.2% from 36.6%, while Quiksilver Europe's gross profit margin decreased to 43.3% from 45.2%. The domestic off-price market had excess product from other major brands at the end of fiscal 2000, creating a buyer's market. This condition, along with a higher level of prior season Wintersports apparel sales in the third quarter, resulted in the lower domestic gross margin. Foreign currency exchange rates were the primary reason for the gross margin decline in Europe. Quiksilver Europe buys a large part of its product in U.S. dollars, and when the U.S. dollar significantly strengthened in the latter part of fiscal 2000, product costs in French francs increased. Because the Company was both unwilling and unable to completely pass these higher costs along to consumers, gross margins decreased. Hedging strategies did not completely offset the effect of the stronger U.S. dollar in this period of rapid movement in exchange rates between the U.S. dollar and the French franc, or euro. Selling, General and Administrative Expense SG&A increased 14.8% in fiscal 2000 to $142,888,000 from $124,479,000 in the previous year. Domestic SG&A increased 15.6% to $90,174,000 from $77,974,000, and Quiksilver Europe's SG&A increased 13.4% to $52,714,000 from $46,505,000 in those same periods. Higher personnel costs and other costs related to increased sales volume were the primary reasons for these increases. As a percentage of sales, SG&A decreased to 27.7% in fiscal 2000 from 28.1% in fiscal 1999. Royalty Income and Expense Royalty income exceeded royalty expense in fiscal 2000 by $232,000. The opposite was true in the previous year when royalty expense exceeded royalty income by $3,143,000. This improvement resulted from the Quiksilver International acquisition. The benefit of this improved royalty stream is offset, in part, by added SG&A to operate Quiksilver International's licensing business and the interest costs associated with the acquisition. Interest Expense and Income Taxes Interest expense in fiscal 2000 increased 85.1% overall to $6,435,000 from $3,476,000 in the previous year. Debt related to the Quiksilver International acquisition added approximately $1,200,000 of interest expense in fiscal 2000. The rest of the increase came primarily from additional borrowings to provide working capital to support the Company's growth, and to continued investments in retail stores and computer equipment. The Company's income tax rate for fiscal 2000 decreased to 38.6% from 40.7% in fiscal 1999. Lower income tax rates in Europe were the primary reasons for this benefit. In particular, the statutory tax rate in France was decreased during fiscal 2000, and Quiksilver Europe generated more profits in countries with lower income tax rates. Net Income Net income in fiscal 2000 increased 19.8% to $31,836,000 or $1.37 per share on a diluted basis. In the previous year, net income was $26,584,000 or $1.14 per share on a diluted basis. Basic earnings per share was $1.42 for fiscal 2000 compared to $1.20 for fiscal 1999. 16 FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY The Company finances its working capital needs and capital investments with operating cash flows and its bank revolving lines of credit. These lines of credit are made available by multiple banks in the U.S. and in Europe. Term loans are also used to supplement these lines of credit and are typically used to finance long-term assets. Cash and cash equivalents totaled $5,002,000 at October 31, 2001 versus $2,298,000 at October 31, 2000. Working capital amounted to $132,416,000 at October 31, 2001, compared to $119,529,000, an increase of 10.8%. The Company's strategy is to keep cash balances low (thereby keeping its lines of credit balances low) while maintaining adequate liquidity in its credit facilities. The Company believes that its current cash flows and credit facilities are adequate to cover the Company's cash needs for the foreseeable future. The Company further believes that increases in its credit facilities can be obtained as needed to fund future growth. Operating Cash Flows The Company generated $5,847,000 from operations during fiscal 2001 compared to cash used in operations of $4,100,000 in fiscal 2000. The amount of net income plus noncash expenses was comparable in fiscal 2001 and fiscal 2000. And although cash invested in inventories exceeded the prior year by $7,510,000 (net of accounts payable decrease), the increase in trade accounts receivable was $18,305,000 less in fiscal 2001. These factors resulted in a $9,947,000 improvement in operating cash flows. Operations used cash in fiscal 2000 primarily due to the increase in cash invested in inventories during that year in comparison to fiscal 1999. Overall, cash used in operating activities totaled $4,100,000 in fiscal 2000 versus $4,645,000 of cash provided by operations in fiscal 1999. Capital Expenditures The Company has avoided high levels of capital expenditures for its manufacturing functions by using independent contractors for sewing and other processes such as washing, dyeing and embroidery. The cutting process is performed in-house domestically to enhance control and efficiency, while screenprinting is performed in-house both domestically and in Europe. Fiscal 2001 capital expenditures were $22,622,000, which was comparable to the $23,900,000 spent two years prior and $6,202,000 higher than the $16,420,000 spent in fiscal 2000. In fiscal 2001, the Company increased its investment in company-owned retail stores and also expanded its facilities in Europe. Investments in computer equipment, in-store shops and fixtures also continued in fiscal 2001. Capital spending in fiscal 1999 included the addition of the Company's domestic headquarters. New Company-owned retail stores and, to a lesser extent, in-store shops are again part of the Company's plans in fiscal 2002. Computer hardware and software will also be added to continuously improve systems. Capital spending for these and other projects in fiscal 2002 is expected to range between $24,000,000 and $27,000,000. Acquisitions The Company made several acquisitions in fiscal 2000. Hawk Designs, Inc. was acquired in March 2000. Freestyle, S.A. ("Gotcha Europe"), which is the licensee of Gotcha International in Europe, was acquired by Quiksilver Europe in May 2000. Quiksilver International was acquired in July 2000, and Fidra, Inc. was acquired in August 2000. The Hawk Designs, Inc. purchase added the Tony Hawk trademark to the Company's portfolio of brands as it relates to apparel and related accessories. The Company also operates Hawk stores, which sell Hawk Clothing, related clothing and accessories, and skate hardgoods. Quiksilver Europe's acquisition of Gotcha Europe resulted in a new license agreement that continues through 2015. Fidra was a startup 17 business in fiscal 2000 that the Company acquired from its originator, John Ashworth. Initial shipments began in the third quarter of fiscal 2001. Prior to the Quiksilver International acquisition, the Quiksilver trademarks were owned by two separate companies. The Company (that is, Quiksilver, Inc.) owned the trademarks in the United States and Mexico. Quiksilver International Pty Ltd, an Australian company (that is, Quiksilver International), owned the trademarks everywhere else throughout the world. Historically, the Company paid royalties to Quiksilver International on all Quiksilver sales outside the United States and Mexico. The Company acquired Quiksilver International effective July 1, 2000. From that point forward, the worldwide trademark rights have been owned by the Company, and the royalty expense has been eliminated. The initial acquisition payment was $23,564,000, which includes cash payments to the previous shareholders of $23,101,000 and transaction costs, net of imputed interest, of $463,000. Two additional payments will also be made that are denominated in Australian dollars, one at the end of fiscal 2002 and one at the end of fiscal 2005. The amount of these two additional payments is based on the computed earnings of Quiksilver International through June 30, 2005, subject to specified minimums. The minimum deferred purchase price payments totaled $17,294,000 on a then present value basis, and was recorded at July 1, 2000 as a component of the purchase price. The deferred purchase price payment due at the end of fiscal 2002 was increased by $4,267,000, with a corresponding increase to Trademarks, as a result of Quiksilver International's operations for the 12 months ended June 30, 2001. The initial payment was financed using the Company's domestic line of credit. The obligation to make the two remaining payments is included in the Company's balance sheet as a component of debt. Noncash interest expense is recorded monthly to reflect the calculated financing costs associated with these remaining obligations. The remaining obligation as of October 31, 2001 was $21,655,000 including the interest component. Debt Structure The Company's debt structure includes short-term lines of credit and long-term loans. European banks are primarily used to finance the European business, and a syndication of U.S. banks provides financing for the domestic business. The domestic credit facility includes a term loan and a revolving credit facility. The revolving credit commitment was changed in October 2001 to increase the amount by $25,000,000 to $125,000,000. The line of credit expires on June 28, 2002, and it bears interest based on the agent bank's reference rate or LIBOR. The weighted average interest rate at October 31, 2001 was 4.3%. The term loan is repayable in equal quarterly installments through October 2004 and amounted to $18,750,000 at October 31, 2001. The term loan bears interest contractually based on LIBOR. However, the Company entered into an interest rate swap agreement to fix the interest rate at 7.20% per year. This swap agreement is effective through October 2004 and is an effective hedge of the related interest rate exposure. The line of credit and the term loan are secured and are subject to generally the same restrictive covenants. The most significant covenants relate to maintaining certain leverage and fixed charge coverage ratios. The payment of dividends is restricted, among other things, and the Company's assets, other than trademarks and other intellectual property, generally have been pledged as collateral. At October 31, 2001, the Company was in compliance with such covenants. The Company believes that the line of credit will be renewed with substantially similar terms. The Company also has another term loan with a single bank that amounted to $10,353,000 on October 31, 2001 and is repayable in installments of $102,500 per month with a final balloon payment due on October 29, 2004. The Company anticipates that these monthly payments and final balloon payment will be paid from borrowings on the Company's revolving credit facility. This term loan was established in April 2000 and is secured by the leasehold improvements at the Company's headquarters in Huntington Beach, California. The interest rate structure and restrictive covenants are substantially the same as those under the syndicated credit facility. However, the Company entered into an interest rate swap agreement to fix the interest rate at 8.43% per year. This swap agreement is effective through April 2007 and is an effective hedge of the related interest rate exposure. 18 As of October 31, 2001, the Company had $47,000,000 of borrowings outstanding under the domestic line of credit and $29,103,000 outstanding under the domestic term loans. In Europe, the Company has arrangements with several banks that provide approximately $46,000,000 for cash borrowings and approximately $33,000,000 for letters of credit. At October 31, 2001, related interest rates ranged from 4.7% to 5.2%. These lines of credit expire on various dates through April 2002, and the Company believes that the banks will continue to make these facilities available with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2001 was $19,228,000 at an average interest rate of 5.0%. Quiksilver Europe also has $19,706,000 of long-term debt, most of which is collateralized by land and buildings. This debt bears interest at rates ranging generally from 4.1% to 5.9%. Principal and interest payments are required either monthly, quarterly or annually, and the loans are due at various dates through 2011. The Company's financing activities generated $19,883,000 of cash in fiscal 2001, compared to $45,622,000 in the previous year and $17,649,000 the year before that. These borrowings were used to fund the business acquisitions, capital expenditures and the inventory investments discussed above. Stock Split The Company's stock was split three-for-two in April 1999. Trade Accounts Receivable and Inventories The Company's trade accounts receivable were $155,879,000 at October 31, 2001 versus $136,394,000 the previous year, an increase of 14.3%. Of those totals, domestic receivables were basically unchanged at $87,398,000 compared to $87,369,000, and Quiksilver Europe's receivables increased 39.7% to $68,481,000 from $49,025,000. The overall increase in receivables is generally consistent with the sales increase in the fourth quarter. However, Quiksilver Europe's average days sales outstanding based on the October 31 amounts increased somewhat offsetting the domestic improvement. This increase occurred primarily because additional licensed Boardriders Clubs were opened in Europe that have longer than average terms. Consolidated inventories increased 19.5% to $107,562,000 at October 31, 2001 from $90,034,000 the year before. The domestic component increased 15.1% to $83,887,000 from $72,860,000, and the European piece increased 37.9% to $23,675,000 from $17,174,000. The Company's average inventory turnover was 3.8 times at the end of fiscal 2001 based on a rolling average computation. This is consistent with the rate at the end of the previous year. However, domestic finished goods inventory levels are above optimum levels as planned sales were not achieved in the fourth quarter of fiscal 2001. The Company believes that domestic inventory levels will remain high through the first half of fiscal 2002. European inventories were increased in preparation for the upcoming Spring/Summer season. Significant Accounting Estimates It is not uncommon for some of the Company's customers to have financial difficulties from time to time. This is normal given the wide variety of the Company's account base, which includes small surf shops, medium-sized retail chains, and some large department store chains. In some cases, customers have ended up in bankruptcy. However, the Company's losses from these situations have been consistent with its estimates. To allow for such losses, the Company establishes reserves for doubtful accounts to reduce the value of its receivables. Management believes that the allowance for doubtful accounts at October 31, 2001 is adequate to cover anticipated losses. Throughout the year, the Company monitors developments 19 regarding its major customers. However, if customers experience unforeseen, material financial difficulties, this could have an adverse impact on the Company's profits. Inflation Inflation has been modest during the years covered by this report. Accordingly, inflation has had an insignificant impact on the Company's sales and profits. New Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," on November 1, 2001. SFAS No. 133 affected the Company's financial statements beginning with the first quarter of fiscal 2001 by requiring that the Company recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. The adoption of SFAS No. 133 resulted in a transition adjustment of $799,000 (net of tax effects of $533,000) that was recorded as a cumulative-effect type adjustment in other comprehensive income to recognize the fair value of derivatives that are designated as cash-flow hedges. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations". This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS No. 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS No. 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS No. 141 to have a material effect on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually and also in the event of an impairment indicator. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 as of November 1, 2001 and has begun to test goodwill for impairment under the new rules, applying a fair-value-based test. The Company expects that adoption of SFAS No. 142 will increase annual operating income through a reduction of amortization expense by approximately $3.0 million or $.07 per share diluted, on an annual basis. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to have a significant impact on the Company's financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets. FORWARD-LOOKING STATEMENTS Certain words in this report like "believes", "anticipates", "expects", "estimates" and similar expressions are intended to identify, in certain cases, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from the predicted results. Such factors include, among others, the following: - General economic and business conditions - The acceptance in the marketplace of new products - The availability of outside contractors at prices favorable to the Company - The ability to source raw materials at prices favorable to the Company - Currency fluctuations - Changes in business strategy or development plans 20 - Availability of qualified personnel - Changes in political, social and economic conditions and local regulations, particularly in Europe and Asia - Other factors outlined in the Company's previously filed public documents, copies of which may be obtained without cost from the Company Given these uncertainties, investors are cautioned not to place too much weight on such statements. The Company is not obligated to update these forward-looking statements. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is exposed to a variety of risks. Two of these risks are foreign currency fluctuations and changes in interest rates that affect interest expense. (See also Note 14 to the Company's financial statements.) Foreign Currency and Derivatives The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to its variable rate debt. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company's consolidated financial statements due to the translation of the operating results and financial position of the Company's international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage the Company's exposure to the risk of fluctuations in interest rates. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. Other derivatives, which do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks, are marked to market value with corresponding gains or losses recorded in earnings. As of October 31, 2001, the Company was hedging forecasted transactions expected to occur in the following twelve months. Assuming exchange rates at October 31, 2001 remain constant, $247,0000 of gains related to hedges of these transactions are expected to be reclassified into earnings over the next twelve months. Also included in accumulated other comprehensive income at October 31, 2001 is a charge related to cash flow hedges of the Company's long-term debt that is denominated in Australian dollars, totaling $1,442,000, which will be amortized into earnings through fiscal 2005 as the debt matures. On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the fiscal year ended October 31, 2001, the Company reclassified into earnings a net loss of $689,000 resulting from the expiration, sale, termination, or exercise of derivative contracts. Additionally, 21 a gain of $1,125,000 was recognized during the fiscal year ended October 31, 2001 for changes in the value of derivatives that were marked to market value. The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts. Translation of Results of International Subsidiaries As discussed above, the Company is exposed to financial statement gains and losses as a result of translating the operating results and financial position of the company's international subsidiaries. The local currency statements of income of the Company's European and Australian subsidiaries are translated into U.S. dollars using the average exchange rate during the reporting period. Changes in foreign exchange rates effect the Company's reported profits and distort comparisons from year to year. The Company uses various foreign currency exchange contracts and intercompany loans to hedge the profit and loss effects of such exposure, but the accounting rules do not allow the Company to hedge the actual translation of sales and expenses. By way of example, when the U.S. dollar strengthens compared to the French franc (or euro), there is a negative effect on Quiksilver Europe's reported results. It takes more profits in French francs to generate the same amount of profits in stronger U.S. dollars. The opposite is also true. That is, when the U.S. dollar weakens there is a positive effect. In fiscal 2001, the U.S. dollar strengthened compared to the French franc. So, sales of Quiksilver Europe increased about 29% in French francs compared to the year before, but only increased about 23% in U.S. dollars. The Euro With the exception of the United Kingdom, the primary countries where Quiksilver Europe operates adopted the euro as legal currency effective January 1, 1999. At that time exchange rates between the French franc and the euro were fixed. Euro denominated currency began circulating as of January 1, 2002. Quiksilver Europe began processing transactions in euros effective November 1, 2001. Interest Rates Most of the Company's lines of credit and long-term debt bear interest based on LIBOR. Interest rates, therefore, can move up or down depending on market conditions. As discussed above, the Company has entered into interest rate swap agreements to hedge its exposure to such fluctuations. The approximate amount of remaining variable rate debt was $66,000,000 at October 31, 2001, and the average interest rate at that time was 4.5%. If interest rates were to increase by 10%, the Company's net income would be reduced by approximately $180,000 based on these fiscal 2001 levels. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Index to Consolidated Financial Statements" for a listing of the consolidated financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item will be included in the Company's Proxy Statement related to its 2002 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2001 and is included in this report by this reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be included in the Company's Proxy Statement related to its 2002 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2001 and is included in this report by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be included in the Company's Proxy Statement related to its 2002 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2001 and is included in this report by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be included in the Company's Proxy Statement related to its 2002 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2001 and is included in this report by this reference. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. Consolidated Financial Statements See "Index to Consolidated Financial Statements" on page 25 2. Exhibits See "Exhibit Index" on page 45 (b) Reports on Form 8-K. 1. The Company filed a report on Form 8-K to report various conference call errata on December 20, 2001. 24 QUIKSILVER, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page INDEPENDENT AUDITORS' REPORT.................................................... 26 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets October 31, 2001 and 2000................................................ 27 Consolidated Statements of Income Years Ended October 31, 2001, 2000 and 1999.............................. 28 Consolidated Statements of Comprehensive Income Years Ended October 31, 2001, 2000 and 1999............................... 28 Consolidated Statements of Stockholders' Equity Years Ended October 31, 2001, 2000 and 1999.............................. 29 Consolidated Statements of Cash Flows Years Ended October 31, 2001, 2000 and 1999.............................. 30 Notes to Consolidated Financial Statements.................................. 31
25 INDEPENDENT AUDITORS' REPORT To The Board of Directors and Stockholders of Quiksilver, Inc.: We have audited the accompanying consolidated balance sheets of Quiksilver, Inc. and subsidiaries as of October 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Quiksilver, Inc. and subsidiaries as of October 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP December 18, 2001 Costa Mesa, California 26 QUIKSILVER, INC. CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2001 AND 2000
2001 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents ........................................ $ 5,002,000 $ 2,298,000 Trade accounts receivable, less allowance for doubtful accounts of $6,280,000 (2001) and $5,090,000 (2000) - Note 3 ............... 155,879,000 136,394,000 Other receivables ................................................ 6,427,000 5,654,000 Inventories - Note 4 ............................................. 107,562,000 90,034,000 Deferred income taxes - Note 11 .................................. 8,548,000 5,234,000 Prepaid expenses and other current assets ........................ 4,831,000 3,759,000 ------------- ------------- Total current assets ....................................... 288,249,000 243,373,000 Fixed assets, net - Notes 5 and 6 ................................... 61,453,000 49,834,000 Trademarks, less accumulated amortization of $4,830,000 (2001) and $2,825,000 (2000) - Note 10 ................ 45,911,000 43,566,000 Goodwill, less accumulated amortization of $6,888,000 (2001) and $6,022,000 (2000) - Note 2 ................. 18,929,000 18,962,000 Deferred income taxes - Note 11 ..................................... 1,837,000 789,000 Other assets ........................................................ 2,359,000 2,218,000 ------------- ------------- Total assets ............................................... $ 418,738,000 $ 358,742,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit - Note 6 ......................................... $ 66,228,000 $ 49,203,000 Accounts payable ................................................. 40,554,000 40,642,000 Accrued liabilities - Note 7 ..................................... 24,898,000 22,568,000 Current portion of long-term debt - Note 6 ....................... 24,153,000 9,428,000 Income taxes payable - Note 11 ................................... -- 2,003,000 ------------- ------------- Total current liabilities .................................. 155,833,000 123,844,000 Long-term debt - Note 6 ............................................. 46,311,000 57,284,000 ------------- ------------- Total liabilities .......................................... 202,144,000 181,128,000 ------------- ------------- Commitments and contingencies - Note 8 Stockholders' equity - Note 9: 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 - 23,890,283 (2001) and 23,234,036 (2000) ....................... 239,000 232,000 Additional paid-in capital ....................................... 52,706,000 42,833,000 Treasury stock, 721,300 shares ................................... (6,778,000) (6,778,000) Retained earnings ................................................ 181,447,000 153,426,000 Accumulated other comprehensive loss ............................. (11,020,000) (12,099,000) ------------- ------------- Total stockholders' equity ................................. 216,594,000 177,614,000 ------------- ------------- Total liabilities and stockholders' equity ................. $ 418,738,000 $ 358,742,000 ============= =============
See notes to consolidated financial statements. 27 QUIKSILVER, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
2001 2000 1999 ---- ---- ---- Net sales............................................... $615,452,000 $515,689,000 $443,734,000 Cost of goods sold...................................... 382,762,000 315,900,000 268,184,000 ------------ ------------ ------------ Gross profit......................................... 232,690,000 199,789,000 175,550,000 ------------ ------------ ------------ Operating expenses: Selling, general and administrative expense.......... 181,220,000 142,888,000 124,479,000 Royalty income....................................... (5,169,000) (3,681,000) (2,123,000) Royalty expense...................................... -- 3,449,000 5,266,000 ------------ ------------ ------------ Total operating expenses.......................... 176,051,000 142,656,000 127,622,000 ------------ ------------ ------------ Operating income........................................ 56,639,000 57,133,000 47,928,000 Interest expense........................................ 10,873,000 6,435,000 3,476,000 Foreign currency gain................................... (95,000) (1,650,000) (960,000) Other expense........................................... 449,000 486,000 545,000 ------------ ------------ ------------ Income before provision for income taxes................ 45,412,000 51,862,000 44,867,000 Provision for income taxes - Note 11.................... 17,391,000 20,026,000 18,283,000 ------------ ------------ ------------ Net income.............................................. $ 28,021,000 $ 31,836,000 $ 26,584,000 ============ ============ ============ Net income per share - Note 1........................... $1.22 $1.42 $1.20 ============ ============ ============ Net income per share, assuming dilution - Note 1........ $1.17 $1.37 $1.14 ============ ============ ============ Weighted average common shares outstanding - Note 1..... 22,952,000 22,406,000 22,096,000 ============ ============ ============ Weighted average common shares outstanding, assuming dilution - Note 1........................... 24,049,000 23,232,000 23,284,000 ============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
2001 2000 1999 ---- ---- ---- Net income .................................................... $ 28,021,000 $ 31,836,000 $ 26,584,000 Other comprehensive income (loss): Foreign currency translation adjustment .................... 2,274,000 (8,309,000) (3,431,000) Net unrealized loss on derivative instruments, net of tax .. (1,195,000) -- -- ------------ ------------ ------------ Comprehensive income .......................................... $ 29,100,000 $ 23,527,000 $ 23,153,000 ============ ============ ============
See notes to consolidated financial statements. 28 QUIKSILVER, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
ACCUMULATED COMMON STOCK ADDITIONAL OTHER TOTAL -------------------- PAID-IN TREASURY RETAINED COMPREHENSIVE STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCK EARNINGS INCOME (LOSS) EQUITY ---------- -------- ----------- ----------- ------------ ------------- ------------- Balance, November 1, 1998....... 21,828,447 $218,000 $25,848,000 $(3,054,000) $ 95,006,000 $ (359,000) $117,659,000 Exercise of stock options..... 902,773 9,000 7,574,000 -- -- -- 7,583,000 Tax benefit from exercise of stock options............... -- -- 3,358,000 -- -- -- 3,358,000 Net income and other comprehensive loss.......... -- -- -- -- 26,584,000 (3,431,000) 23,153,000 ---------- -------- ----------- ----------- ------------ ------------ ------------ Balance, October 31, 1999....... 22,731,220 227,000 36,780,000 (3,054,000) 121,590,000 (3,790,000) 151,753,000 Exercise of stock options..... 502,816 5,000 4,302,000 -- -- -- 4,307,000 Tax benefit from exercise of stock options............... -- -- 1,751,000 -- -- -- 1,751,000 Repurchase of common stock.... -- -- -- (3,724,000) -- -- (3,724,000) Net income and other comprehensive loss.......... -- -- -- -- 31,836,000 (8,309,000) 23,527,000 ---------- -------- ----------- ----------- ------------ ------------ ------------ Balance, October 31, 2000....... 23,234,036 232,000 42,833,000 (6,778,000) 153,426,000 (12,099,000) 177,614,000 Exercise of stock options..... 641,000 6,000 5,859,000 -- -- -- 5,865,000 Tax benefit from exercise of stock options............ -- -- 3,778,000 -- -- -- 3,778,000 Employee stock purchase plan........................ 15,247 1,000 236,000 -- -- -- 237,000 Net income and other comprehensive income........ -- -- -- -- 28,021,000 1,079,000 29,100,000 ---------- -------- ----------- ----------- ------------ ------------ ------------ Balance, October 31, 2001....... 23,890,283 $239,000 $52,706,000 $(6,778,000) $181,447,000 $(11,020,000) $216,594,000 ========== ======== =========== =========== ============ ============ ============
See notes to consolidated financial statements. 29 QUIKSILVER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income ........................................................... $ 28,021,000 $ 31,836,000 $ 26,584,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .................................. 13,877,000 10,023,000 7,671,000 Provision for doubtful accounts ................................ 5,042,000 3,135,000 3,088,000 Loss on sale of fixed assets ................................... 39,000 183,000 543,000 Foreign currency loss (gain) ................................... 140,000 (2,002,000) -- Interest accretion ............................................. 1,667,000 518,000 -- Deferred income taxes .......................................... (3,364,000) 1,392,000 (2,665,000) Changes in operating assets and liabilities, net of effects from business acquisitions: Trade accounts receivable ................................ (21,699,000) (40,004,000) (35,122,000) Other receivables ........................................ 301,000 (1,091,000) (614,000) Inventories .............................................. (16,492,000) (21,481,000) (3,369,000) Prepaid expenses and other current assets ................ 2,190,000 (2,315,000) (775,000) Other assets ............................................. 871,000 (275,000) (348,000) Accounts payable ......................................... (1,224,000) 11,275,000 6,501,000 Accrued liabilities ...................................... (1,484,000) 659,000 3,214,000 Income taxes payable ..................................... (2,038,000) 4,047,000 (63,000) ------------ ------------ ------------ Net cash provided by (used in) operating activities .. 5,847,000 (4,100,000) 4,645,000 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sales of fixed assets .................................. 82,000 2,000 299,000 Capital expenditures ................................................. (22,622,000) (16,420,000) (23,900,000) Business acquisitions, net of acquired cash (Note 2) ................. (250,000) (24,409,000) -- ------------ ------------ ------------ Net cash used in investing activities ................ (22,790,000) (40,827,000) (23,601,000) ------------ ------------ ------------ Cash flows from financing activities: Borrowings on lines of credit ........................................ 70,363,000 71,127,000 55,806,000 Payments on lines of credit .......................................... (53,630,000) (50,872,000) (44,652,000) Borrowings on long-term debt ......................................... 7,872,000 41,822,000 4,442,000 Payments on long-term debt ........................................... (10,824,000) (17,038,000) (5,530,000) Purchase of treasury stock ........................................... -- (3,724,000) -- Proceeds from stock option exercises ................................. 6,102,000 4,307,000 7,583,000 ------------ ------------ ------------ Net cash provided by financing activities ............ 19,883,000 45,622,000 17,649,000 Effect of exchange rate changes on cash ................................. (236,000) 154,000 (273,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents .................... 2,704,000 849,000 (1,580,000) Cash and cash equivalents, beginning of year ............................ 2,298,000 1,449,000 3,029,000 ------------ ------------ ------------ Cash and cash equivalents, end of year .................................. $ 5,002,000 $ 2,298,000 $ 1,449,000 ============ ============ ============ Supplementary cash flow information: Cash paid during the year for: Interest .......................................................... $ 8,984,000 $ 5,526,000 $ 3,430,000 ============ ============ ============ Income taxes ...................................................... $ 17,821,000 $ 15,284,000 $ 19,849,000 ============ ============ ============ Non-cash financing activity -- Debt assumed in business acquisitions (Note 2) .................... $ 4,267,000 $ 19,384,000 $ -- ============ ============ ============
See notes to consolidated financial statements. 30 QUIKSILVER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Company Business The Company designs, produces and distributes clothing, accessories and related products for active-minded people and develops brands that represent a casual lifestyle--driven from a boardriding heritage. The Company's primary focus is apparel for young men and young women under the Quiksilver, Roxy, Raisins, Radio Fiji, Gotcha (Europe) and Hawk Clothing labels. The Company also manufactures apparel for boys (Quiksilver Boys and Hawk Clothing), girls (Teenie Wahine and Raisins Girls), men (Quiksilveredition) and women (Leilani swimwear), as well as snowboards, snowboard boots and bindings under the Lib Technologies, Gnu, Supernatural Manufacturing and Bent Metal labels. Distribution is primarily in the United States and Europe and is primarily based in surf shops and specialty stores that provide an outstanding retail experience for their customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Since acquiring Quiksilver International Pty Ltd, an Australian company, in July 2000 (See Note 2--Acquisitions), the Company owns all international rights to use the Quiksilver trademark. Prior to this acquisition, the Company owned these intellectual property rights in the United States and Mexico only, and operated under license agreements with Quiksilver International Pty Ltd to use the Quiksilver trademark in other countries and territories. The Company competes in markets that are highly competitive. The Company's ability to evaluate and respond to changing consumer demands and tastes is critical to its success. The Company believes that consumer acceptance depends on product, image, design, fit and quality. Consequently, the Company has developed an experienced team of designers, artists, merchandisers, pattern makers, and cutting and sewing contractors that it believes has helped it remain in the forefront of design in the areas in which it competes. The Company believes, however, that its continued success will depend on its ability to promote its image and to design products acceptable to the marketplace. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Quiksilver, Inc. and subsidiaries, including Na Pali, S.A.S. and subsidiaries ("Quiksilver Europe") and Quiksilver Australia Pty Ltd and subsidiaries ("Quiksilver International"). Intercompany accounts and transactions have been eliminated in consolidation. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Cash Equivalents Certificates of deposit and highly liquid short-term investments purchased with original maturities of three months or less are considered cash equivalents. Inventories Inventories are valued at the lower of cost (first-in, first-out) or market. Fixed Assets Furniture, equipment and buildings are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, which generally range from two to ten years. Leasehold improvements are recorded at cost and amortized over their estimated useful lives or related lease term, whichever is shorter. The cost of land use rights for certain leased retail locations (totaling approximately $5,200,000 at 31 October 31, 2001) is included in, and accounted for, as land in the accompanying consolidated financial statements and is reviewed periodically for impairment. Trademarks The Quiksilver trademark purchased in 1988 for the United States and Mexico is being amortized on a straight-line basis over 20 years. The Quiksilver trademark purchased in July 2000 for all other countries and territories and the Hawk Clothing trademark acquired in March 2000 are being amortized on a straight-line basis over 25 years. Long-Lived Assets The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". In accordance with SFAS No. 121, long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Goodwill Goodwill arose primarily from the acquisitions of Quiksilver Europe, The Raisin Company, Inc., Mervin and Freestyle S.A. and is being amortized on a straight-line basis over periods ranging from 20 to 30 years. The Company assesses the recoverability of goodwill at each balance sheet date by determining whether the amortization of the balance over its remaining useful life can be recovered through projected undiscounted future operating cash flows from each acquisition. Revenue Recognition Sales are recognized upon the transfer of title and risk of ownership to customers. Allowances for estimated returns and doubtful accounts are provided when sales are recorded. Stock Based Compensation The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock option plans. Included in Note 9 -- Stockholders' Equity to these consolidated financial statements are the pro forma disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation". Income Taxes The Company accounts for income taxes using the asset and liability approach as promulgated by SFAS No. 109, "Accounting for Income Taxes". Deferred income tax assets and liabilities are established for temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities at tax rates expected to be in effect when such assets or liabilities are realized or settled. Deferred income tax assets are reduced by a valuation allowance if, in the judgment of the Company's management, it is more likely than not that such assets will not be realized. Net Income Per Share During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share", which requires the Company to report basic and diluted earnings per share ("EPS"). Basic EPS is based on the weighted average number of shares outstanding during the periods, while diluted EPS additionally includes the dilutive effect of the Company's outstanding stock options computed using the treasury stock method. For the years ended October 31, 2001, 2000 and 1999, the weighted average common shares outstanding, assuming dilution, includes 1,097,000, 826,000 and 1,188,000, respectively, of dilutive stock options. During fiscal 1999, the Company's Board of Directors approved a three-for-two split of the Company's Common Stock. The split was effected in the form of a stock dividend on April 23, 1999 to shareholders of record on April 15, 1999. All share and per share information has been restated to reflect the stock split. 32 Foreign Currency and Derivatives The Company's primary functional currency is the U.S. dollar, while the functional currency of Quiksilver Europe is the French franc (or euro). Assets and liabilities of the Company denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on November 1, 2000. SFAS No. 133 affected the Company's financial statements beginning with the first quarter of fiscal 2001 by requiring that the Company recognize all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the use of the derivative. The adoption of SFAS No. 133 resulted in a transition adjustment of $799,000 (net of tax effects of $533,000) that was recorded as a cumulative-effect type adjustment in other comprehensive income to recognize the fair value of derivatives that are designated as cash-flow hedges. Comprehensive Income Comprehensive income includes all changes in stockholders' equity except those resulting from investments by, and distributions to, stockholders. Accordingly, the Company's Consolidated Statements of Comprehensive Income include net income and foreign currency adjustments that arise from the translation of the financial statements of Quiksilver Europe and Quiksilver International into U.S. dollars and unrealized gains and losses on certain derivative instruments. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments The carrying value of the Company's trade accounts receivable and accounts payable approximates their fair value due to their short-term nature. The carrying value of the Company's lines of credit and long-term debt approximates its fair value as these borrowings include a series of short-term notes at floating interest rates. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". This standard eliminates the pooling method of accounting for business combinations initiated after June 30, 2001. In addition, SFAS No. 141 addresses the accounting for intangible assets and goodwill acquired in a business combination. This portion of SFAS No. 141 is effective for business combinations completed after June 30, 2001. The Company does not expect SFAS No. 141 to have a material effect on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible Assets", which revises the accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually and also in the event of an impairment indicator. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 as of November 1, 2001 and has begun to test goodwill for impairment under the new rules, applying a fair-value-based test. The Company expects that adoption of SFAS No. 142 will increase annual operating income through a reduction of amortization expense by approximately $3.0 million or $.07 per share diluted, on an annual basis. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to have a significant impact on the Company's financial position or results of 33 operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets. NOTE 2 -- BUSINESS ACQUISITIONS Effective July 1, 2000, the Company acquired Quiksilver International, an Australian company that owns the worldwide trademark rights to the Quiksilver brand name (other than in the United States and Mexico where those rights were already owned by the Company.) The initial acquisition payment was $23,564,000, which includes cash consideration of $23,101,000 and transaction costs, net of imputed interest, of $463,000. Under the terms of the purchase agreements, two additional payments will be made, one at the end of fiscal 2002 and one at the end of fiscal 2005. Such deferred purchase price payments, which are denominated in Australian dollars, are contingent on the computed earnings of Quiksilver International through June 20, 2005, subject to specified minimums. The deferred minimum purchase price payments, which were discounted to present value, totaled $17,294,000 at the date of the acquisition, and are included as a component of the purchase price recorded at July 1, 2000. The deferred purchase price payment due at the end of fiscal 2002 was increased by $4,267,000, with a corresponding increase to Trademarks, as a result of Quiksilver International's operations for the 12 months ended June 30, 2001. The obligation related to these deferred purchase price payments is reflected in the Consolidated Balance Sheet as a component of debt. The acquisition has been recorded using the purchase method of accounting and resulted in a trademark valuation at July 1, 2000 of $41,397,000, which is being amortized over 25 years. Effective May 1, 2000, the Company acquired the operations of Freestyle, S. A., a French company that is the European licensee of Gotcha International ("Gotcha Europe"). The initial purchase price was $2,200,000, which includes a cash payment of $900,000 and assumed debt of $1,300,000. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $3,000,000 at the acquisition date. This goodwill is being amortized over 20 years. Effective March 1, 2000, the Company acquired the operations of Hawk Designs, Inc., the owner of the intellectual property rights to the name Tony Hawk for apparel and related accessories. The initial purchase price was $1,290,000, which includes a cash payment of $500,000, additional consideration of $250,000 paid in fiscal 2001 and $250,000 to be paid in fiscal 2002, and assumed bank debt of $290,000. Under the terms of the purchase agreement and for additional compensation, Tony Hawk also agreed to promote Quiksilver products through December 31, 2005, renewable through 2015 at the Company's option. The acquisition has been recorded using the purchase method of accounting and resulted in a trademark valuation of $1,165,000, which is being amortized over 25 years. The results of operations for all acquisitions are included in the Consolidated Statements of Income from their respective acquisition dates, and accordingly, are all included for the full year of fiscal 2001. Assuming these acquisitions had occurred as of November 1, 1998, consolidated net sales would have been $522,154,000 and $456,865,000 for the years ended October 31, 2000 and 1999, respectively. Net income would have been $31,846,000 and $28,267,000, respectively for those same years, and diluted earnings per share would have been $1.37 and $1.21, respectively. NOTE 3 -- ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts includes the following:
YEARS ENDED OCTOBER 31, -------------------------------------- 2001 2000 1999 ---- ---- ---- Balance, beginning of year................ $5,090,000 $ 5,738,000 $ 3,738,000 Provision for doubtful accounts........ 5,042,000 3,135,000 3,088,000 Deductions............................. (3,852,000) (3,783,000) (1,088,000) ---------- ----------- ----------- Balance, end of year...................... $6,280,000 $ 5,090,000 $ 5,738,000 ========== =========== ===========
34 NOTE 4 -- INVENTORIES During the fiscal year ended October 31, 2001, the Company recorded a $6,000,000 writedown of its domestic inventories. This writedown was required primarily as a result of the aftermath of September 11, 2001, when the market for consumer products, including casual lifestyle apparel, experienced a dramatic falloff in demand and resulted in a substantial amount of customer order cancellations. This phenomenon created an industry wide glut of excess product available to the traditional off price channel thereby driving the price of certain seasonal product below cost. Inventories consist of the following:
OCTOBER 31, --------------------------- 2001 2000 ---- ---- Raw materials.............................. $ 21,325,000 $ 22,191,000 Work in process............................ 8,138,000 7,543,000 Finished goods............................. 78,099,000 60,300,000 ------------ ------------ $107,562,000 $ 90,034,000 ============ ============
NOTE 5 -- FIXED ASSETS Fixed assets consist of the following:
OCTOBER 31, --------------------------- 2001 2000 ---- ---- Furniture and equipment...................... $ 64,791,000 $ 44,252,000 Leasehold improvements....................... 17,898,000 17,402,000 Land and buildings........................... 13,233,000 11,391,000 ------------ ------------ 95,922,000 73,045,000 Accumulated depreciation and amortization.... (34,469,000) (23,211,000) ------------ ------------ $ 61,453,000 $ 49,834,000 ============ ============
NOTE 6 -- LINES OF CREDIT AND LONG-TERM DEBT The Company has a syndicated bank facility that was amended in October 2001 to increase the revolving credit maximum amount (the "Credit Agreement"). The Credit Agreement provides for (i) a revolving line of credit of up to $125,000,000, including a $60,000,000 sublimit for letters of credit and (ii) a term loan initially totaling $25,000,000. The revolving line of credit expires on June 28, 2002. Borrowings under the revolving line of credit bear interest based on the bank's reference rate or based on LIBOR for borrowings committed to be outstanding for 30 days or longer. The weighted average interest rate at October 31, 2001 was 4.3%. The term loan is repayable in equal quarterly installments through October 2004, and bears interest contractually based on LIBOR. However, the Company entered into an interest rate swap agreement to fix the interest rate at 7.20% per year. This swap agreement is effective through October 2004 and is an effective hedge of the related interest rate exposure. The fair value of the interest rate swap at October 31, 2001 was a loss of $766,000. As of October 31, 2001, the Company had $47,000,000 of cash borrowings outstanding under the revolving line of credit and $18,750,000 outstanding under the term loan. The Credit Agreement contains restrictive covenants. The most significant covenants relate to maintaining certain leverage and fixed charge coverage ratios. The payment of dividends is restricted, among other things, and the Company's assets, other than trademarks and other intellectual property, generally have been pledged as collateral. At October 31, 2001, the Company was in compliance with such covenants. The Company believes that the line of credit will be renewed with substantially similar terms. 35 The Company also has a term loan with a U.S. bank that initially totaled $12,300,000 in April 2000. This term loan is repayable in installments of $102,500 per month with a final maturity in October 2004. The Company anticipates that these monthly payments and final balloon payment will be paid from borrowings on the Company's revolving credit facility. This term loan is secured by the leasehold improvements at the Company's Huntington Beach headquarters and bears interest contractually based on LIBOR. However, in January 2000, the Company entered into an interest rate swap agreement with a notional amount equal to the term loan, effective through April 2007, to fix the interest rate at 8.43% per annum. The fair value of the interest rate swap at October 31, 2001 was a loss of $1,041,000. The restrictive covenants under this term loan are substantially the same as those under the Credit Agreement. The outstanding balance of this term loan at October 31, 2001 was $10,353,000. Quiksilver Europe has arrangements with banks that provide for maximum cash borrowings of approximately $46,000,000 in addition to approximately $33,000,000 available for the issuance of letters of credit. At October 31, 2001, these lines of credit bore interest at rates ranging from 4.7% to 5.2%. The lines of credit expire on various dates through April 2002, and the Company believes that these lines of credit will continue to be available with substantially similar terms. As of October 31, 2001, $19,228,000 was outstanding under these lines of credit. Quiksilver Europe also has $19,706,000 of long-term debt, the majority of which is collateralized by land and buildings. This long-term debt bears interest at rates ranging generally from 4.1% to 5.9%, requires monthly, quarterly or annual principal and interest payments and is due at various dates through 2011. As part of the acquisition of Quiksilver International, the Company is obligated to make two additional purchase price payments, which are denominated in Australian dollars, and are contingent on the computed earnings of Quiksilver International through June 20, 2005. While these obligations were discounted to present value as of the acquisition date, the carrying amount of these obligations fluctuates based on changes in the exchange rate between Australian dollars and U.S. dollars. As of October 31, 2001, these obligations totaled $21,655,000. Principal payments on long-term debt are due approximately as follows: 2002..................................... $24,153,000 2003..................................... 11,010,000 2004..................................... 17,407,000 2005..................................... 10,464,000 2006..................................... 2,646,000 Thereafter............................... 4,784,000 ----------- $70,464,000 ===========
NOTE 7 -- ACCRUED LIABILITIES Accrued liabilities consist of the following:
OCTOBER 31, ------------------------- 2001 2000 ---- ---- Accrued employee compensation and benefits.... $11,411,000 $10,863,000 Accrued sales and payroll taxes............... 2,428,000 2,832,000 Derivative liability.......................... 2,646,000 -- Other liabilities............................. 8,413,000 8,873,000 ----------- ----------- $24,898,000 $22,568,000 =========== ===========
36 NOTE 8 -- COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases certain land and buildings under long-term operating lease agreements. The following is a schedule of future minimum lease payments required under such leases as of October 31, 2001: 2002..................................... $ 12,710,000 2003..................................... 13,247,000 2004..................................... 12,071,000 2005..................................... 11,488,000 2006..................................... 11,289,000 Thereafter............................... 40,058,000 ------------ $100,863,000 ============
Total rent expense was $11,051,000, $6,670,000 and $4,840,000 during the years ended October 31, 2001, 2000 and 1999, respectively. Litigation Legal claims against the Company consist of matters incidental to the Company's business. In the opinion of management, the outcome of these claims will not materially affect the Company's consolidated financial position or results of operations. NOTE 9 -- STOCKHOLDERS' EQUITY In March 2000, the Company's stockholders approved the Company's 2000 Stock Incentive Plan (the "2000 Plan"), which generally replaced the Company's previous stock option plans. Under the 2000 Plan, 4,436,209 shares are reserved for issuance over its term, consisting of 3,236,209 shares authorized under predecessor plans plus an additional 1,200,000 shares. Nonqualified and incentive options may be granted to officers and employees selected by the plan's administrative committee at an exercise price not less than the fair market value of the underlying shares on the date of grant. Payment by option holders upon exercise of an option may be made in cash, or, with the consent of the committee, by delivering previously outstanding shares of the Company's Common Stock. Options vest over a period of time, generally three to five years, as designated by the committee and are subject to such other terms and conditions as the committee determines. Certain stock options have also been granted in connection with the Company's business acquisitions. 37 Changes in shares under option for the years ended October 31, 2001, 2000 and 1999 are summarized as follows:
YEARS ENDED OCTOBER 31, ------------------------------------------------------------------ 2001 2000 1999 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- Outstanding, beginning of year...... 3,616,301 $10.01 3,410,531 $ 9.22 3,846,408 $ 8.15 Granted........................... 642,100 17.30 784,790 13.00 490,298 16.05 Exercised......................... (641,000) 9.16 (502,818) 8.59 (902,773) 8.34 Canceled.......................... (44,719) 14.30 (76,202) 14.71 (23,402) 12.30 --------- --------- --------- Outstanding, end of year............ 3,572,682 $11.42 3,616,301 $10.01 3,410,531 $ 9.22 ========= ====== ========= ====== ========= ====== Options exercisable, end of year.... 2,340,242 $ 9.52 2,168,831 $ 8.30 1,948,571 $ 7.39 ========= ====== ========= ====== ========= ====== Weighted average fair value of options granted during the year... $10.70 $ 6.55 $ 7.42 ====== ====== ======
Outstanding stock options at October 31, 2001 consist of the following:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------- --------------------- WEIGHTED RANGE OF AVERAGE WEIGHTED WEIGHTED EXERCISE REMAINING AVERAGE AVERAGE PRICES SHARES LIFE PRICE SHARES PRICE ------ ------ ---- ----- ------ ----- (YEARS) $ 1.79 - $ 2.65 75,000 0.6 $ 2.19 75,000 $ 2.19 2.66 - 5.31 172,500 2.0 3.35 172,500 3.35 5.32 - 7.96 696,713 4.2 7.01 693,713 7.01 7.97 - 10.62 554,056 5.5 8.95 554,056 8.95 10.63 - 15.93 1,522,113 7.6 13.09 758,643 13.08 15.94 - 23.89 527,300 9.0 18.25 61,330 17.53 23.90 - 26.55 25,000 9.4 26.55 25,000 26.55 --------- --------- 1.79 - 26.55 3,572,682 6.4 $11.42 2,340,242 $ 9.52 ========= ====== ========= ======
The fair value of each option grant was estimated as of the grant date using the Black-Scholes option-pricing model for the years ended October 31, 2001, 2000 and 1999 assuming risk-free interest rates of 4.9%, 5.8% and 6.2%, respectively, volatility of 64.8%, 58.6% and 57.0%, respectively, zero dividend yield, and expected lives of 4.6, 3.7 and 2.9 years, respectively. If compensation expense was determined based on the fair value method beginning with grants in the year ended October 31, 1996, the Company's net income and net income per share, assuming dilution would have been reduced to the pro forma amounts indicated below:
YEARS ENDED OCTOBER 31, ---------------------------------------- 2001 2000 1999 ---- ---- ---- Actual net income................................... $28,021,000 $31,836,000 $26,584,000 Pro forma net income................................ 24,832,000 29,658,000 24,703,000 Actual net income per share, assuming dilution...... $ 1.17 $ 1.37 $ 1.14 Pro forma net income per share, assuming dilution... 1.04 1.28 1.06
38 The impact of outstanding nonvested stock options granted prior to the year ended October 31, 1996 has been excluded from the pro forma calculation. Accordingly, the pro forma adjustments are not indicative of future period pro forma adjustments. As of October 31, 2001, there were 776,478 shares of common stock that were available for future grant. The Company began the Quiksilver Employee Stock Purchase Plan ("the ESPP") in fiscal 2001, which provides a method for employees of the Company to purchase common stock at a 15% discount from fair market value as of the beginning or end of each purchasing period or six months, whichever is lower. The ESPP covers substantially all full time employees who have at least five months of service with the Company. The ESPP is intended to constitute an "employee stock purchase plan" within the meaning of section 423 of the Internal Revenue Code of 1986, as amended, and therefore the Company does not recognize compensation expense related to the ESPP. During fiscal 2001, 15,247 shares of stock were issued under the plan with proceeds to the Company of $237,000. NOTE 10 -- ROYALTY, TRADEMARK AND ADVERTISING The Company and Quiksilver International entered into an agreement in January 1996 that required, among other things, the Company to pay a fee of approximately $400,000 per year for advertising and promotion. From a consolidated perspective, this agreement was eliminated effective with the acquisition of Quiksilver International during fiscal 2000. Quiksilver Europe had a European trademark license and manufacturing agreement (the "Trademark Agreement") with Quiksilver International. The Trademark Agreement provided that Quiksilver Europe could sell products under the Quiksilver trademark and tradename through 2012 in the territories covered by the Trademark Agreement (primarily Western Europe). In consideration of the rights granted under the Trademark Agreement, Quiksilver Europe paid to Quiksilver International a royalty on a monthly basis amounting to 3% of Quiksilver Europe's net sales of Quiksilver product. The Trademark Agreement also required Quiksilver Europe to pay a promotional fee of 1% of net sales. From a consolidated perspective, this Trademark Agreement was eliminated effective with the acquisition of Quiksilver International during fiscal 2000. Quiksilver Europe also has a license agreement with Gotcha International, L.P. that resulted from the Company's acquisition of Freestyle, S.A., the European licensee of Gotcha International, L.P. The license agreement provides that Quiksilver Europe can sell products under the Gotcha trademark and tradename through 2015 in the territories covered by the license agreement (primarily Western Europe.) Royalties range from 2.8% to 4.0% of net sales, based on sales volume, with certain minimum requirements. Promotional contributions are also required based on sales volume and range from 1.0% to 1.5%. The Company licensed the use of the Quiksilver and Roxy trademarks in Mexico in exchange for royalties of 4.5% of net sales after Mexican taxes, and the use of the Quiksilver and Roxy trademarks on watches and sunglasses in exchange for royalties of 8% and 10% of sales, respectively. The Company also licensed a chain of outlet stores that pay the Company royalties of 4% of product purchases from the Company. These license agreements expire through 2006. Effective with the acquisition of Quiksilver International during fiscal 2000, the Company acquired licenses for the use of the Quiksilver trademark in various countries and territories around the world. The licensees are headquartered in Australia, Japan, Turkey, South Africa, Brazil, Indonesia, Korea, Argentina, Chile and Mauritius. These licensees pay the Company royalties ranging from 3% to 5% of the licensees sales. 39 NOTE 11 -- INCOME TAXES A summary of the provision for income taxes is as follows:
YEARS ENDED OCTOBER 31, --------------------------------------- 2001 2000 1999 ---- ---- ---- Current: Federal...................... $ 8,038,000 $ 8,820,000 $11,430,000 State........................ 2,023,000 2,103,000 2,504,000 Foreign...................... 10,694,000 7,711,000 7,014,000 ----------- ----------- ----------- 20,755,000 18,634,000 20,948,000 ----------- ----------- ----------- Deferred: Federal...................... (2,506,000) 1,158,000 (2,170,000) State........................ (640,000) 209,000 (420,000) Foreign...................... (218,000) 25,000 (75,000) ----------- ----------- ----------- (3,364,000) 1,392,000 (2,665,000) ----------- ----------- ----------- Provision for income taxes...... $17,391,000 $20,026,000 $18,283,000 =========== =========== ===========
A reconciliation of the effective income tax rate to a computed "expected" statutory federal income tax rate is as follows:
YEARS ENDED OCTOBER 31, --------------------------- 2001 2000 1999 ---- ---- ---- Computed "expected" statutory federal income tax rate................................... 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit................................ 2.0 2.9 3.0 Foreign income tax rate differential.......... 1.3 0.3 2.3 Other......................................... -- 0.4 0.4 ----- ---- ----- Effective income tax rate..................... 38.3% 38.6% 40.7% ===== ==== =====
The components of net deferred income taxes are as follows:
OCTOBER 31, --------------------------- 2001 2000 ---- ---- Deferred income tax assets: Allowance for doubtful accounts.............. $ 4,835,000 $ 3,443,000 Trademark amortization....................... 981,000 907,000 State taxes.................................. 46,000 403,000 Other comprehensive income................... 961,000 -- Nondeductible accruals and other............. 5,401,000 3,140,000 ----------- ----------- 12,224,000 7,893,000 ----------- ----------- Deferred income tax liabilities: Goodwill amortization........................ (622,000) (413,000) Depreciation................................. (737,000) (1,183,000) Other........................................ (480,000) (274,000) ----------- ----------- (1,839,000) (1,870,000) ----------- ----------- Net deferred income taxes $10,385,000 $ 6,023,000 =========== ===========
The tax benefits from the exercise of certain stock options are reflected as additions to paid-in capital. No provision has been made for federal, state, or additional foreign income taxes which would be due upon the actual or deemed distribution of approximately $66,000,000 of undistributed earnings of foreign subsidiaries as of October 31, 2001 that have been, or are intended to be, permanently invested. 40 NOTE 12 -- RETIREMENT PLAN The Company maintains the Quiksilver 401(k) Employee Savings Plan and Trust (the "401(k) Plan"). This plan is generally available to all domestic employees with six months of service and is funded by employee contributions and periodic discretionary contributions from the Company which are approved by the Company's Board of Directors. The Company made contributions of $404,000, $320,000 and $242,000 to the 401(k) Plan for the years ended October 31, 2001, 2000 and 1999, respectively. NOTE 13 -- SEGMENT AND GEOGRAPHIC INFORMATION Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's management in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories and related products. Operating results of the Company's various product lines have been aggregated because of their common characteristics and their reliance on shared operating functions. Within the consumer products industry, the Company operates primarily in the United States (referred to herein as "domestic") and in Europe, and no single customer accounts for more than 10% of the Company's net sales. Information related to domestic and European operations is as follows:
YEARS ENDED OCTOBER 31, ------------------------------------------- 2001 2000 1999 ---- ---- ---- Net sales to unaffiliated customers: Domestic......................... $391,575,000 $333,075,000 $290,363,000 Europe........................... 223,877,000 182,614,000 153,371,000 ------------ ------------ ------------ Consolidated.................. $615,452,000 $515,689,000 $443,734,000 ============ ============ ============ Gross profit: Domestic......................... $136,072,000 $120,685,000 $106,156,000 Europe........................... 96,618,000 79,104,000 69,394,000 ------------ ------------ ------------ Consolidated.................. $232,690,000 $199,789,000 $175,550,000 ============ ============ ============ Operating income: Domestic......................... $ 31,294,000 $ 36,110,000 $ 29,565,000 Europe........................... 25,345,000 21,023,000 18,363,000 ------------ ------------ ------------ Consolidated.................. $ 56,639,000 $ 57,133,000 $ 47,928,000 ============ ============ ============ Identifiable assets: Domestic......................... $282,108,000 $265,000,000 $180,546,000 Europe........................... 136,630,000 93,742,000 79,127,000 ------------ ------------ ------------ Consolidated.................. $418,738,000 $358,742,000 $259,673,000 ============ ============ ============
France accounted for 45.9%, 50.5% and 55.5% of European net sales to unaffiliated customers for the years ended October 31, 2001, 2000 and 1999, respectively, while the United Kingdom accounted for 18.0%, 12.8% and 13.5%, respectively, and Spain accounted for 14.3%, 12.5% and 11.1%, respectively. NOTE 14 -- DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of its international subsidiaries that 41 are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to its variable rate debt. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company's consolidated financial statements due to the translation of the operating results and financial position of the Company's international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage the Company's exposure to the risk of fluctuations in interest rates. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. Other derivatives, which do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks, are marked to market value with corresponding gains or losses recorded in earnings. As of October 31, 2001, the Company was hedging forecasted transactions expected to occur in the following twelve months. Assuming exchange rates at October 31, 2001 remain constant, $247,000 of gains related to hedges of these transactions are expected to be reclassified into earnings over the next twelve months. Also included in accumulated other comprehensive income at October 31, 2001 is a charge related to cash flow hedges of the Company's long-term debt that is denominated in Australian dollars, totaling $1,442,000, which will be amortized into earnings through fiscal 2005 as the debt matures. On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the fiscal year ended October 31, 2001, the Company reclassified into earnings a net loss of $689,000 resulting from the expiration, sale, termination, or exercise of derivative contracts. Additionally, a gain of $1,225,000 was recognized during the fiscal year ended October 31, 2001 for changes in the value of derivatives that were marked to market value. The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts. A summary of derivative contracts at October 31, 2001 is as follows:
NOTIONAL FAIR AMOUNT MATURITY VALUE ------ -------- ----- British pounds........ $23,941,000 Nov 2001 - Aug 2002 $ 278,000 U.S. dollars.......... 20,500,000 Nov 2001 - Aug 2002 418,000 Australian dollars.... 26,020,000 Sept 2002 - Sept 2005 (837,000) Interest rate swap.... 18,750,000 Oct 2004 (766,000) Interest rate swap.... 10,353,000 April 2007 (1,041,000) ----------- ----------- $99,564,000 $(1,948,000) =========== ===========
42 NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of quarterly financial data (unaudited) is as follows:
QUARTER QUARTER QUARTER QUARTER ENDED ENDED ENDED ENDED JANUARY 31 APRIL 30 JULY 31 OCTOBER 31 ---------- -------- ------- ---------- Year ended October 31, 2001 Net sales.................. $121,833,000 $168,198,000 $ 155,259,000 $170,162,000 Gross profit............... 47,435,000 67,462,000 58,878,000 58,915,000 Net income................. 3,706,000 13,981,000 7,955,000 2,379,000 Net income per share, assuming dilution........ 0.16 0.58 0.33 0.10 Trade accounts receivable.. 120,969,000 149,442,000 149,221,000 155,879,000 Inventories................ 113,281,000 98,241,000 125,508,000 107,562,000 Year ended October 31, 2000 Net Sales.................. $ 99,929,000 $142,139,000 $ 122,011,000 $151,610,000 Gross Profit............... 38,868,000 58,272,000 46,785,000 55,864,000 Net Income................. 4,079,000 11,309,000 6,670,000 9,778,000 Net Income per share, assuming dilution........ 0.18 0.49 0.29 0.42 Trade accounts receivable.. 94,739,000 122,729,000 110,797,000 136,394,000 Inventories................ 90,376,000 72,360,000 83,378,000 90,034,000
43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: January 28, 2002 QUIKSILVER, INC. (REGISTRANT) By: /s/ Robert B. McKnight, Jr. By: /s/ Steven L. Brink ----------------------------- ------------------------------ Robert B. McKnight, Jr. Steven L. Brink Chairman of the Board and Chief Financial Officer Chief Executive Officer and Treasurer (Principal Executive Officer) (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE SIGNED ---------- ----- ----------- /s/ Robert B. McKnight, Jr. Chairman of the Board and January 28, 2002 - ------------------------------ Chief Executive Officer Robert B. McKnight, Jr. (Principal Executive Officer) /s/ Steven L. Brink Chief Financial Officer January 28, 2002 - ------------------------------ and Treasurer Steven L. Brink (Principal Accounting Officer) /s/ William M. Barnum, Jr. Director January 28, 2002 - ------------------------------ William M. Barnum, Jr. /s/Charles E. Crowe Director January 28, 2002 - ------------------------------ Charles E. Crowe /s/ Michael H. Gray Director January 28, 2002 - ------------------------------ Michael H. Gray /s/ Harry Hodge Director January 28, 2002 - ------------------------------ Harry Hodge Director - ------------------------------ Robert G. Kirby /s/ Tom Roach Director January 28, 2002 - ------------------------------ Tom Roach
44 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Certificate of Incorporation as presently in effect (incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1996). 3.2 Bylaws as presently in effect (incorporated by reference to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1990). 10.1 Revolving Credit and Term Loan Agreement dated as of October 6, 2000 (incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000). 10.2 First Amendment to Revolving Credit and Term Loan Agreement dated October 9, 2001 (filed herewith). 10.3 Term Loan Agreement dated as of April 25, 2000 (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the three months ended April 30, 2000). 10.4 Second Amendment to term Loan Agreement dated October 12, 2000 (incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000). 10.5 Share Purchase Agreement, dated July 27, 2000, by and among Quiksilver, Inc., Quiksilver Australia Pty Ltd, Quiksilver International Pty Ltd and Shareholders of Quiksilver International Pty Ltd. (incorporated by reference from the Company's report on Form 8-K dated July 27, 2000). 10.6 Minority Shareholder Purchase Agreement, dated July 27, 2000, by and among Quiksilver, Inc., Quiksilver Australia Pty Ltd and Shareholders of Quiksilver International Pty Ltd. (incorporated by reference from the Company's report on Form 8-K dated July 27, 2000). 10.7 Form of Indemnity Agreement between the Registrant and individual Directors and officers of the Registrant (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1996).(1) 10.8 Quiksilver, Inc. Stock Option Plan dated March 24, 1995 (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1995).(1) 10.9 Quiksilver, Inc. 1995 Nonemployee Directors' Stock Option Plan dated March 24, 1995 (incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the three months ended April 30, 1996).(1) 10.10 Quiksilver, Inc. 1996 Stock Option Plan dated January 26, 1996 (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the three months ended April 30, 1996.(1) 10.11 Quiksilver, Inc. 2000 Stock Incentive Plan (incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000). 10.12 Employment Agreement between Robert B. McKnight, Jr. and Registrant dated April 1, 1996 (incorporated by reference to Exhibit 10.10 of the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1996).(1) 10.13 Employment Agreement between Harry Hodge and Registrant dated April 1, 1996 (incorporated by reference to Exhibit 10.11 of the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1996).(1) 10.14 Employment Agreement between Steven L. Brink and Registrant dated October 24, 1996 (incorporated by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 1996).(1)
45 10.15 Services Agreement between Bernard Mariette and Registrant dated November 1, 1998 (incorporated by reference from the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000). 10.16 Employment Agreement between Charles Exon and Registrant dated August 1, 2000 (filed herewith). 21.1 Names and Jurisdictions of Subsidiaries. 23.1 Independent Auditors' Consent.
(1) Management contract or compensatory plan. 46 EX-10.2 3 a78631ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 FIRST AMENDMENT TO REVOLVING CREDIT AND TERM LOAN AGREEMENT This Amendment, dated as of October 9, 2001, is entered into by (1) QUIKSILVER, INC., a Delaware corporation (the "Borrower"), (2) the banks whose names appear on the signature pages hereof (the "Lenders") and (3) UNION BANK OF CALIFORNIA, N.A., a national banking association ("UBOC"), as administrative agent for the Lenders (in such capacity, the "Agent"). Recitals A. The Borrower, the Lenders, UBOC, as the Agent and as co-lead arranger, The Chase Manhattan Bank, as syndication agent and co-lead arranger, and Fleet National Bank, as documentation agent, are party to a Revolving Credit and Term Loan Agreement dated as of October 6, 2000 (the "Credit Agreement"). Terms defined in the Credit Agreement and not otherwise defined herein have the same respective meanings when used herein, and the other definitional provisions set forth in Section 1.2 of the Credit Agreement are incorporated herein by reference. B. The Borrower and the Lenders wish to amend the Credit Agreement to increase the Revolving Loan Commitment to an aggregate of $125,000,000. Accordingly, the Borrower and the Lenders hereby agree as set forth below. SECTION 1. Amendments to Credit Agreement. Effective as of the date hereof but subject to satisfaction of the conditions precedent set forth in Section 2, the Borrower and the Lenders hereby agree that the Credit Agreement is amended as set forth below. (a) The last sentence of Section 2.3(a) of the Credit Agreement is amended in full to read as follows: "No commercial Letter of Credit shall in any event have an expiration date later than 120 days after the Revolving Loan Commitment Expiration Date, and no standby Letter of Credit shall in any event have an expiration date later than the Revolving Loan Commitment Expiration Date; provided, however, that up to $2,000,000 in aggregate face amount of standby Letters of Credit may have expiration date(s) up to 12 months after the Revolving Loan Commitment Expiration Date; further provided, however, that, on or before the Revolving Loan Commitment Expiration Date, the Borrower will pledge cash collateral to the Agent for the benefit of the Lenders, pursuant to documentation in form and substance satisfactory to the Agent, in the amount equal to the aggregate maximum amount available to be drawn under any and all standby Letters of Credit to be outstanding after the Revolving Loan Commitment Expiration Date." (b) Each Lender's signature page to the Credit Agreement is amended by deleting the amount set forth opposite the caption "Revolving Loan Commitment" below the signature block of such Lender and substituting the applicable amount set forth below for such Lender.
Lender Revolving Loan Commitment ------ ------------------------- Union Bank of California, N.A. $33,000,000 The Chase Manhattan Bank $22,000,000 Fleet National Bank $22,000,000 U.S. Bank National Association $20,500,000 SunTrust Bank $17,500,000 Israel Discount Bank of New York $10,000,000
SECTION 2. Conditions Precedent. This Amendment shall become effective as of the date first set forth above when and if the Agent receives all of the following documents, each dated the date hereof, in form and substance satisfactory to the Agent and in the number of originals reasonably requested by the Agent: (a) this Amendment, duly executed by the Borrower and the Lenders; (b) new Revolving Notes, appropriately completed for each of the Lenders and duly executed by the Borrower (the "New Revolving Notes"); (c) an amendment and restatement of the letter agreement between the Borrower and UBOC concerning fees (the "New Fee Letter"); and (d) such other approvals, opinions, evidence and documents as any Lender, through the Agent, may reasonably request. SECTION 3. Condition Subsequent. It shall be a condition to the continued effectiveness of this Amendment that the Agent receive by October 31, 2001, in form and substance satisfactory to the Agent and in the number of originals reasonably requested thereby, resolutions of the Board of Directors of the Borrower authorizing (a) the execution, delivery and performance by the Borrower of this Amendment, the New Revolving Notes, the New Fee Letter and the Loan Documents, as amended hereby and thereby, to which the Borrower is a party and (b) the borrowings contemplated by the Credit Agreement, as amended hereby, certified by the Secretary or an Assistant Secretary of the Borrower to be correct and complete and in full force and effect. SECTION 4. Representations and Warranties. The Borrower represents and warrants to the Lenders and the Agent as set forth below. -2- (a) The execution, delivery and performance by the Borrower of this Amendment, the New Revolving Notes, the New Fee Letter and the Loan Documents, as amended hereby and thereby, to which the Borrower is a party are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action and do not (i) contravene any Requirement of Law or contractual restriction binding on or affecting the Borrower or (ii) result in or require the creation or imposition of any Lien (other than any created by the Loan Documents) upon or with respect to any of the properties of the Borrower or any Subsidiary. (b) No authorization, approval or other action by, or notice to or filing with, any Governmental Authority is required for the due execution, delivery or performance by the Borrower of this Amendment, the New Revolving Notes, the New Fee Letter or any of the Loan Documents, as amended hereby or thereby, to which the Borrower is a party. (c) This Amendment, the New Revolving Notes, the New Fee Letter and each of the Loan Documents, as amended hereby and thereby, to which the Borrower is a party constitute legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally. (d) Each of the Collateral Documents constitutes a valid and perfected first-priority Lien on the Collateral purported to be encumbered thereby, enforceable against all third parties in all jurisdictions, and secures the payment of all obligations of the Borrower under the Loan Documents, as amended hereby and by the New Revolving Notes and the New Fee Letter, to which the Borrower is a party, and the execution, delivery and performance of this Amendment, the New Revolving Notes and the New Fee Letter do not adversely affect the Lien of any of the Collateral Documents. (e) The unaudited consolidated and consolidating financial statements containing information as of July 31, 2001 and for the 9-month fiscal period then ended that were delivered by the Borrower to the Lenders pursuant to Section 5.1(b) of the Credit Agreement, prepared in accordance with Section 5.1(b) of the Credit Agreement and certified by the Chief Financial Officer of the Borrower, fairly present the financial condition of the Borrower and its Subsidiaries as of such date and the results of the operations of the Borrower and its Subsidiaries for the 9-month fiscal period ended on such date, all in accordance with GAAP applied on a consistent basis. Since July 31, 2001 there has been no event or condition resulting in a Material Adverse Effect. The Borrower and its Subsidiaries have no material contingent liabilities except as disclosed in such financial statements or the notes thereto. (f) There is no pending or, to the knowledge of the Borrower, threatened action or proceeding affecting the Borrower or any Subsidiary before any court, Governmental Authority, referee or arbitrator that could reasonably be expected to have a Material Adverse Effect. -3- (g) There has been no amendment to any of the Organic Documents of the Borrower on or after October 12, 2000. The representations and warranties of the Borrower contained in the Loan Documents are correct on and as of the date hereof as though made on and as of such date. No event has occurred and is continuing, or would result from the effectiveness of this Amendment, that constitutes a Default. SECTION 5. Reference to and Effect on Loan Documents. (a) On and after the effective date of this Amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this Amendment. (b) Except as specifically amended above and except for the issuance of the New Revolving Notes and the execution of the New Fee Letter, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. Without limiting the generality of the foregoing, the Collateral Documents (other than the Na Pali Security Agreement) and all of the Collateral described therein do and shall continue to secure the payment of all of the obligations of the Borrower under the Credit Agreement and the other Loan Documents, and the Na Pali Security Agreement and all of the Collateral described therein do and shall continue to secure the payment of all of the obligations of the Borrower under the Credit Agreement, in each case as amended hereby and by the New Revolving Notes and the New Fee Letter, as applicable. (c) Except as expressly set forth herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agent or any Lender under any of the Loan Documents or constitute a waiver of any provision of any of the Loan Documents. SECTION 6. Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, execution and delivery of this Amendment and the other instruments and documents to be delivered hereunder, including (to the extent agreed by the Borrower and the Agent separately herefrom) the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities hereunder and thereunder. SECTION 7. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be effective as delivery of a originally executed counterpart of this Amendment. -4- [THIS SPACE INTENTIONALLY LEFT BLANK.] -5- SECTION 8. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THE STATE OF CALIFORNIA. QUIKSILVER, INC. By: ----------------------------------- Steven L. Brink Chief Financial Officer UNION BANK OF CALIFORNIA, N.A., as Administrative Agent and a Lender By: ----------------------------------- Margaret Furbank Vice President THE CHASE MANHATTAN BANK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- FLEET NATIONAL BANK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- S-1 U.S. BANK NATIONAL ASSOCIATION (including the bank formerly known as Pacific Century Bank) By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- SUNTRUST BANK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- ISRAEL DISCOUNT BANK OF NEW YORK By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- S-2 EX-10.16 4 a78631ex10-16.txt EXHIBIT 10.16 EXHIBIT 10.16 August 1, 2000 PERSONAL AND CONFIDENTIAL Charles S. Exon, Esq. Quiksilver, Inc. 15202 Graham Street Huntington Beach, CA 92649 Re: Employment at Quiksilver, Inc. Dear Charlie: This letter ("Agreement") will confirm our understanding and agreement regarding your employment with Quiksilver, Inc. ("Quiksilver" or the "Company"), commencing on August 1, 2000 ("Date of Hire"), and will be effective as of that date. This Agreement completely supersedes and replaces any negotiations, discussions, understandings or agreements, express or implied, you and the Company have had regarding your employment. 1. Position; Exclusivity of Employment. Your position will be Executive Vice President, Business and Legal Affairs - International, and you will initially report to me. A current job description for your position is contained on Addendum "A" attached hereto. During your employment with Quiksilver, you will devote your full professional and business time, interest, abilities and energies to the Company and will not engage in any business activities competitive with or adverse to the Company's business or welfare, whether alone, as an employee, as an attorney, as a partner, as a member, or as a shareholder, officer or director of any other corporation or law firm, or as a trustee, fiduciary or in any other similar representative capacity of any other entity. The Company agrees that you will be insured against, indemnified or otherwise covered for legal malpractice or similar claims that may arise out of your carrying out your duties and responsibilities hereunder. 2. Base Salary. Your base salary will be $25,000 per month ($300,000 on an annualized basis), less applicable withholdings and deductions, paid on the Company's regular payroll dates. Your salary will be reviewed at the time management salaries are reviewed periodically and may be adjusted (up or down) at the Company's discretion in light of Quiksilver's performance, your performance, market conditions and other factors deemed relevant by the Company; provided, however, that your base salary will not be reduced below its initial level through July 31, 2003, should your employment continue through that date. 3. Bonus. For the Company's fiscal years ending October 31 of 2000, 2001, 2002 and 2003, you shall be eligible to receive a bonus or bonuses based on the criteria set forth on Addendum "B" attached hereto, for that portion of the fiscal year during which you are so employed. Any bonus earned pursuant to Addendum "B" shall be paid within ten (10) days following the date the Company publicly releases its annual audited financial statements (the "Bonus Payment Date"), and shall be less applicable withholdings and deductions. In the event that your employment with the Company is terminated prior to the end of the applicable fiscal year (including by reason of termination, resignation, disability or death), you shall be entitled to receive a pro rata portion of the bonus otherwise payable to you based upon the actual number of days which you were employed by the Company during the applicable fiscal year, which shall be paid on the Bonus Payment Date. The Company has made no representations or commitments regarding the existence or components of any bonus program should you remain employed with the Company after October 31, 2003. 4. Vacation. Since Quiksilver does not have a vacation policy for executives of your level, no vacation days will be treated as earned or accrued. 5. Health Insurance. You (and any eligible dependents you elect) will be covered by the Company's group health insurance programs on the same terms and conditions applicable to comparable employees. The Company reserves the right to change, modify, or eliminate such coverage in its discretion. 6. Life Insurance. The Company will pay the premium on a term life insurance policy on your life with a company and policy of our choice, and a beneficiary of your choice, in the face amount determined by the Company of not less than $1,000,000. Our obligation to obtain and maintain this insurance is contingent upon your establishing and maintaining insurability, and we are not required to pay premiums for such a policy in excess of $2,500 annually. 7. Stock Options. Pursuant to the terms of the Company's 2000 Stock Option Plan, and subject to formal approval by the Board of Directors, the Company will grant you a non-qualified stock option for 30,000 shares of the Company's common stock. None of these options shall vest until such time as you and the Company enter into a written stock option agreement, which shall provide, among other things, that none of these options shall vest until one year from your Date of Hire, at which time one-third of such options (10,000 shares) shall vest, with each remaining one-third (10,000 shares each) vesting on the second and third anniversary of your Date of Hire, respectively; provided, however, that all such unvested options shall vest immediately on the effective date of a Change in Control as defined in Addendum "C" attached hereto. All unvested options shall automatically terminate upon your termination of employment. 8. At-Will Employment; Termination. Notwithstanding anything to the contrary in this Agreement, express or implied, your employment is for an unspecified term, and either you or the Company may terminate such employment at will and with or without Cause or notice at any time for any reason. This aspect of your employment relationship can only be changed by an individualized written agreement signed by both you and the Chairman of the Board of the Company. The Company may also terminate your employment immediately, without notice, and without further obligation for Cause, which shall include, but not be limited to, (i) your death, (ii) your permanent disability which renders you unable to perform your duties and responsibilities for a period in excess of three consecutive months, (iii) willful misconduct in the performance of your duties, (iv) violation of the Rules of Professional Responsibility of the State Bar of California, including any discipline or suspension, (v) loss of your license to practice law in the State of California, (vi) commission of a felony or any violation of law involving moral turpitude or dishonesty, (vii) self-dealing, (viii) willful breach of duty, (ix) habitual neglect of duty, (x) a material breach by you of your obligations under Paragraphs 1, 10 or 12 of this Agreement, or (xi) sustained unsatisfactory performance following notice to improve. If the Company elects to terminate your employment without Cause, or you terminate your employment for Good Reason (as defined below), the Company will continue to pay your base salary (but not any bonuses, overrides, insurance, or other employment benefits) on its regular payroll dates for a period of twelve (12) months following the date of termination and shall have no further obligation or liability to you. "Good Reason" for you to terminate employment means a voluntary termination within six (6) months following a Change in Control (as defined in Addendum "C") as a result of (i) the assignment to you of duties materially inconsistent with your position as set forth above without your consent, (ii) a material change in your reporting level from that set forth in this Agreement without your consent, (iii) a material diminution of your authority without your consent, (iv) a material breach by the Company of its obligations under this Agreement, or (v) a failure by the Company to obtain from any successor, before the succession takes place, an agreement to assume and perform the obligations contained in this Agreement. 9. Trade Secrets; Confidential and/or Proprietary Information; Attorney-Client Privilege. The Company owns certain trade secrets and other confidential and/or proprietary information which constitute valuable property rights, which it has developed through a substantial expenditure of time and money, which are and will continue to be utilized in the Company's business and which are not generally known in the trade. This proprietary information includes the list of names of the customers and suppliers of the Company, and other particularized information concerning the products, finances, processes, material preferences, fabrics, designs, material sources, pricing information, production schedules, sales and marketing strategies, sales commission formulae, merchandising strategies, order forms and other types of proprietary information relating to our products, customers and suppliers. You agree that you will not disclose and will keep strictly secret and confidential all trade secrets and proprietary information of the Company, including, but not limited to, those items specifically mentioned above. You also agree to preserve in the strictest of confidence all information and documents falling within the attorney-client and/or attorney work product privileges, which privileges survive the termination of your employment relationship with the Company. 10. Expense Reimbursement. The Company will reimburse you for documented reasonable and necessary business expenses incurred by you while engaged in business activities for the Company's benefit on such terms and conditions as shall be generally available to other executives of the Company. In your case, this will include annual dues to maintain your active membership in the State Bar of California, including section dues of the Business Law Section. 11. Compliance With Business Policies. You will devote your full business time and attention to Quiksilver and will not be involved in other business ventures that would interfere with your duties under Paragraph 1 above without express authorization from me or the Company's Board of Directors. You will be required to observe the Company's personnel and business policies and procedures as they are in effect from time to time. In the event of any conflicts, the terms of this Agreement will control. 12. Entire Agreement. This Agreement, its addenda, the 2000 Stock Option Plan, and any stock option agreements the Company may enter into with you contain the entire integrated agreement between us regarding these issues, and no modification or amendment to this Agreement will be valid unless set forth in writing and signed by both you and the Chairman of the Board of the Company. 13. Arbitration as Exclusive Remedy. To the fullest extent allowed by law, any dispute, controversy or claim arising out of or relating to this Agreement, the breach thereof, or any aspect of your employment or the cessation thereof must be settled exclusively by final and binding arbitration before a single arbitrator in Orange County, California, under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA"), as the exclusive remedy for such dispute, controversy or claim. In any such arbitration, the parties may conduct discovery to the same extent as would be permitted in a court of law. The Company shall pay the arbitrator's fees and any AAA administrative expenses. Possible disputes covered by this agreement to arbitrate include (but are not limited to) wage, contract, discrimination, and other employment-related claims under laws known as Title VII of the Civil Rights Act, the California Fair Employment and Housing Act, the Americans With Disabilities Act, the Age Discrimination in Employment Act, and any other statutes or laws relating to an employee's relationship with his employer. However, claims for workers' compensation benefits and unemployment insurance are not covered by this arbitration agreement, and such claims may be presented by you to the appropriate court or state agency as provided by California law. The arbitrator shall issue a reasoned, written decision, and shall have full authority to award all remedies available in a court of law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. BY ENTERING INTO THIS ARBITRATION AGREEMENT, BOTH YOU AND THE COMPANY VOLUNTARILY ARE GIVING UP ANY RIGHTS TO A COURT OR JURY TRIAL. 14. Successors and Assigns. This Agreement will be assignable by the Company to any successor or to any other company owned or controlled by the Company, and will be binding upon any successor to the business of the Company, whether direct or indirect, by purchase of securities, merger, consolidation, purchase of all or substantially all of the assets of the Company or otherwise. Please sign, date and return the enclosed copy of this letter to me for our files to acknowledge your agreement with the above. Charlie, all of us at Quiksilver very much look forward to you joining our organization and continuing our professional relationship. Best personal regards. Very truly yours, Robert B. McKnight, Jr. Chairman and Chief Executive Officer Enclosure ACKNOWLEDGED AND AGREED: - ---------------------------- Charles S. Exon Dated: ---------------------- EX-21.1 5 a78631ex21-1.txt EXHIBIT 21.1 EXHIBIT 21.1 QUIKSILVER, INC. NAMES AND JURISDICTIONS OF SUBSIDIARIES
Subsidiary Name Jurisdiction - --------------- ------------ QS Retail, Inc. California Mervin Manufacturing, Inc. California Mt. Waimea, Inc. California Quiksilver Wetsuits, Inc. California Hawk Designs, Inc. California Fidra, Inc. California Quiksilver Australia Pty Ltd Australia Quiksilver International Pty Ltd Australia Pavilion Productions Pty Ltd Australia NaPali Europe, S.A.S. France Na Pali, S.A.S. France Freestyle, S.A. France Kokolo SARL France Emerald Coast Europe France Infoborn SARL France Cariboo, Eurl France Lanai United Kingdom Gen X Publishing Ltd. United Kingdom Molokai Ltd. United Kingdom Emerald Coast Limited United Kingdom Kauai GmbH Germany Quiksilver Europa, S.L. Spain Sumbawa SL Spain Haapiti, SRL Italy
EX-23.1 6 a78631ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-24527, No. 33-65002, No. 33-65004, No. 33-58657, No. 333-04169, No. 333-56593, No. 333-40328, No. 333-64106 and No. 33-65724 of Quiksilver, Inc. on Form S-8 of our report, dated December 18, 2001, appearing in the Annual Report on Form 10-K of Quiksilver, Inc. for the year ended October 31, 2001. DELOITTE & TOUCHE LLP Costa Mesa, California January 24, 2002 -----END PRIVACY-ENHANCED MESSAGE-----