-----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, EPwR1RaOvL2l9gjvwV2Y1XIkgrcCUWSr1+BLHqKZfapWeXg5h9/ASr07/UZLYEG3 aBLtUrfQ469JSDNjjX4k9w== 0000892569-98-002576.txt : 19980915 0000892569-98-002576.hdr.sgml : 19980915 ACCESSION NUMBER: 0000892569-98-002576 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUIKSILVER INC CENTRAL INDEX KEY: 0000805305 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 330199426 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14229 FILM NUMBER: 98708802 BUSINESS ADDRESS: STREET 1: 1740 MONROVIA AVE CITY: COSTA MESA STATE: CA ZIP: 92627 BUSINESS PHONE: 7146451395 MAIL ADDRESS: STREET 1: 1740 MONROVIA AVE CITY: COSTA MESA STATE: CA ZIP: 92627 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 07/31/98 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998 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) 1740 MONROVIA AVENUE COSTA MESA, CALIFORNIA 92627 (Address of principal executive offices) (Zip Code) (714) 645-1395 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The number of shares outstanding of issuer's Common Stock, par value $0.01 per share, at September 4, 1998 was 14,448,564 2 QUIKSILVER, INC. FORM 10-Q INDEX
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets July 31, 1998 and October 31, 1997............................................. 2 Condensed Consolidated Statements of Income Three Months Ended July 31, 1998 and 1997...................................... 3 Condensed Consolidated Statements of Income Nine Months Ended July 31, 1998 and 1997....................................... 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended July 31, 1998 and 1997....................................... 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 7 Part II - OTHER INFORMATION Item 5. Other Events................................................................... 11 Item 6. Exhibits and Reports on Form 8-K................................................ 11 SIGNATURE............................................................................... 12
1 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements QUIKSILVER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 31, OCTOBER 31, 1998 1997 ---- ---- ASSETS Current assets: Cash and cash equivalents...................................... $ 3,055,000 $ 4,103,000 Trade accounts receivable, less allowance for doubtful accounts of $2,874,000 (1998) and $2,725,000 (1997)....................................... 60,752,000 54,668,000 Other receivables............................................. 2,802,000 1,773,000 Inventories - Note 2.......................................... 65,797,000 48,372,000 Prepaid expenses and other current assets..................... 3,485,000 2,841,000 ------------- ------------- Total current assets..................................... 135,891,000 111,757,000 Property and equipment, less accumulated depreciation and amortization of $13,266,000 (1998) and $10,033,000 (1997)...... 19,277,000 16,436,000 Trademark, less accumulated amortization of $1,795,000 (1998) and $1,646,000 (1997)........................ 1,638,000 1,778,000 Goodwill, less accumulated amortization of $4,257,000 (1998) and $3,807,000 (1997)........................ 17,609,000 18,141,000 Other assets...................................................... 8,064,000 1,538,000 ------------- ------------- Total assets...................................................... $ 182,479,000 $ 149,650,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit................................................ $ 15,745,000 $ 18,671,000 Accounts payable............................................... 25,886,000 13,079,000 Accrued liabilities............................................ 13,752,000 10,725,000 Current portion of long term debt.............................. 2,182,000 1,474,000 Income taxes payable........................................... 2,017,000 515,000 ------------- ------------- Total current liabilities................................ 59,582,000 44,464,000 Long term debt.................................................... 15,304,000 10,178,000 ------------- ------------- Total liabilities........................................ 74,886,000 54,642,000 ------------- ------------- Stockholders' equity Preferred stock, $.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none............................................... -- -- Common stock, $.01 par value, authorized shares - 30,000,000; issued and outstanding shares - 14,448,564 (1998) and 14,278,940 (1997)............ 144,000 71,000 Additional paid-in-capital..................................... 24,086,000 22,657,000 Retained earnings.............................................. 88,692,000 77,043,000 Treasury stock, 130,000 shares................................. (3,054,000) (3,054,000) Cumulative foreign currency translation adjustment............. (2,275,000) (1,709,000) ------------- ------------- Total stockholders' equity............................... 107,593,000 95,008,000 ------------- ------------- Total liabilities and stockholders' equity............... $ 182,479,000 $ 149,650,000 ============= =============
See notes to condensed consolidated financial statements. 2 4 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JULY 31, --------------------------- 1998 1997 ---- ---- Net sales............................................................ $ 78,265,000 $ 58,541,000 Cost of goods sold................................................... 48,438,000 36,432,000 --------------- --------------- Gross profit...................................................... 29,827,000 22,109,000 --------------- --------------- Operating expenses: Selling, general and administrative expense....................... 21,904,000 16,100,000 Royalty income.................................................... (365,000) (393,000) Royalty expense................................................... 972,000 731,000 --------------- --------------- Total operating expenses....................................... 22,511,000 16,438,000 --------------- --------------- Operating income..................................................... 7,316,000 5,671,000 Interest expense..................................................... 672,000 526,000 Foreign currency gain................................................ (280,000) (5,000) Other expense........................................................ 69,000 56,000 --------------- --------------- Income before provision for income taxes............................. 6,855,000 5,094,000 Provision for income taxes........................................... 2,777,000 2,122,000 --------------- --------------- Net income........................................................... $ 4,078,000 $ 2,972,000 =============== =============== Basic net income per share........................................... $ 0.29 $ 0.21 =============== =============== Diluted net income per share......................................... $ 0.28 $ 0.21 =============== =============== Weighted average shares outstanding.................................. 14,094,000 13,828,000 =============== =============== Diluted weighted average shares outstanding.......................... 14,716,000 14,213,000 =============== ===============
See notes to condensed consolidated financial statements. 3 5 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JULY 31, -------------------------- 1998 1997 ---- ---- Net sales............................................................ $ 211,708,000 $ 165,266,000 Cost of goods sold................................................... 127,897,000 101,388,000 --------------- --------------- Gross profit...................................................... 83,811,000 63,878,000 --------------- --------------- Operating expenses: Selling, general and administrative expense....................... 60,691,000 45,567,000 Royalty income.................................................... (1,136,000) (1,103,000) Royalty expense................................................... 2,719,000 2,051,000 --------------- --------------- Total operating expenses....................................... 62,274,000 46,515,000 --------------- --------------- Operating income..................................................... 21,537,000 17,363,000 Interest expense..................................................... 1,935,000 1,240,000 Foreign currency (gain) loss......................................... (315,000) 75,000 Other expense........................................................ 213,000 150,000 --------------- --------------- Income before provision for income taxes............................. 19,704,000 15,898,000 Provision for income taxes........................................... 8,055,000 6,427,000 --------------- --------------- Net income........................................................... $ 11,649,000 $ 9,471,000 =============== =============== Basic net income per share........................................... $ 0.83 $ 0.68 =============== =============== Diluted net income per share......................................... $ 0.80 $ 0.67 =============== =============== Weighted average shares outstanding.................................. 14,050,000 13,898,000 =============== =============== Diluted weighted average shares outstanding.......................... 14,496,000 14,126,000 =============== ===============
See notes to condensed consolidated financial statements. 4 6 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, 1998 1997 ---- ---- Cash flows from operating activities: Net income........................................................ $ 11,649,000 $ 9,471,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................... 4,273,000 2,709,000 Provision for doubtful accounts............................. 1,774,000 1,104,000 Loss on sale of fixed assets................................ 35,000 148,000 Changes in operating assets and liabilities, net of effects of acquisition (1997): Trade accounts receivable................................ (8,299,000) (11,337,000) Other receivables........................................ (970,000) 108,000 Inventories.............................................. (17,614,000) (11,137,000) Prepaid expenses and other current assets................ (790,000) (180,000) Other assets............................................. (365,000) 590,000 Accounts payable......................................... 13,713,000 2,692,000 Accrued liabilities...................................... 2,858,000 (1,263,000) Income taxes payable..................................... 1,513,000 627,000 --------------- --------------- Net cash provided by (used in) operating activities... 7,777,000 (6,468,000) Cash flows from investing activities: Proceeds from sales of fixed assets............................... 47,000 83,000 Capital expenditures.............................................. (12,825,000) (6,962,000) Acquisition of Mervin Manufacturing, Inc.......................... (500,000) (1,750,000) --------------- --------------- Net cash used in investing activities................. (13,278,000) (8,629,000) Cash flows from financing activities: Borrowings on lines of credit..................................... 26,881,000 30,734,000 Payments on lines of credit....................................... (29,664,000) (25,126,000) Borrowings on long-term debt...................................... 7,419,000 7,640,000 Payments on long-term debt........................................ (1,540,000) (351,000) Proceeds from stock option exercises.............................. 1,502,000 1,277,000 --------------- --------------- Net cash provided by financing activities.............. 4,598,000 14,174,000 Effect of exchange rate changes on cash.............................. (145,000) (207,000) --------------- --------------- Net decrease in cash and cash equivalents............................ (1,048,000) (1,130,000) Cash and cash equivalents, beginning of period....................... 4,103,000) 3,429,000 --------------- --------------- Cash and cash equivalents, end of period............................. $ 3,055,000 $ 2,299,000 =============== =============== Supplementary cash flow information: Cash paid during the period for: Interest....................................................... $ 1,636,000 $ 1,071,000 =============== =============== Income taxes................................................... $ 6,524,000 $ 5,930,000 =============== =============== Non-cash financing activity - Bank debt assumed in acquisition............................... $ -- $ 2,682,000 =============== ===============
See notes to condensed consolidated financial statements. 5 7 QUIKSILVER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three and nine months ended July 31, 1998 and 1997. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 1997 included in the Company's Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors. 2. Inventories consist of the following:
JULY 31, OCTOBER 31, 1998 1997 ---- ---- Raw Materials..................................... $ 15,777,000 $ 16,754,000 Work-In-Process................................... 8,953,000 5,693,000 Finished Goods.................................... 41,067,000 25,925,000 --------------- --------------- $ 65,797,000 $ 48,372,000 =============== ===============
3. Net income per share - During the three months ended January 31, 1998, the Company adopted Statement of Financial Accounting Standards ("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. Prior period net income per share data were restated for consistency. 4. During the three months ended April 30, 1998, the Company's Board of Directors approved a two-for-one split of the Company's Common Stock. The split was effected in the form of a dividend on April 24, 1998 to shareholders of record on April 16, 1998. All share and per-share information has been restated to reflect the stock dividend. 5. Effective July 17, 1998, the Company's loan agreement with a U.S. bank was amended to add a $10,000,000 term loan generally at LIBOR plus 1.35%, extend the maturity date of the revolving line of credit to May 2000, and to reduce the interest rate on line of credit borrowings based on LIBOR to 1.25% above LIBOR. 6 8 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1997 Net sales for the three months ended July 31, 1998 increased 33.7% to $78,265,000 from $58,541,000 in the comparable period of the prior year. Domestic net sales for the three months ended July 31, 1998 increased 30.8% to $49,981,000 from $38,216,000 in the comparable period of the prior year, and European net sales increased 39.2% to $28,284,000 from $20,325,000 for those same periods. As measured in French Francs, Quiksilver Europe's functional currency, net sales in the current year's quarter increased 41.8% compared to the prior year. Domestic mens sales increased 14.3% to $31,560,000 from $27,608,000 in the comparable period of the prior year, while domestic womens sales increased 68.2% to $15,979,000 from $9,501,000. Sales of snowboards, boots and bindings amounted to $2,442,000 for the current year's quarter compared to $1,107,000 in the prior year (from the date of the Mervin acquisition). The domestic mens sales increase came from the Quiksilver Young Mens, Boys and Accessories divisions. The domestic womens sales increase came from the Roxy division. In Europe, mens sales increased 31.1% to $25,864,000 from $19,723,000, while womens sales increased 302.0% to $2,420,000 from $602,000. The gross profit margin for the three months ended July 31, 1998 increased somewhat to 38.1% from 37.8% in the comparable period of the prior year. The domestic gross profit margin increased to 35.8% from 35.3%, and the European gross profit margin decreased somewhat to 42.2% from 42.4% for those same periods. The increase in the domestic gross profit margin resulted primarily from a change in product mix. In the current year's quarter, there were more sales of juniors sportswear product, which sells at higher average profit margins, and less sales of private label product, which sells at lower average profit margins. Selling, general and administrative expense ("SG&A") for the three months ended July 31, 1998 increased 36.0% to $21,904,000 from $16,100,000 in the comparable period of the prior year. Domestic SG&A increased 33.1% to $12,949,000 from $9,729,000 in the comparable period of the prior year, and European SG&A increased 40.6% to $8,955,000 from $6,371,000 for those same periods. The increase in domestic SG&A was primarily due to higher personnel and other costs related to increased sales volume, along with increased distribution center expenses. The increase in European SG&A was primarily due higher personnel and other costs related to increased sales volume. Net royalty expense for the three months ended July 31, 1998 increased 80.0% to $607,000 from $338,000 in the comparable period of the prior year. This increase was due primarily to increased royalty expense related to European sales. The Company receives domestic royalty income from its Mexico, wetsuit, watch, sunglass, and outlet store licensees as well as Raisins international licensees, and Quiksilver Europe pays royalties on European sales under a trademark agreement with Quiksilver International. Interest expense for the three months ended July 31, 1998 increased 27.8% to $672,000 from $526,000 in the comparable period of the prior year. This increase was primarily due to higher long term liabilities in Europe, which resulted from borrowings to begin the build out of two company-owned boardriders clubs in Paris. The effective income tax rate for the three months ended July 31, 1998, which is based on current estimates of the annual effective income tax rate, decreased to 40.5% from 41.7% in the comparable period of the prior year. The prior year's income tax rate was adversely affected by an increase in the French tax rate. As a result of the above factors, net income for the three months ended July 31, 1998 increased 37.2% to $4,078,000 or $0.28 per share on a diluted basis from $2,972,000 or $0.21 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $0.29 per share for the three months ended July 31, 1998 from $0.21 per share in the comparable period of the prior year. 7 9 NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997 Net sales for the nine months ended July 31, 1998 increased 28.1% to $211,708,000 from $165,266,000 in the comparable period of the prior year. Domestic net sales for the nine months ended July 31, 1998 increased 23.8% to $132,192,000 from $106,815,000 in the comparable period of the prior year, and European net sales increased 36.0% to $79,516,000 from $58,451,000 for those same periods. As measured in French Francs, Quiksilver Europe's net sales in the first nine months of the current year increased 45.5% compared to the prior year. Domestic men's sales increased 11.1% to $80,525,000 from $72,454,000 in the comparable period of the prior year, while domestic women's sales increased 38.7% to $46,123,000 from $33,254,000. Sales of snowboards, boots and bindings amounted to $5,544,000 for the current year's nine months compared to $1,107,000 in the prior year (from the date of the Mervin acquisition). The Domestic men's sales increase came from all divisions except Private Label. The Domestic womens sales increase came from the Quiksilver Roxy division. In Europe, mens sales increased 30.3% to $72,961,000 from $55,979,000, while women's sales increased 165.2% to $6,555,000 from $2,472,000. The gross profit margin for the nine months ended July 31, 1998 increased to 39.6% from 38.7% in the comparable period of the prior year. The domestic gross profit margin increased to 36.6% from 35.3% in the comparable period of the prior year, and the European gross profit margin decreased slightly to 44.6% from 44.7% for those same periods. The increase in the domestic gross profit margin resulted primarily from a change in product mix and the impact of selling excess raw materials during the first half of the prior year at margins that were less than normal wholesale and from markdowns taken during the first half of the prior year to sell Pirate Surf product, which was removed from production plans. In the current year's nine months, there were more sales of juniors product, which sells at higher average profit margins, and less sales of private label product, which sells at lower average profit margins. Selling, general and administrative expense ("SG&A") for the nine months ended July 31, 1998 increased 33.2% to $60,691,000 from $45,567,000 in the comparable period of the prior year. Domestic SG&A increased 30.7% to $36,223,000 from $27,721,000 in the comparable period of the prior year, and European SG&A increased 37.1% to $24,468,000 from $17,846,000 for those same periods. The increase in domestic SG&A was primarily due to higher personnel and other costs related to increased sales volume, along with increased distribution center expenses. The increase in European SG&A was primarily due to higher personnel and other costs related to increased sales volume. Net royalty expense for the nine months ended July 31, 1998 increased 67.0% to $1,583,000 from $948,000 in the comparable period of the prior year. This increase was due primarily to increased royalty expense related to European sales. Interest expense for the nine months ended July 31, 1998 increased 56.0% to $1,935,000 from $1,240,000 in the comparable period of the prior year. This increase was primarily due to higher average outstanding balances on the Company's domestic line of credit and increased long-term liabilities in Europe during the third quarter of the current year. In addition to domestic borrowings that provided working capital to fund the Company's growth, funds were borrowed to acquire Mervin, upgrade the Company's computer systems, equip the Company's new warehouse facility in Huntington Beach, California, and in the third quarter of the current year, to begin the build-out of two Company owned boardriders clubs in Paris. The effective income tax rate for the nine months ended July 31, 1998, which is based on current estimates of the annual effective income tax rate, increased to 40.9% from 40.4% in the comparable period of the prior year. As a result of the above factors, net income for the nine months ended July 31, 1998 increased 23.0% to $11,649,000 or $0.80 per share from $9,471,000 or $0.67 per share in the comparable period of the prior year. Basic net income per share increased to $0.83 per share for the nine months ended July 31, 1998 from $0.68 per share in the comparable period of the prior year. 8 10 FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY The Company finances its capital investments and seasonal working capital requirements with funds generated by operations and its bank revolving lines of credit. Net cash provided by operating activities for the nine months ended July 31, 1998 was $7,777,000 compared to net cash used in operating activities of $6,468,000 in the comparable period of the prior year. This $14,245,000 increase in cash provided by operating activities was due primarily to the decrease in cash used for inventories and trade accounts receivable, and a higher level of net income plus noncash charges. Cash paid for inventories net of changes in accounts payable decreased by $4,544,000 as a result of improved domestic cash management, in contrast to the growth in inventories in preparation for the 1998 Fall and Holiday seasons. The increase in trade accounts receivable was $3,038,000 less in the nine months ended July 31, 1998 compared to the prior year primarily as a result of improved domestic collection efforts. Net income plus noncash expenses increased by $4,299,000 comparing the nine months ended July 31, 1998 to the prior year. For the nine months ended July 31, 1998, capital expenditures increased 84.2% to $12,825,000 from $6,962,000 in the comparable period of the prior year primarily due to investments during the nine months ended July 31, 1998 in retail space in Paris, the new corporate headquarters building in France, and the domestic distribution center in Huntington Beach, California. Effective July 17, 1998, the Company's loan agreement with a U.S. bank was amended to add a $10,000,000 term loan generally at LIBOR plus 1.35%, extend the maturity date of the revolving line of credit to May 2000, and to reduce the interest rate on line of credit borrowings based on LIBOR to 1.25% above LIBOR. During the nine months ended July 31, 1998, net cash provided by financing activities totaled $4,598,000 compared to $14,174,000 in the comparable period of the prior year. These decreased borrowings during the first nine months of fiscal 1998 result from the improved cash flow from operations as described above. The net decrease in cash and cash equivalents for the nine months ended July 31, 1998 was $1,048,000 compared to a decrease of $1,130,000 in the comparable period of the prior year. Cash and cash equivalents decreased to $3,055,000 at July 31, 1998 from $4,103,000 at October 31, 1997, while working capital increased $9,016,000 or 13.4% to $76,309,000 from $67,293,000 for that same period. The Company believes its current lines of credit are adequate to cover its seasonal working capital and other requirements for the foreseeable future, and that increases in its lines of credit can be obtained as needed to fund future growth. Accounts receivable increased 11.1% to $60,752,000 at July 31, 1998 from $54,668,000 at October 31, 1997. Domestic accounts receivable decreased 1.1% to $36,491,000 at July 31, 1998 from $36,887,000 at October 31, 1997, and European accounts receivable increased 36.4% to $24,261,000 from $17,781,000 for that same period. Domestic accounts receivable decreased as a result of improved collection efforts, while the increases in European accounts receivable is generally consistent with the increase in European sales. Consolidated inventories increased 36.0% to $65,797,000 at July 31, 1998 from $48,372,000 at October 31, 1997. Domestic inventories increased 26.1% to $48,878,000 from $38,758,000 at October 31, 1997, and European inventories increased 76.0% to $16,919,000 from $9,614,000 for that same period. The increase in inventories occurred primarily to support increased sales for the Fall and Holiday seasons of the current year and from increased product offerings in Europe. Customers of the Company have experienced financial difficulties, from time to time, including the filing of reorganization proceedings under bankruptcy laws. The Company has not incurred significant losses outside the normal course of business as a result of the financial difficulties of these customers. While management believes that allowances for doubtful accounts at July 31, 1998 are adequate, the Company carefully monitors developments regarding its major customers. Additional material financial difficulties encountered by these or other significant customers could have an adverse impact on the Company's financial position or results of operations. 9 11 FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY (CONTINUED) FOREIGN CURRENCY Quiksilver Europe sells in various European countries and collects at future dates in the customers' local currencies and purchases certain raw materials or product in currencies other than French Francs. Accordingly, the Company is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. When considered appropriate, management purchases financial instruments, primarily forward exchange contracts, to reduce its exposure to these exchange rate fluctuations. Quiksilver Europe's statements of income are translated from French Francs into U.S. Dollars at average exchange rates in affect during the reporting period. When the French Franc strengthens compared to the U.S. Dollar there is a positive affect on Quiksilver Europe's results as reported in the Company's Consolidated Financial Statements. Conversely, when the U.S. Dollar strengthens, there is a negative affect. Because the average exchange rate between the French Franc and the U.S. Dollar was relatively consistent during the three months ended July 31, 1998 compared to the three months ended July 31, 1997, there was minimal affect from exchange rate fluctuations on the comparisons between the periods. European net sales increased 41.8% in French Francs during the three months ended July 31, 1998 compared to the three months ended July 31, 1997. As measured and reported in the Company's Condensed Consolidated Statements of Income, European net sales increased 39.2%. 10 12 PART II - OTHER INFORMATION Item 5. Other Events. The Securities and Exchange Commission (the "SEC") has recently amended its Rule 14a-4, which governs the use by the Company of discretionary voting authority with respect to certain shareholder proposals. SEC Rule 14a-4(c)(1) provides that, if the proponent of a shareholder proposal fails to notify the Company at least 45 days prior to the month and day of mailing the prior year's proxy statement, the proxies of the Company's management would be permitted to use their discretionary authority at the Company's next annual meeting of shareholders if the proposal were raised at the meeting without any discussion of the matter in the proxy statement. In order to provide shareholders with notice of the deadline for the submission of such proposals for the Company's 1999 Annual Meeting of Shareholders, the Company hereby notifies all shareholders of the Company that after December 30, 1998 any shareholder proposal submitted outside the process of SEC Rule 14a-8 will be considered untimely for purposes of SEC Rules 14a-4 and 14a-5(e). Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Second Amendment to the Amended and Restated Loan Agreement dated as of July 17, 1998. 27.0 Financial Data Schedule. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended July 31, 1998. 11 13 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUIKSILVER, INC., a Delaware Corporation September 14, 1998 /s/ Steven L. Brink ------------------------------------ Steven L. Brink Chief Financial Officer, Secretary and Treasurer (Principal Accounting Officer) 12 14 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 10.1 Second Amendment to the Amended and Restated Loan Agreement dated as of July 17, 1998. 27.0 Financial Data Schedule.
EX-10.1 2 2ND AMENDMENT TO THE AMENDED LOAN AGREEMENT 1 SECOND AMENDMENT TO THE AMENDED AND RESTATED LOAN AGREEMENT THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED LOAN AGREEMENT (this "Second Amendment") dated as of July 17, 1998, is made and entered into by and between QUIKSILVER, INC., a Delaware Corporation ("Borrower"), and UNION BANK OF CALIFORNIA, N.A. ("Bank"). RECITALS: A. Borrower and Bank are parties to that certain Amended and Restated Loan Agreement dated July 1, 1997 (the "Agreement"), pursuant to which Bank agreed to extend credit to Borrower. B. Borrower and Bank desire to amend the Agreement subject to the terms and conditions of this Second Amendment. AGREEMENT: In consideration of the above recitals and of the mutual covenants and conditions contained herein, Borrower and Bank agree as follows: 1. DEFINED TERMS. Initially capitalized terms used herein which are not otherwise defined shall have the meanings assigned thereto in the Agreement. 2. AMENDMENTS TO THE AGREEMENT. (a) Section 1.1 of the Agreement is hereby amended by substituting the date "May 3, 2000" for the date "May 3, 1999". (b) Section 1.1.1 of the Agreement is hereby amended by substituting the date "May 3, 2000" for the date "May 3, 1999" and the date "October 1, 2000" for the date "October 1, 1999". (c) Section 1.1.1.2 of the Agreement is hereby deleted in its entirety. (d) Section 1.1.1.3 is hereby added in its entirety as follows: 1.1.1.3 THE TERM LOAN B. Bank will loan to Borrower an amount not to exceed Ten Million Dollars ($10,000,000), amortizing over ten years, (the "Term Loan"). The Term Loan B shall be evidenced by a promissory note (the "Note") on the standard form used by Bank for commercial loans. The proceeds will be used to repay the existing Seven Million Dollar ($7,000,000) Revolving Loan B maturing October 1, 1998 and provide financing for Company's capital expenses. -1- 2 (e) Section 4.6 Quick Ratio of the Agreement is hereby amended by substituting the amount ".95:1.00" for "1.00:1.00" (f) Section 4.7 of the Agreement is hereby amended in its entirety as follows: 4.7 TANGIBLE NET WORTH. Until October 31, 1998, Borrower will at all times maintain Tangible Net Worth of not less than Fifty-One Million Dollars ($51,000,000). Thereafter, Borrower will at all times maintain a minimum Tangible Net Worth that increases on the first day of each of Borrower's successive fiscal years by Ninety percent (90%) of Borrower's net profit after taxes for the fiscal year just ended plus One Hundred percent (100%) of any future equity additions. "Tangible Net Worth" shall mean net worth increased by indebtedness of Borrower subordinated to Bank and decreased by patents, licenses, trademarks, trade names, goodwill and other similar intangible assets, organizational expenses, and monies due from affiliates, including officers, shareholders and directors. Net profit after tax shall have the same meaning as set forth in GAAP. 3. EFFECTIVENESS OF THE SECOND AMENDMENT. This Second Amendment shall become effective as of the date hereof when, and only when, Bank shall have received all of the following, in form and substance satisfactory to Bank: (a) The counterpart of this Second Amendment, duly executed by Borrower; (b) The Commercial Promissory Note, duly executed by Borrower; (c) Such other documents, instruments or agreements as Bank may reasonably deem necessary. 4. RATIFICATION. Except as specifically amended herein above, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. 5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows: (a) Each of the representations and warranties contained in the Agreement, as may be amended hereby, is hereby reaffirmed as of the date hereof, each as if set forth herein; (b) The execution, delivery and performance of the Second Amendment and any other instruments or documents in connection herewith are within Borrower's power, have been duly authorized, are legal, valid and binding obligations of Borrower, and are not in conflict with the terms of any charter, bylaw, or other organization papers of Borrower or with any law, indenture, agreement or undertaking to which Borrower is a party or by which Borrower is bound or affected; (c) No event has occurred and is continuing or would result from this Second Amendment which constitutes or would constitute an Event of Default under the Agreement. 6. GOVERNING LAW. This Second Amendment and all other instruments or documents in connection herewith shall be governed by and construed according to the laws of the State of California. 7. COUNTERPARTS. This Second Amendment may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. -2- 3 WITNESS the due execution hereof as of the date first above written. QUIKSILVER, INC., UNION BANK OF CALIFORNIA, N.A. A DELAWARE CORPORATION By: /s/ Steven L. Brink By: /s/ Rita H. Dailey --------------------------------- --------------------------------- Steven L. Brink Rita H. Dailey Chief Financial Officer Vice President -3- EX-27 3 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUIKSILVER, INC. JULY 31, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q. 9-MOS OCT-31-1998 JUL-31-1998 3,055,000 0 63,626,000 2,874,000 65,797,000 135,891,000 32,543,000 13,266,000 182,479,000 59,582,000 15,304,000 0 0 144,000 107,449,000 182,479,000 211,708,000 211,708,000 127,897,000 127,897,000 0 1,774,000 1,935,000 19,704,000 8,055,000 11,649,000 0 0 0 11,649,000 0.83 0.80
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