-----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, NBRtnTQr56W0N5q9nzwv0oNcy7OCteVZ4oeI6Xo2fMdd81jV+Fj2sZf8abTSENVu 18Q5vwExRVx8fKX0OAuMCw== 0001095811-01-000451.txt : 20010129 0001095811-01-000451.hdr.sgml : 20010129 ACCESSION NUMBER: 0001095811-01-000451 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20010126 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-K405 SEC ACT: SEC FILE NUMBER: 001-14229 FILM NUMBER: 1516675 BUSINESS ADDRESS: STREET 1: 15202 GRAHAM STREET CITY: HUNTINGTON BEACH STATE: CA ZIP: 92649 BUSINESS PHONE: 714-889-2200 MAIL ADDRESS: STREET 1: 1740 MONROVIA AVE CITY: COSTA MESA STATE: CA ZIP: 92627 10-K405 1 a68848e10-k405.txt FORM 10-K405 FISCAL YEAR END OCTOBER 31, 2000 1 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, 2000 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. [X] The aggregate market value of the Registrant's Common Stock held by non-affiliates of the Registrant as of January 16, 2001 was approximately $520,000,000 based on the number of shares outstanding on such date and the last sale price for the Common Stock on such date of $22.94 as reported by the New York Stock Exchange. As of January 16, 2001, there were 22,689,125 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 2001 Annual Meeting of Stockholders to be filed with the Commission within 120 days of October 31, 2000. ================================================================================ 2 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.................................................. 5 Seasonality...................................................... 6 Production and Raw Materials..................................... 6 Imports and Import Restrictions.................................. 7 Trademark License Agreements..................................... 7 Competition...................................................... 8 Employees........................................................ 8 Research and Development......................................... 9 Environmental Matters............................................ 9 Acquisitions..................................................... 9 Item 2. PROPERTIES....................................................... 10 Item 3. LEGAL PROCEEDINGS................................................ 10 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 10 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................. 11 Item 6. SELECTED FINANCIAL DATA.......................................... 11 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 13 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS...... 20 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 21 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 21 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 22 Item 11. EXECUTIVE COMPENSATION........................................... 22 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................... 22 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 22 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................... 23 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. 24 SIGNATURES ................................................................ 42 3 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 (Quiksilver Silver Edition) and women (Leilani and Alex Goes), as well as snowboards, snowboard boots and bindings under the Lib Technologies, Gnu 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. While some of the Company's domestic products are imported, the majority are manufactured in the United States. The majority of the Company's European products are manufactured in Asia. Sales are included as either domestic or European based on which division designed, produced and shipped the product. Since acquiring Quiksilver International Pty Ltd, an Australian company ("Quiksilver International"), in July 2000 (See "Acquisitions" on page 9), 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 to use the "Quiksilver" trademark 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" trademark. These licensees also can buy products from the Company. Certain domestic 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 2000, fiscal 1999 or fiscal 1998 refer to the years ended October 31, 2000, 1999 or 1998, 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: o General economic and business conditions o The acceptance in the marketplace of new products o The availability of outside contractors at prices favorable to the Company o The ability to source raw materials at prices favorable to the Company o Currency fluctuations o Changes in business strategy or development plans o Availability of qualified personnel o Changes in political, social and economic conditions and local regulations, particularly in Europe and Asia o Other factors outlined in the Company's previously filed public documents, copies of which may be obtained without cost from the Company 1 4 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. Quiksilver Silver Edition 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 expanded as "Teenie Wahine" into the Girls category in fiscal 1998. 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" and "Gnu" brands of snowboards and accessories, and makes "Bent Metal" snowboard bindings. Mervin introduced Gnu snowboard boots and bindings in fiscal 1999. The "Hawk Clothing" brand was added to the Company's portfolio in fiscal 2000 with the acquisition of Hawk Designs, Inc. This purchase added a potentially key trademark to the Company's portfolio of brands, by obtaining the rights to "Tony Hawk", a skateboarding icon, to be used with apparel and related accessories. 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 2001 with a new brand, Fidra. Fidra is a startup business that the Company acquired from its originator, John Ashworth. Initial shipments are expected in the third quarter of fiscal 2001. 2 5 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. PERCENTAGE OF SALES -------------------------- PRODUCTS 2000 1999 1998 - -------- ---- ---- ---- T-Shirts....................................... 20% 18% 17% Swimwear....................................... 15 15 14 Accessories.................................... 14 13 13 Shirts......................................... 11 13 14 Pants.......................................... 9 9 7 Jackets and sweaters........................... 8 9 10 Fleece......................................... 7 8 9 Shorts......................................... 6 7 6 Tops and dresses............................... 4 5 4 Snowboards, snowboard boots, bindings and accessories..................... 3 3 4 Other.......................................... 3 0 2 --- --- --- 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 $265 to $475 and in Europe up to approximately $505. 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" name. 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 this 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 (8 - 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 6 An important marketing vehicle for the Company is the sponsorship of high profile athletes in outdoor, individual sports, including surfing, snowboarding, windsurfing and skateboarding. 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", "H3O" and "Snowboarding" in the United States and "Wind" and "Surf Session" in Europe. The ad campaign also includes national publications in the United States, such as "Rolling Stone", "Seventeen", "ESPN Magazine" and "Spin", and mainstream publications in various European countries. 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 skate contests in the markets where it directly 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. 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 surfers, windsurfers and snowboarders, produce promotional movies and videos featuring athletes wearing and/or using "Quiksilver" products, and organize surfing and windsurfing contests that have international significance. An example of one such contest is the "Quiksilver Pro" that is generally held annually in Indonesia. 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. The latest images from The Crossing are available at the Company's website at www.quiksilver.com, and a multipart National Geographic television series is being produced based on this innovative expedition. 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 6,950 store locations combined. Likewise, Roxy products are sold to customers with approximately 5,500 store locations. It's estimated that approximately 4,900 of these Roxy locations also carry Quiksilver product. The Company's swimwear brands (Raisins, Leilani and Radio Fiji) are found in 9,000 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 4,600 store locations in Europe. Overall (not including licensees), the Company's products are distributed in approximately 18,600 retail locations. Quiksilver Europe accounted for approximately 35% of the Company's consolidated net sales during fiscal 2000, which is consistent with fiscal 1999. Fiscal 2000 foreign sales from the U.S. (primarily to Canada, Japan, Central and South America) were approximately 6% of consolidated net sales. 4 7 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 28% of the Company's sales were to this channel of distribution in fiscal 2000. 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 56% 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, Burdines, and Liberty House 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 2000. Approximately 4% of the Company's business is done through distributors in certain European countries. The Company's sales are spread over a large wholesale customer base. During fiscal 2000, 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 6% of the Company's consolidated net sales during fiscal 2000. Sales of the Company's products are made by 182 independent sales representatives in the United States and Europe and 48 distributors in Europe. The Company's sales representatives are generally compensated on a commission basis. Of the Company's domestic net sales during fiscal 2000, approximately 43% resulted from sales to customers located on the west coast of the United States, approximately 25% resulted from sales to customers located on the east coast of the United States, approximately 4% resulted from sales to customers in Hawaii, and approximately 28% resulted from sales to customers located in other areas of the United States or from exports. Of the Company's European net sales during fiscal 2000, approximately 51% resulted from sales to customers located in France, 13% in the United Kingdom, 13% in Spain, 3% in Germany and 3% in Italy, with the remaining 17% spread throughout other countries. 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 2000, the number of Quiksvilles increased by 216, resulting in 1,118 shops at October 31, 2000. This total includes 817 domestic shops and 301 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 and a Hawk Clothing store. 5 8 The Company owns stores in selected markets that provide brand-building opportunities; however, Boardriders Clubs are generally owned by independent retailers. The Company currently owns 17 stores located in Maui, New York, London (2), Paris (2), Amsterdam, Boston, Park City, Miami, Los Angeles, Seattle, Costa Mesa, Waikiki (2) and New Jersey (2). During fiscal 2000, eight Boardriders Clubs were opened domestically, and 15 were opened in Europe. Including the Company's licensees, the total number of stores open at October 31, 2000 was 183. This total includes 24 domestic, 67 in Europe, and 92 in licensed territories. Of the total Boardriders Clubs at October 31, 2000, 7 are Roxy stores, and one is a Quiksilver Youth store. The Company's Hawk Clothing store was opened in November 2000. 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 (UNAUDITED) ----------------------------------------------------------------------- QUARTER ENDING 2000 1999 1998 - -------------- ---------------------- --------------------- ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- ------ ------- (DOLLAR AMOUNTS IN THOUSANDS) January 31 ................ $ 99,929 19.4% $ 85,947 19.4% $ 55,251 17.5% April 30 .................. 142,139 27.5 128,128 28.9 78,192 24.7 July 31 ................... 122,011 23.7 105,160 23.7 78,265 24.8 October 31 ................ 151,610 29.4 124,499 28.0 104,407 33.0 -------- ----- -------- ----- -------- ----- Total $515,689 100.0% $443,734 100.0% $316,115 100.0% ======== ===== ======== ===== ======== =====
PRODUCTION AND RAW MATERIALS The Company's products are sourced separately for its domestic and European operations. A majority 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, 2000, approximately 58% of the Company's domestic apparel products were manufactured by independent contractors and approximately 42% 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 2000, such offshore production accounted for approximately 7% 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 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. No formal contractual obligations exist between the Company and its independent manufacturing contractors. 6 9 Goods are generally manufactured and processed on an order-by-order basis. During fiscal 2000, no single contractor or finished goods supplier accounted for more than 7% 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 2000, approximately 72% of the Company's consolidated raw material fabric/trim purchases, and 84% 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 5% of the Company's consolidated expenditures for raw material purchases during fiscal 2000, while the Company's primary supplier of t-shirt blanks accounted for approximately 39%. 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 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. TRADEMARK LICENSE AGREEMENTS Since acquiring Quiksilver International Pty Ltd in July 2000 (See "Acquisitions" below), the Company owns all 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 Gotcha (Europe), the Company owns 7 10 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. 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" trademark 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" trademark 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, Nautica, Calvin Klein and Fubu. 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, Nautica, Calvin Klein, Nike and Adidas. In the snowboardwear and snowboard market, the Company's principal competitors are Burton, K-2 and Morrow. The Company believes its revenues from snowboardwear and snowboards are less than its competitors in the market. 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 success will depend on its ability to promote its image and to design products acceptable to the marketplace. EMPLOYEES On October 31, 2000, the Company employed approximately 1,560 persons, including approximately 980 in production, operations and shipping functions, approximately 540 in sales, administrative or clerical capacities, and approximately 40 in executive capacities. None of the Company's domestic employees 8 11 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. The Company does not anticipate that it will incur any material capital expenditures for environmental control facilities during the next fiscal year. 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 obligation related to these deferred purchase price payments is reflected in the Consolidated Balance Sheet as a component of long-term debt. The Company's management believes that the Company will 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 will further enhance its image in the skateboard apparel market Effective July 1, 1997, the Company acquired the operations of Mervin, the maker of two snowboard brands, Lib Technologies and Gnu, and Bent Metal bindings. The initial purchase price was $4,582,000, which includes a cash payment of $1,900,000 and assumed bank debt of $2,682,000. Under the terms of the purchase agreement, additional consideration aggregating up to $2,600,000 could have been paid if Mervin achieved certain earnings goals through fiscal 2000. Mervin achieved its goal for the four months ended October 31, 1997, which resulted in a payment of $500,000 in January 1998 and an adjustment to goodwill of $500,000 at October 31, 1997. Mervin did not achieve its goal for the years ended October 31, 1998, October 31, 1999 or October 31, 2000. Accordingly, no additional payments were made related to those years. 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 are expected in the third quarter of fiscal 2001. 9 12 ITEM 2. PROPERTIES The Company's executive offices, merchandising and design, production and warehouse facilities occupy approximately 410,000 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 headquarters 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 executive offices, merchandising and design and production facilities in Huntington Beach expires in 2013, with two, five-year extensions available. The Company's supplemental domestic warehouse space is operated under a five-year lease that expires in 2004. 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, one of which expired in 2000 and is being leased on a month-to-month basis, and one that expires in 2004. The Company also leases various retail locations in the United States and Europe. The aggregate monthly rental payment for rented facilities is approximately $500,000. 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. 10 13 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 and as restated to reflect an April 1999 three-for-two stock split. HIGH LOW ------ ------ 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 Fiscal 1999 4th Quarter ended October 31, 1999................ $25.25 $13.00 3rd Quarter ended July 31, 1999................... 30.75 21.50 2nd Quarter ended April 30, 1999.................. 30.69 19.19 1st Quarter ended January 31, 1999................ 22.56 13.88 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 406 on January 16, 2001. The number of beneficial shareholders on that date is estimated to be approximately 5,000. ITEM 6. SELECTED FINANCIAL DATA The table below should be read together with the Company's fiscal 2000 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 taken from the Company's consolidated financial statements. The Company's consolidated financial statements as of October 31, 2000 and 1999 and for each of the three years in the period ended October 31, 2000 have been audited by Deloitte & Touche LLP, the Company's independent auditors. Their report is included on page 24. 11 14
YEARS ENDED OCTOBER 31, ------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) Statement of Income Data Net sales ................................. $515,689 $443,734 $316,115 $231,783 $193,474 Income before provision for income taxes .. 51,862 44,867 30,768 21,283 19,279 Net income ................................ 31,836 26,584 17,963 12,644 11,660 Net income per share(1) ................... 1.42 1.20 0.85 0.61 0.56 Net income per share, assuming dilution(1). 1.37 1.14 0.82 0.60 0.54 Weighted average common shares outstanding(1) ......................... 22,406 22,096 21,144 20,723 20,642 Weighted average common shares outstanding, assuming dilution(1) ...... 23,232 23,284 21,820 21,111 21,627 Balance Sheet Data Total assets .............................. $358,742 $259,673 $213,071 $149,650 $115,580 Working capital ........................... 119,529 109,823 92,321 67,293 55,647 Lines of credit ........................... 49,203 28,619 17,465 18,671 8,211 Long-term debt ............................ 66,712 28,184 30,962 11,652 2,880 Stockholders' equity ...................... 177,614 151,753 117,659 95,008 80,727 Current ratio ............................. 1.97 2.32 2.36 2.51 2.73 Return on average stockholders' equity .... 19.33 19.73 16.89 14.39 15.58
- ----------------- (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. 12 15 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 2000 financial statements and notes. 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, which includes Quiksilver Young Men's, Boys, Toddlers, WinterSports, Quiksilver Silver Edition, and Hawk Clothing, increased 15.9% to $197,843,000 for fiscal 2000 from $170,717,000 the year before. Domestic women's net sales, including Roxy, Teenie Wahine, Raisins, Leilani and Radio Fiji, increased 13.6% to $123,487,000 from $108,722,000 for those same periods. WinterSports hardgoods are sold under the Lib Technologies, Gnu, Arcane and Bent Metal brands and 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 continues to benefit from increased consumer demand for its products. The Company believes that this increased demand is coming primarily from the Company's product design and marketing efforts. Quiksilver Europe's net sales also increased across all divisions and account 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. To understand Quiksilver Europe's fiscal 2000 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 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, net sales grew 37.8% in fiscal 2000. This is much 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 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 13 16 $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 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 this 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 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. 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. RESULTS OF OPERATIONS -- FISCAL 1999 COMPARED TO FISCAL 1998 Net Sales Net sales for fiscal 1999 increased 40.4% to $443,734,000 from $316,115,000 in fiscal 1998. Of that total, domestic net sales increased 43.2% to $290,363,000 from $202,807,000, and Quiksilver Europe's net sales increased 35.4% to $153,371,000 from $113,308,000. Domestic net sales in the men's category increased 39.1% to $170,717,000 for fiscal 1999 from $122,753,000 the year before. In the women's category, domestic net sales increased 56.8% to $108,722,000 from $69,357,000. The other component of domestic net sales is wintersports hardgoods, which totaled $10,924,000 for fiscal 1999, a 2.1% increase from $10,697,000 in the previous year. Domestic men's net sales increased in all divisions, except WinterSports. The Company continued to benefit from increased consumer demand for its Quiksilver products in the men's category. Improved product design and national marketing were the primary causes of this higher demand. Increased product offerings and an expanded customer base were the primary reasons for the sales increase in the women's category. 14 17 Men's net sales for Quiksilver Europe increased 28.9% to $133,835,000 for fiscal 1999 from $103,850,000 the year before. European women's net sales increased 106.6% to $19,536,000 from $9,458,000 for those same periods. These increases came across all divisions with particular strength in France, the United Kingdom and Spain. As measured in French francs, Quiksilver Europe's functional currency, net sales increased 37.6%. This French franc growth rate is generally consistent with the U.S. dollar growth rate of 35.4% because the U.S. dollar was worth generally the same amount of French francs in fiscal 1999 compared to the previous year. Gross Profit The consolidated gross profit margin for fiscal 1999 decreased to 39.6% from 40.1% in the previous year. The domestic gross profit margin decreased to 36.6% from 37.0%, and Quiksilver Europe's gross profit margin decreased to 45.2% from 45.6% for those same periods. The domestic gross profit margin decreased primarily because sales of clearance goods in the first and fourth quarters of fiscal 1999 were higher than in the year before. This effect was offset somewhat by improved utilization of overhead in the third quarter. The gross profit margin decreased in Europe primarily because sampling costs were higher than in the previous year. Additional samples were produced to support expanded sales efforts in the Boys and Roxy divisions. Selling, General and Administrative Expense SG&A increased 36.0% in fiscal 1999 to $124,479,000 from $91,508,000 the year before. The domestic component increased 39.6% to $77,974,000 from $55,875,000, and Quiksilver Europe's piece increased 30.5% to $46,505,000 from $35,633,000 for those same periods. Higher personnel and other costs related to increased sales volume were the primary reasons for these increases. Quiksilver Europe also spent more on advertising than in the year before. As a percentage of net sales, SG&A decreased to 28.1% in fiscal 1999 from 28.9% in the previous year. Royalty Income and Expense Net royalty expense for fiscal 1999 increased 34.5% to $3,143,000 from $2,337,000 in fiscal 1998. The Company received higher royalty income from its domestic licensees. But this benefit was more than offset by higher royalty expense paid on Quiksilver Europe's increased sales. Interest Expense and Income Taxes Interest expense was $3,476,000 for fiscal 1999, an increase of 27.1% from the previous year's level of $2,734,000. This increase came from three primary factors. First, the domestic division borrowed more money to provide working capital to support its growth. Secondly, the Company moved into new headquarters in Huntington Beach, and funds were borrowed to outfit the building. Lastly, two company-owned Boardriders Club stores were opened in Paris, and these stores were financed with long-term debt. The Company's income tax rate for fiscal 1999 decreased to 40.7% from 41.6% the year before. A decrease in the statutory tax rate in France was the primary cause. Net Income Net income for fiscal 1999 increased 48.0% to $26,584,000 or $1.14 per share on a diluted basis. The year before, net income was $17,963,000 or $0.82 per share on a diluted basis. Basic earnings per share was $1.20 in fiscal 1999 versus $0.85 in the previous year. 15 18 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 $2,298,000 at October 31, 2000 versus $1,449,000 at October 31, 1999. Working capital amounted to $119,529,000 at October 31, 2000, compared to $109,823,000, an increase of 8.8%. 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 used $4,100,000 in operations during fiscal 2000. In the previous year, operations generated cash of $4,645,000, while in fiscal 1998, operations used cash of $1,090,000. Inventory investments were the primary reasons for these fluctuations from year to year. Cash invested in inventory in fiscal 2000 exceeded the previous year by $13,338,000 (net of accounts payable increase). In contrast, cash invested in inventory in fiscal 1999 was $11,821,000 less than the cash invested in the previous year. The reason for this is that in fiscal 2000, inventory levels were increased based on planned sales increases in the upcoming spring 2001 season, and to take advantage of "in-season" business in certain product categories. Partially offsetting the increased cash invested in inventories in fiscal 2000 was the lower amount of cash paid for income taxes. The Company paid $4,565,000 less in income taxes compared to the year before due to timing benefits. The Company's net income in fiscal 2000, after adding back non-cash expenses, increased by $9,864,000 over the year before. This additional cash flow was used to finance the Company's increasing working capital needs resulting from its growth. 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, dying and embroidery. The cutting process is performed in-house domestically to enhance control and efficiency while screenprinting is performed in-house in Europe. Shortly after the end of fiscal 2000, the Company acquired a domestic screenprint and embroidery business to do a portion of the domestic screenprinting and embroidery work in-house. Fiscal 2000 capital expenditures were $16,420,000, which was significantly less than the $23,900,000 spent in fiscal 1999 and the $19,785,000 spent in fiscal 1998. The Company's investments in facilities caused fiscal 1999 and 1998 capital spending to be high. The domestic headquarters was added in fiscal 1999. The year before, the Company built its European headquarters and two company-owned Boardriders Club stores in Paris. In fiscal 2000, capital spending was focused on retail stores, in-store shops and fixtures and computer equipment. Facilities investments decreased approximately $10,000,000 from the previous year. New Boardriders Clubs and Quiksvilles are again part of the Company's plans in fiscal 2001. Computer hardware and software will also be added to continuously improve our systems. Capital spending for these and other projects in fiscal 2001 is expected to total between $18,000,000 and $22,000,000. 16 19 Acquisitions The Company made several acquisitions in fiscal 2000. Hawk Designs, Inc. was acquired in March. Freestyle, S.A. ("Gotcha Europe"), which is the licensee of Gotcha International in Europe, was acquired by Quiksilver Europe in May. Quiksilver International was acquired in July, and Fidra, Inc. was acquired in August. The Hawk Designs, Inc. purchase added a potentially key trademark to the Company's portfolio of brands. The Company now owns the rights to "Tony Hawk", a skateboarding icon, for apparel and related accessories. Quiksilver Europe's acquisition of Gotcha Europe resulted in a new license agreement that continues through 2015. 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 present value basis. This initial amount was recorded at July 1, 2000 as a component of the purchase price. The initial payment was financed using the Company's domestic line of credit, which was amended to allow for the acquisition. The obligation to make the two remaining payments is included in the Company's balance sheet as a component of long-term debt. Noncash interest expense is recorded each quarter to reflect the calculated financing costs associated with these remaining obligations. Fidra is a startup business that the Company acquired from its originator, John Ashworth. Initial shipments are expected in the third quarter of fiscal 2001. 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 facilities were changed three times during fiscal 2000. These changes were needed to increase the credit available to fund the Company's growing working capital needs, and also to provide financing for the Quiksilver International acquisition. In April 2000, a bank syndicate was formed, and the line of credit amount was increased. Later in July, the credit agreement was amended to allow for the acquisition of Quiksilver International, which was discussed above. In October 2000, the bank syndicate was expanded, and the line of credit was increased to $100,000,000. A $25,000,000 term loan was also added at that time. This new term loan is in addition to an existing term loan with a single bank that was originally for $12,300,000. 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, 2000 was 8.5%. The term loan is repayable in equal quarterly installments through October 2004. The term loan bears interest based on LIBOR. The interest rate of the term loan at October 31, 2000 was 8.8%. The line of credit and the term loan are secured and are subject to generally the same restrictive convenants. 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, 2000, the Company was in compliance with such covenants. 17 20 The term loan that initially totaled $12,300,000 is repayable $102,500 per month with a final balloon payment due on October 29, 2004. 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. As of October 31, 2000, the Company had $44,854,000 of borrowings outstanding under the line of credit and $36,685,000 outstanding under the term loans. In Europe, the Company has unsecured lines of credit with several banks that provide approximately $39,000,000 for cash borrowings and approximately $26,000,000 for letters of credit. At October 31, 2000, related interest rates ranged from 4.6% to 5.0%. Theses lines of credit expire on various dates through April 2001, and the Company believes that they will be renewed with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2000 was $4,349,000 at an average interest rate of 4.9%. Quiksilver Europe also has $14,217,000 of long-term debt, most of which is collateralized by land and buildings. This debt bears interest at rates ranging generally from 4.4% to 6.0%. Principal and interest payments are required either monthly, quarterly or annually, and the loans are due at various dates through 2009. The Company's financing activities generated $45,622,000 of cash in fiscal 2000, compared to $17,649,000 in the previous year and $19,977,000 the year before that. These borrowings were used to fund the business acquisitions, capital expenditures and the inventory investments discussed above. Stock Splits The Company's stock was split twice during the last three years. In April 1999, the stock was split three-for-two, and in April 1998, it was split two-for-one. Trade Accounts Receivable and Inventories The Company's trade accounts receivable were $136,394,000 at October 31, 2000 versus $107,619,000 the previous year, an increase of 26.7%. Of those totals, domestic receivables increased 17.9% to $87,369,000 from $74,128,000, and Quiksilver Europe's receivables increased 46.4% to $49,025,000 from $33,491,000. These levels of receivables are generally consistent with the sales increases. The average days sales outstanding based on the October 31 amounts increased about two days year over year, however, due to the timing of shipments within the fourth quarter. Consolidated inventories increased 24.7% to $90,034,000 at October 31, 2000 from $72,207,000 the year before. The domestic component increased 37.2% to $72,860,000 from $53,098,000, and the European piece decreased 10.1% to $17,174,000 from $19,109,000. Domestic finished goods inventory levels were increased to take advantage of "in-season" business in certain categories, including t-shirts, certain accessories and footwear. At the same time, inventory levels were increased based on planned sales increases in the upcoming spring 2001 season. The timing of shipments referred to above had the effect of reducing European inventories compared to last year's levels. 18 21 The Company's average inventory turnover was 3.8 times at the end of fiscal 2000 based on a rolling average computation. This is consistent with other quarters during fiscal 2000, but was down somewhat from average turnover of 4.2 times at the end of the previous year. 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 has been relatively normal and anticipated. 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, 2000 is adequate to cover anticipated losses. Throughout the year, the Company monitors developments 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 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on November 1, 2000. SFAS No. 133 will affect the Company's financial statements beginning with the first quarter of fiscal 2001 and requires that an entity 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 that was recorded in two parts. The transition adjustment recorded to recognize the fair value of derivatives that are designated as cash-flow hedges was charged to other comprehensive income and amounted to approximately $300,000 net of income taxes. The transition adjustment recorded to recognize the fair value of derivatives that do not qualify for hedge accounting under SFAS No. 133 was charged to foreign exchange loss and amounted to approximately $540,000 net of income taxes. 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: o General economic and business conditions o The acceptance in the marketplace of new products o The availability of outside contractors at prices favorable to the Company o The ability to source raw materials at prices favorable to the Company o Currency fluctuations o Changes in business strategy or development plans o Availability of qualified personnel o Changes in political, social and economic conditions and local regulations, particularly in Europe and Asia o 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. 19 22 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 The Company has two basic categories of foreign currency risk. One type is referred to as "translation" risk, and the other is referred to as "transaction" risk. Translation risk results from taking the financial statements of the Company's European and Australian subsidiaries and converting them into U.S. dollars. The local currency financial statements are translated using the average exchange rate during the reporting period. Changes in foreign exchange rates affect the Company's reported profits and distort comparisons from year to year. Accounting rules do not allow the Company to hedge the 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 2000, the U.S. dollar strengthened compared to the French franc. So, sales of Quiksilver Europe increased about 38% in French francs compared to the year before, but only increased about 19% in U.S. dollars. To reduce the Company's exposure to this translation risk, Quiksilver Europe makes a loan to the domestic business, from time to time, that is repayable in French francs. The amount of the loan is based on the expected profits of Quiksilver Europe. The Company recognized a foreign exchange loss of $21,000 in fiscal 2000 and a foreign exchange gain totaling $327,000 in fiscal 1999 related to these loans. Transaction risk results from specific business transactions that are denominated in a currency other than the Company's operating currency. For example, Quiksilver Europe operates in French francs (or euros) but sells in the United Kingdom in British pounds. Quiksilver Europe also purchases inventory in U.S. dollars. Changes in the foreign exchange rate between francs and pounds, and francs and dollars create this transaction risk. The Company enters into various foreign exchange contracts to hedge these risks. Such contracts take the form of forwards or options, but they are not used by the Company for trading purposes. The Company's goal is to ensure that cash flows in Quiksilver Europe's operating currency, French francs, are not reduced as a result of changes in exchange rates. For the years through fiscal 2000, gains and losses related to hedges of firmly committed foreign currency transactions were deferred and recognized when the hedged transaction occurred. But as of November 1, 2000, these accounting rules changed as a result of adopting FAS 133 (discussed above under the caption "New Accounting Pronouncements".) Foreign currency exchange rates were the primary reason for the gross margin decline in Europe (discussed above under the caption "2000 versus 1999".) When the U.S. dollar significantly strengthened in the latter part of fiscal 2000, product costs in French francs increased for purchases of product denominated in U.S. dollars. Because the Company was both unwilling and unable to completely pass these higher costs along to consumers, gross margins decreased. Hedging strategies were not completely effective in this period of rapid movement in exchange rates between the U.S. dollar and the French franc, or euro. The domestic division also has foreign currency transaction risk. The Company's obligation for the second and third payments for the acquisition of Quiksilver International (discussed above) is 20 23 denominated in Australian dollars. When the U.S. dollar strengthened compared to the Australian dollar in the latter of part of fiscal 2000, the Company benefited and recognized a gain of $1,551,000. Shortly after the end of fiscal 2000, the Company entered into forward contracts to hedge this Australian dollar exposure. With the exception of the United Kingdom, the 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 is planned to be in circulation starting January 1, 2002. Quiksilver Europe has upgraded its information systems, and has the ability to process transactions in euros. Interest Rates Most of the Company's lines of credit and long-term debt bears interest based on LIBOR. Interest rates, therefore, can move up or down depending on market conditions. The approximate amount of this variable rate debt was $85,000,000 at October 31, 2000, and the average interest rate at that time was 7.9%. If interest rates were to increase by 10%, the Company's net income would be reduced by approximately $400,000 based on these fiscal 2000 levels. In January 2000, the Company entered into an interest rate swap agreement to fix the interest rate of a variable rate term loan at 8.43% per year. The term loan and the notional amount of the swap both initially totaled $12,300,000. The swap is effective through April 2007. 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. 21 24 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 2001 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2000 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 2001 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2000 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 2001 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2000 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 2001 Annual Meeting of Stockholders. This Proxy Statement is required to be filed with the Commission within 120 days of October 31, 2000 and is included in this report by this reference. 22 25 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 24 2. Exhibits See "Exhibit Index" on page 43 (b) Reports on Form 8-K. 1. The Company filed a report on Form 8-K to report the acquisition of Quiksilver International on August 27, 2000 23 26 QUIKSILVER, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- INDEPENDENT AUDITORS' REPORT........................................... 25 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets October 31, 2000 and 1999...................................... 26 Consolidated Statements of Income Years Ended October 31, 2000, 1999 and 1998.................... 27 Consolidated Statements of Comprehensive Income Years Ended October 31, 2000, 1999 and 1998..................... 27 Consolidated Statements of Stockholders' Equity Years Ended October 31, 2000, 1999 and 1998.................... 28 Consolidated Statements of Cash Flows Years Ended October 31, 2000, 1999 and 1998.................... 29 Notes to Consolidated Financial Statements........................ 30 24 27 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2000, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP December 19, 2000 Costa Mesa, California 25 28 QUIKSILVER, INC. CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2000 AND 1999
2000 1999 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ....................... $ 2,298,000 $ 1,449,000 Trade accounts receivable, less allowance for doubtful accounts of $5,090,000 (2000) and $5,738,000 (1999) - Note 3 .................... 136,394,000 107,619,000 Other receivables ............................... 5,654,000 4,074,000 Inventories - Note 4 ............................ 90,034,000 72,207,000 Deferred income taxes - Note 11 ................. 5,234,000 5,672,000 Prepaid expenses and other current assets ....... 3,759,000 2,153,000 ------------- ------------- Total current assets ...................... 243,373,000 193,174,000 Fixed assets, net - Notes 5 and 6 .................. 49,834,000 45,153,000 Trademarks, less accumulated amortization of $2,825,000 (2000) and $2,044,000 (1999) - Note 10 43,566,000 1,393,000 Goodwill, less accumulated amortization of $6,022,000 (2000) and $5,233,000 (1999) - Note 2 18,962,000 17,055,000 Deferred income taxes - Note 11 .................... 789,000 401,000 Other assets ....................................... 2,218,000 2,497,000 ------------- ------------- Total assets .............................. $ 358,742,000 $ 259,673,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit - Note 6 ........................ $ 49,203,000 $ 28,619,000 Accounts payable ................................ 40,642,000 31,325,000 Accrued liabilities - Note 7 .................... 22,568,000 19,792,000 Current portion of long-term debt - Note 6 ...... 9,428,000 3,615,000 Income taxes payable - Note 11 .................. 2,003,000 -- ------------- ------------- Total current liabilities ................. 123,844,000 83,351,000 Long-term debt - Note 6 ............................ 57,284,000 24,569,000 ------------- ------------- Total liabilities .................................. 181,128,000 107,920,000 ------------- ------------- 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 - 23,234,036 (2000) and 22,731,220 (1999) ...... 232,000 227,000 Additional paid-in capital ...................... 42,833,000 36,780,000 Treasury stock, 721,300 (2000) and 390,000 (1999) shares ................................ (6,778,000) (3,054,000) Retained earnings ............................... 153,426,000 121,590,000 Accumulated other comprehensive loss ............ (12,099,000) (3,790,000) ------------- ------------- Total stockholders' equity ................ 177,614,000 151,753,000 ------------- ------------- Total liabilities and stockholders' equity $ 358,742,000 $ 259,673,000 ============= =============
See notes to consolidated financial statements. 26 29 QUIKSILVER, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
2000 1999 1998 ------------- ------------- ------------- Net sales ......................................... $ 515,689,000 $ 443,734,000 $ 316,115,000 Cost of goods sold ................................ 315,900,000 268,184,000 189,399,000 ------------- ------------- ------------- Gross profit ................................... 199,789,000 175,550,000 126,716,000 ------------- ------------- ------------- Operating expenses: Selling, general and administrative expense .... 142,888,000 124,479,000 91,508,000 Royalty income ................................. (3,681,000) (2,123,000) (1,514,000) Royalty expense ................................ 3,449,000 5,266,000 3,851,000 ------------- ------------- ------------- Total operating expenses .................... 142,656,000 127,622,000 93,845,000 ------------- ------------- ------------- Operating income .................................. 57,133,000 47,928,000 32,871,000 Interest expense .................................. 6,435,000 3,476,000 2,734,000 Foreign currency gain ............................. (1,650,000) (960,000) (946,000) Other expense ..................................... 486,000 545,000 315,000 ------------- ------------- ------------- Income before provision for income taxes .......... 51,862,000 44,867,000 30,768,000 Provision for income taxes - Note 11 .............. 20,026,000 18,283,000 12,805,000 ------------- ------------- ------------- Net income ........................................ $ 31,836,000 $ 26,584,000 $ 17,963,000 ============= ============= ============= Net income per share - Note 1 ..................... $ 1.42 $ 1.20 $ 0.85 ============= ============= ============= Net income per share, assuming dilution - Note 1 .. $ 1.37 $ 1.14 $ 0.82 ============= ============= ============= Weighted average common shares outstanding - Note 1 22,406,000 22,096,000 21,144,000 ============= ============= ============= Weighted average common shares outstanding, assuming dilution - Note 1 ..................... 23,232,000 23,284,000 21,820,000 ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
2000 1999 1998 ------------- ------------- ------------- Net income .......................................... 31,836,000 $ 26,584,000 $17,963,000 Other comprehensive (loss) income -- Foreign currency translation adjustment (8,309,000) (3,431,000) 1,350,000 ------------ ------------ ----------- Comprehensive income ................................. 23,527,000 $ 23,153,000 $19,313,000 ============ ============ ===========
See notes to consolidated financial statements. 27 30 QUIKSILVER, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
COMMON STOCK ADDITIONAL ------------------------ PAID-IN TREASURY SHARES AMOUNT CAPITAL STOCK ---------- -------- ----------- ----------- Balance, November 1, 1997 .. 21,418,410 $214,000 $22,514,000 $(3,054,000) Exercise of stock options ................ 410,037 4,000 2,602,000 -- Tax benefit from exercise of stock options ................ -- -- 732,000 -- Net income and other comprehensive income ... -- -- -- -- ---------- -------- ----------- ----------- Balance, October 31, 1998 .. 21,828,447 218,000 25,848,000 (3,054,000) Exercise of stock options ................ 902,773 9,000 7,574,000 -- Tax benefit from exercise of stock options ................ -- -- 3,358,000 -- Net income and other comprehensive loss ..... -- -- -- -- ---------- -------- ----------- ----------- Balance, October 31, 1999 .. 22,731,220 227,000 36,780,000 (3,054,000) Exercise of stock options ................ 502,816 5,000 4,302,000 -- Tax benefit from exercise of stock options ................ -- -- 1,751,000 -- Repurchase of common stock -- -- -- (3,724,000) Net income and other comprehensive loss ..... -- -- -- -- ---------- -------- ----------- ----------- Balance, October 31, 2000 .. 23,234,036 $232,000 $42,833,000 $(6,778,000) ========== ======== =========== ===========
ACCUMULATED OTHER TOTAL RETAINED COMPREHENSIVE STOCKHOLDERS' EARNINGS INCOME (LOSS) EQUITY ------------ ------------- -------------- Balance, November 1, 1997 .. $ 77,043,000 $ (1,709,000) $ 95,008,000 Exercise of stock options ................ -- -- 2,606,000 Tax benefit from exercise of stock options ................ -- -- 732,000 Net income and other comprehensive income ... 17,963,000 1,350,000 19,313,000 ------------ ------------ ------------- Balance, October 31, 1998 .. 95,006,000 (359,000) 117,659,000 Exercise of stock options ................ -- -- 7,583,000 Tax benefit from exercise of stock options ................ -- -- 3,358,000 Net income and other comprehensive loss ..... 26,584,000 (3,431,000) 23,153,000 ------------ ------------ ------------- Balance, October 31, 1999 .. 121,590,000 (3,790,000) 151,753,000 Exercise of stock options ................ -- -- 4,307,000 Tax benefit from exercise of stock options ................ -- -- 1,751,000 Repurchase of common stock -- -- (3,724,000) Net income and other comprehensive loss ..... 31,836,000 (8,309,000) 23,527,000 ------------ ------------ ------------- Balance, October 31, 2000 .. $153,426,000 $(12,099,000) $ 177,614,000 ============ ============ =============
See notes to consolidated financial statements. 28 31 QUIKSILVER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
2000 1999 1998 ------------ ------------ ------------ Cash flows from operating activities: Net income ............................................. $ 31,836,000 $ 26,584,000 $ 17,963,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization .................... 10,023,000 7,671,000 5,621,000 Provision for doubtful accounts .................. 3,135,000 3,088,000 2,886,000 Loss (gain) on sale of fixed assets .............. 183,000 543,000 (174,000) Foreign currency gain ............................ (2,002,000) -- -- Interest accretion ............................... 518,000 -- -- Deferred income taxes ............................ 1,392,000 (2,665,000) (1,057,000) Changes in operating assets and liabilities, net of effects from business acquisitions: Trade accounts receivable .................. (40,004,000) (35,122,000) (25,510,000) Other receivables .......................... (1,091,000) (614,000) (1,866,000) Inventories ................................ (21,481,000) (3,369,000) (21,332,000) Prepaid expenses and other current assets .. (2,315,000) (775,000) (270,000) Other assets ............................... (275,000) (348,000) (315,000) Accounts payable ........................... 11,275,000 6,501,000 12,643,000 Accrued liabilities ........................ 659,000 3,214,000 6,811,000 Income taxes payable ....................... 4,047,000 (63,000) 3,510,000 ------------ ------------ ------------ Net cash (used in) provided by operating activities .................. (4,100,000) 4,645,000 (1,090,000) ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sales of fixed assets .................... 2,000 299,000 371,000 Capital expenditures ................................... (16,420,000) (23,900,000) (19,785,000) Business acquisitions, net of acquired cash (Note 2) ... (24,409,000) -- (500,000) ------------ ------------ ------------ Net cash used in investing activities ... (40,827,000) (23,601,000) (19,914,000) ------------ ------------ ------------ Cash flows from financing activities: Borrowings on lines of credit .......................... 71,127,000 55,806,000 28,668,000 Payments on lines of credit ............................ (50,872,000) (44,652,000) (29,731,000) Borrowings on long-term debt ........................... 41,822,000 4,442,000 20,488,000 Payments on long-term debt ............................. (17,038,000) (5,530,000) (2,054,000) Purchase of treasury stock ............................. (3,724,000) -- -- Proceeds from stock option exercises ................... 4,307,000 7,583,000 2,606,000 ------------ ------------ ------------ Net cash provided by financing activities 45,622,000 17,649,000 19,977,000 Effect of exchange rate changes on cash ................... 154,000 (273,000) (47,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ...... 849,000 (1,580,000) (1,074,000) Cash and cash equivalents, beginning of year .............. 1,449,000 3,029,000 4,103,000 ------------ ------------ ------------ Cash and cash equivalents, end of year .................... $ 2,298,000 $ 1,449,000 $ 3,029,000 ============ ------------ ============ Supplementary cash flow information: Cash paid during the year for: Interest ............................................ $ 5,526,000 $ 3,430,000 $ 2,644,000 ============ ============ ============ Income taxes ........................................ $ 15,284,000 $ 19,849,000 $ 10,275,000 ============ ============ ============ Non-cash financing activity -- Debt assumed in business acquisitions (Note 2) ...... $ 19,384,000 $ -- $ -- ============ ============ ============
See notes to consolidated financial statements. 29 32 QUIKSILVER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998 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 (Quiksilver Silver Edition) and women (Leilani and Alex Goes), as well as snowboards, snowboard boots and bindings under the Lib Technologies, Gnu 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 tasks 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., QS Retail, Inc., Mt. Waimea, Inc. and Quiksilver Wetsuits, Inc. ("Quiksilver"), Na Pali, S.A., Freestyle S.A. ("Gotcha Europe") and subsidiaries ("Quiksilver Europe"), Quiksilver Australia Pty Ltd and subsidiaries ("Quiksilver International"), Mervin Manufacturing, Inc. ("Mervin"), Hawk Designs, Inc. ("Hawk"), and Fidra, Inc. ("Fidra"), its wholly-owned subsidiaries, which are referred to collectively as the "Company". 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 30 33 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 $3,700,000 at October 31, 2000) 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 25 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 when merchandise is shipped to a customer. 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. 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 dividend on April 23, 1999 to shareholders of record on April 15, 1999. During fiscal 1998, the Company's Board of Directors approved a two-for-one split of the Company's Common Stock. This 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 these stock splits. 31 34 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. 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 enters into foreign currency contracts in managing its foreign exchange risk on foreign currency transactions and does not use the contracts for trading purposes. The Company's goal is to protect the Company from the risk that the eventual French franc or U.S. dollar net cash inflows from the foreign currency transactions will be adversely affected by changes in exchange rates. Firmly committed foreign currency transactions are hedged with forward contracts and options. Gains and losses related to hedges of firmly committed transactions are deferred and recognized when the hedged transaction occurs. Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income" for fiscal 1999. This statement established standards for reporting comprehensive income in a financial statement that is displayed with the same prominence as other financial statements. 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 into U.S. dollars. 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 The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on November 1, 2000. SFAS No. 133 will affect the Company's financial statements beginning with the first quarter of fiscal 2001 and requires that an entity 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 that was recorded in two parts. The transition adjustment recorded to recognize the fair value of derivatives that are designated as cash-flow hedges was charged to other comprehensive income and amounted to approximately $300,000 net of income taxes. The transition adjustment recorded to recognize the fair value of derivatives that do not qualify for hedge accounting under SFAS No. 133 was charged to foreign exchange loss and amounted to approximately $540,000 net of income taxes. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin #101, "Revenue Recognition in Financial Statements." The Company's management has determined that the application of Staff Accounting Bulleting #101 will not have a material impact on the Company's consolidated financial statements. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 of Accounting Principles Board Opinion No. 25, "Accounting for Certain Transactions Involving Stock Compensation," which, among other things, addressed accounting consequences of a modification that reduces the exercise price of a fixed stock option award (otherwise known as repricing). The adoption of this interpretation did not impact the Company's consolidated financial statements. 32 35 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 obligation related to these deferred purchase price payments is reflected in the Consolidated Balance Sheet as a component of long-term 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 totaling $500,000 to be paid in fiscal 2001 and 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. Effective July 1, 1997, the Company acquired the operations of Mervin, the maker of two snowboard brands, Lib Technologies and Gnu, and Bent Metal bindings. The initial purchase price was $4,582,000, which includes a cash payment of $1,900,000 and assumed bank debt of $2,682,000. Under the terms of the purchase agreement, additional consideration aggregating up to $2,600,000 could have been paid if Mervin achieved certain earnings goals through fiscal 2000. Mervin achieved its goal for the four months ended October 31, 1997, which resulted in a payment of $500,000 in January 1998 and an adjustment to goodwill of $500,000 at October 31, 1997. Mervin did not achieve its goal for the years ended October 31, 1998, October 31, 1999 or October 31, 2000. Accordingly, no additional payments were made related to those years. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $3,844,000, which is being amortized over 30 years. The results of operations for all acquisitions are included in the Consolidated Statements of Income from their respective acquisition dates. 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. 33 36 NOTE 3 -- ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts includes the following:
YEARS ENDED OCTOBER 31, ----------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Balance, beginning of year ....... $ 5,738,000 $ 3,738,000 $ 2,725,000 Provision for doubtful accounts 3,135,000 3,088,000 2,886,000 Deductions .................... (3,783,000) (1,088,000) (1,873,000) ----------- ----------- ----------- Balance, end of year ............. $ 5,090,000 $ 5,738,000 $ 3,738,000 =========== =========== ===========
NOTE 4 -- INVENTORIES Inventories consist of the following: OCTOBER 31, -------------------------- 2000 1999 ----------- ----------- Raw materials .................... $22,191,000 $19,225,000 Work in process .................. 7,543,000 7,819,000 Finished goods ................... 60,300,000 45,163,000 ----------- ----------- $90,034,000 $72,207,000 =========== =========== NOTE 5 -- FIXED ASSETS Fixed assets consist of the following: OCTOBER 31, ----------------------------- 2000 1999 ------------ ------------ Furniture and equipment .......... $ 44,252,000 $ 32,716,000 Leasehold improvements ........... 17,402,000 16,951,000 Land and buildings ............... 11,391,000 12,613,000 ------------ ------------ 73,045,000 62,280,000 Accumulated depreciation and amortization............... (23,211,000) (17,127,000) ------------ ------------ $ 49,834,000 $ 45,153,000 ============ ============ NOTE 6 -- LINES OF CREDIT AND LONG-TERM DEBT In April 2000, the Company's loan agreement with a U.S. bank was replaced with a syndicated bank facility. This facility was amended in July 2000 to allow for the acquisition of Quiksilver International, and was replaced effective December 5, 2000 with a second syndicated bank facility (the "Credit Agreement"). The Credit Agreement provides for (i) a revolving line of credit of up to $100,000,000, 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, 2000 was 8.5%. The term loan is repayable in equal quarterly installments through October 2004, and bears interest based on LIBOR, with an interest rate at October 31, 2000 of 8.8%. As of October 31, 2000, the Company had $44,854,000 of cash borrowings outstanding under the revolving line of credit and $25,000,000 outstanding under the term loan. 34 37 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, 2000, the Company was in compliance with such covenants. 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 $102,500 per month with a final maturity in October 2004. It is secured by the leasehold improvements at the Company's Huntington Beach headquarters and bears interest 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, 2000 was a loss of $137,000. 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, 2000 was $11,685,000. Quiksilver Europe also has available unsecured lines of credit with banks that provide for maximum cash borrowings of approximately $39,000,000 in addition to approximately $26,000,000 available for the issuance of letters of credit. At October 31, 2000, these lines of credit bore interest at rates ranging from 4.6% to 5.0%. The lines of credit expire on various dates through April 2001, and the Company believes that these lines of credit will be renewed with substantially similar terms. As of October 31, 2000, $4,349,000 was outstanding under these lines of credit. Quiksilver Europe also has $14,217,000 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 4.4% to 6.0%, requires monthly, quarterly or annual principal and interest payments and is due at various dates through 2009. 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, 2000, these obligations totaled $15,810,000. Principal payments on long-term debt are due approximately as follows: 2001............................................... $ 9,428,000 2002............................................... 18,877,000 2003............................................... 9,783,000 2004............................................... 16,522,000 2005............................................... 8,740,000 Thereafter......................................... 3,362,000 ----------- $66,712,000 =========== NOTE 7 -- ACCRUED LIABILITIES Accrued liabilities consist of the following:
OCTOBER 31, --------------------------- 2000 1999 ----------- ----------- Accrued employee compensation and benefits......... $10,863,000 $12,897,000 Accrued sales and payroll taxes.................... 2,832,000 2,052,000 Other liabilities.................................. 8,873,000 4,843,000 ----------- ----------- $22,568,000 $19,792,000 =========== ===========
35 38 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, 2000: 2001............................................... $ 6,618,000 2002............................................... 6,613,000 2003............................................... 6,643,000 2004............................................... 6,054,000 2005............................................... 5,567,000 Thereafter......................................... 14,810,000 ----------- $46,305,000 =========== Total rent expense was $6,670,000, $4,840,000 and $2,534,000 during the years ended October 31, 2000, 1999 and 1998, 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, 3,736,209 shares are reserved for issuance over its term, consisting of 3,236,209 shares authorized under predecessor plans plus an increase of 500,000 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 are exercisable 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. Changes in shares under option for the years ended October 31, 2000, 1999 and 1998 are summarized as follows:
YEARS ENDED OCTOBER 31, ------------------------------------------------------------------------- 2000 1999 1998 --------------------- ---------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- Outstanding, beginning of year .. 3,410,531 $ 9.22 3,846,408 $ 8.15 3,325,845 $7.47 Granted ....................... 784,790 13.00 490,298 16.05 1,022,901 9.43 Exercised ..................... (502,818) 8.59 (902,773) 8.34 (410,037) 6.48 Canceled ...................... (76,202) 14.71 (23,402) 12.30 (92,301) 8.78 --------- --------- --------- Outstanding, end of year ........ 3,616,301 $10.01 3,410,531 $ 9.22 3,846,408 $8.15 ========= ====== ========= ====== ========= ===== Options exercisable, end of year 2,168,831 $ 8.30 1,948,571 $ 7.39 1,735,306 $6.97 ========= ====== ========= ====== ========= ===== Weighted average fair value of options granted during the year $ 6.55 $ 7.42 $4.83 ====== ====== =====
36 39 Outstanding stock options at October 31, 2000 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 - $ 6.95 706,001 3.7 $ 4.95 700,001 $ 4.94 6.96 - 9.27 1,051,124 6.5 8.15 814,974 8.04 9.28 - 13.90 1,278,126 8.0 11.62 490,276 10.92 13.91 - 18.53 581,050 8.5 15.98 163,580 16.09 --------- --------- 1.79 - 18.53 3,616,301 6.8 $10.01 2,168,831 $ 8.30 ========= ====== ========= ======
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, 2000, 1999 and 1998 assuming risk-free interest rates of 5.8%, 6.2% and 5.2%, respectively, volatility of 58.6%, 57.0% and 52.4%, respectively, zero dividend yield, and expected lives of 2.9, 2.9 and 5.0 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, ---------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Actual net income........................................... $31,836,000 $26,584,000 $17,963,000 Pro forma net income........................................ 29,658,000 24,703,000 14,785,000 Actual net income per share, assuming dilution.............. $ 1.37 $ 1.14 $ 0.82 Pro forma net income per share, assuming dilution........... 1.28 1.06 0.69
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, 2000, there were 499,559 shares of common stock under the 2000 Plan that were available for future grant. 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. 37 40 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" trademark in Mexico in exchange for royalties of 4.5% of net sales after Mexican taxes, and the use of the "Quiksilver" trademark 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. NOTE 11 -- INCOME TAXES A summary of the provision for income taxes is as follows:
YEARS ENDED OCTOBER 31, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Current: Federal ............... $ 8,820,000 $ 11,430,000 $ 6,087,000 State ................. 2,103,000 2,504,000 1,499,000 Foreign ............... 7,711,000 7,014,000 6,276,000 ------------ ------------ ------------ 18,634,000 20,948,000 13,862,000 ------------ ------------ ------------ Deferred: Federal ............... 1,158,000 (2,170,000) (218,000) State ................. 209,000 (420,000) (24,000) Foreign ............... 25,000 (75,000) (815,000) ------------ ------------ ------------ 1,392,000 (2,665,000) (1,057,000) ------------ ------------ ------------ Provision for income taxes $ 20,026,000 $ 18,283,000 $ 12,805,000 ============ ============ ============
A reconciliation of the effective income tax rate to a computed "expected" statutory federal income tax rate is as follows: YEARS ENDED OCTOBER 31, ---------------------- 2000 1999 1998 ---- ---- ---- Computed "expected" statutory federal income tax rate ................................ 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit ............................. 2.9 3.0 3.1 Foreign income tax rate differential ....... 0.3 2.3 3.1 Other ...................................... 0.4 0.4 0.4 ---- ---- ---- Effective income tax rate .................. 38.6% 40.7% 41.6% ==== ==== ==== 38 41 The components of net deferred income taxes are as follows: OCTOBER 31, --------------------------- 2000 1999 ----------- ----------- Deferred income tax assets: Allowance for doubtful accounts $ 3,443,000 $ 2,781,000 Trademark amortization ......... 907,000 826,000 State taxes .................... 403,000 384,000 Nondeductible accruals and other 3,140,000 2,662,000 ----------- ----------- 7,893,000 6,653,000 ----------- ----------- Deferred income tax liabilities: Goodwill amortization .......... (413,000) (409,000) Depreciation ................... (1,183,000) (30,000) Other .......................... (274,000) (141,000) ----------- ----------- (1,870,000) (580,000) ----------- ----------- Net deferred income taxes ......... $ 6,023,000 $ 6,073,000 =========== =========== 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 $53,000,000 of undistributed earnings of foreign subsidiaries as of October 31, 2000 that have been, or are intended to be, permanently invested. 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 $320,000, $242,000 and $183,000 to the 401(k) Plan for the years ended October 31, 2000, 1999 and 1998, respectively. NOTE 13 -- 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. 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. 39 42 Information related to domestic and European operations is as follows:
YEARS ENDED OCTOBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Net sales to unaffiliated customers: Domestic ........................ $333,075,000 $290,363,000 $202,807,000 Europe .......................... 182,614,000 153,371,000 113,308,000 ------------ ------------ ------------ Consolidated ................. $515,689,000 $443,734,000 $316,115,000 ============ ============ ============ Gross profit: Domestic ........................ $120,685,000 $106,156,000 $ 74,987,000 Europe .......................... 79,104,000 69,394,000 51,729,000 ------------ ------------ ------------ Consolidated ................. $199,789,000 $175,550,000 $126,716,000 ============ ============ ============ Operating income: Domestic ........................ $ 36,110,000 $ 29,565,000 $ 20,240,000 Europe .......................... 21,023,000 18,363,000 12,631,000 ------------ ------------ ------------ Consolidated ................. $ 57,133,000 $ 47,928,000 $ 32,871,000 ============ ============ ============ Identifiable assets: Domestic ........................ $265,000,000 $180,546,000 $144,384,000 Europe .......................... 93,742,000 79,127,000 68,687,000 ------------ ------------ ------------ Consolidated ................. $358,742,000 $259,673,000 $213,071,000 ============ ============ ============
France accounted for 50.5%, 55.5% and 58.2% of European net sales to unaffiliated customers for the years ended October 31, 2000, 1999 and 1998, respectively. NOTE 14 -- DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes foreign currency contracts in the form of forwards and options to hedge its cash flow exposure related to foreign currency transactions. Quiksilver Europe's functional currency is French francs, but it generates sales denominated in British pounds, and purchases product denominated in U.S. dollars. A summary of foreign currency contracts at October 31, 2000 is as follows:
NOTIONAL FAIR AMOUNT MATURITY VALUE ----------- --------------------- ----------- British pounds.............. $18,999,000 Nov. 2000 - July 2001 $(1,269,000) U.S. dollars................ 43,286,000 Nov. 2000 - Sept. 2001 (1,000) ----------- ----------- $62,285,000 $(1,270,000) =========== ===========
The Company is exposed to credit losses in the event of nonperformance by counterparties to its forward exchange contracts but has no off-balance sheet credit risk of accounting loss. The Company anticipates, however, that the counterparties will be able to fully satisfy their obligations under the contracts. The Company does not obtain collateral or other security to support the forward exchange contracts subject to credit risk but monitors the credit standing of the counterparties. 40 43 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, 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 Year ended October 31, 1999 Net Sales ............... $85,947,000 $128,128,000 $105,160,000 $124,499,000 Gross Profit ............ 33,421,000 52,339,000 40,967,000 48,823,000 Net Income .............. 3,354,000 9,742,000 5,623,000 7,865,000 Net Income per share, assuming dilution ..... 0.15 0.41 0.24 0.34 Trade accounts receivable 73,187,000 101,205,000 94,523,000 107,619,000 Inventories ............. 85,004,000 67,110,000 73,212,000 72,207,000
41 44 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 26, 2001 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 (Principal Executive Officer) 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 26, 2001 - ------------------------------------- Chief Executive Officer Robert B. McKnight, Jr. (Principal Executive Officer) /s/ Steven L. Brink Chief Financial Officer January 26, 2001 - ------------------------------------- and Treasurer Steven L. Brink (Principal Accounting Officer) /s/ William M. Barnum, Jr. Director January 25, 2001 - ------------------------------------- William M. Barnum, Jr. Director - ------------------------------------- Charles E. Crowe /s/ Michael H. Gray Director January 25, 2001 - ------------------------------------- Michael H. Gray /s/ Harry Hodge Director January 25, 2001 - ------------------------------------- Harry Hodge /s/ Robert G. Kirby Director January 25, 2001 - ------------------------------------- Robert G. Kirby /s/ Tom Roach Director January 24, 2001 - ------------------------------------- Tom Roach
42 45 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 (filed herewith). 10.2 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). 10.3 Second Amendment to term Loan Agreement dated October 12, 2000 (filed herewith). 10.4 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). 10.5 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). 10.6 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) 10.7 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) 10.8 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) 10.9 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) 10.10 Quiksilver, Inc. 2000 Stock Incentive Plan (filed herewith). 10.11 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) 10.12 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) 10.13 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) 10.14 Services Agreement between Bernard Mariette and Registrant dated November 1, 1998 (filed herewith). 21.1 Names and Jurisdictions of Subsidiaries. 23.1 Independent Auditors' Consent. - -------------- (1) Management contract or compensatory plan. EX-10.1 2 a68848ex10-1.txt EXHIBIT 10.1 1 Exhibit 10.1 ================================================================================ REVOLVING CREDIT AND TERM LOAN AGREEMENT among QUIKSILVER, INC. and THE LENDERS PARTIES HERETO and UNION BANK OF CALIFORNIA, N.A., as Agent and Co-Lead Arranger and THE CHASE MANHATTAN BANK, as Syndication Agent and Co-Lead Arranger and FLEET NATIONAL BANK, as Documentation Agent October 6, 2000 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE 1. DEFINITIONS..................................................... 1 1.1 Defined Terms................................................... 1 1.2 Other Definitional Provisions................................... 17 ARTICLE 2. AMOUNT AND TERMS OF LOANS AND LETTERS OF CREDIT; COMMITMENT AMOUNTS......................................................... 17 2.1 Revolving Loans and Letters of Credit; Revolving Loan Commitment Amounts.............................................. 17 2.2 Swing Line Loans; Swing Line Commitment......................... 19 2.3 Issuance of Letters of Credit................................... 22 2.4 Term Loans...................................................... 24 2.5 Optional Prepayments; Optional Commitment Reductions............ 25 2.6 Mandatory Prepayments........................................... 26 2.7 Conversion and Continuation Options............................. 27 2.8 Minimum Amounts of Tranches..................................... 27 2.9 Interest Rates and Payment Dates................................ 27 2.10 Computation of Interest and Fees................................ 29 2.11 Inability to Determine Interest Rate............................ 29 2.12 Pro Rata Treatment and Payments................................. 29 2.13 Illegality...................................................... 30 2.14 Increased Costs................................................. 30 2.15 Taxes........................................................... 31 2.16 Indemnity....................................................... 32 2.17 Unused-Commitment Fees.......................................... 32 2.18 Mitigation of Costs............................................. 33 ARTICLE 3. REPRESENTATIONS AND WARRANTIES.................................. 33 3.1 Organization and Good Standing.................................. 33 3.2 Power and Authority............................................. 33 3.3 Validity and Legal Effect....................................... 33 3.4 No Violation of Laws or Agreements.............................. 34 3.5 Title to Assets; Existing Encumbrances.......................... 34 3.6 Taxes and Assessments........................................... 34 3.7 Litigation and Legal Proceedings................................ 34 3.8 Accuracy of Financial Information............................... 34 3.9 Accuracy of Other Information................................... 35 3.10 Compliance with Laws Generally.................................. 35 3.11 ERISA Compliance................................................ 35 3.12 Environmental Compliance........................................ 36 3.13 Federal Regulations............................................. 37 3.14 Fees and Commissions............................................ 37 3.15 Solvency........................................................ 37 3.16 Investment Company Act; Other Regulations....................... 37
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3.17 Nature of Business.............................................. 37 3.18 Ranking of Loans................................................ 37 3.19 Subsidiaries.................................................... 37 ARTICLE 4. CONDITIONS PRECEDENT............................................ 37 4.1 Conditions to Closing Date...................................... 37 4.2 Conditions to Each Loan or Letter of Credit..................... 39 ARTICLE 5. AFFIRMATIVE COVENANTS........................................... 39 5.1 Financial Statements............................................ 39 5.2 Certificates; Other Information................................. 40 5.3 Payment of Obligations.......................................... 41 5.4 Conduct of Business; Maintenance of Existence and Licenses; Contractual Obligations......................................... 41 5.5 Maintenance of Property; Insurance.............................. 42 5.6 Inspection of Property; Books and Records; Discussions.......... 43 5.7 Environmental Laws.............................................. 43 5.8 Use of Proceeds................................................. 43 5.9 Compliance With Laws, Etc....................................... 44 5.10 Guarantees, Etc................................................. 44 ARTICLE 6. NEGATIVE COVENANTS.............................................. 44 6.1 Financial Condition Covenants................................... 44 6.2 Limitation on Indebtedness...................................... 45 6.3 Limitation on Liens............................................. 45 6.4 Limitation on Fundamental Changes............................... 46 6.5 Limitation on Sale of Assets.................................... 46 6.6 Limitation on Dividends......................................... 47 6.7 Limitation on Investments, Loans and Advances................... 47 6.8 Transactions with Affiliates.................................... 48 6.9 Fiscal Year..................................................... 48 6.10 Sale-Leaseback Transactions..................................... 48 6.11 Unfunded Liabilities............................................ 48 6.12 Hedging Obligations............................................. 48 ARTICLE 7. EVENTS OF DEFAULT............................................... 48 ARTICLE 8. THE AGENT....................................................... 51 8.1 Appointment..................................................... 51 8.2 Delegation of Duties............................................ 51 8.3 Exculpatory Provisions.......................................... 51 8.4 Reliance by the Agent........................................... 52 8.5 Notice of Default............................................... 52 8.6 Non-Reliance on the Agent and Other Lenders..................... 53 8.7 Indemnification................................................. 53 8.8 The Agent in Its Individual Capacity............................ 53 8.9 Successor Agent................................................. 54
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8.10 Syndication Agent and Documentation Agent....................... 54 ARTICLE 9. MISCELLANEOUS................................................... 54 9.1 Amendments and Waivers.......................................... 54 9.2 Notices......................................................... 55 9.3 No Waiver; Cumulative Remedies.................................. 55 9.4 Survival of Representations and Warranties...................... 56 9.5 Payment of Expenses and Taxes................................... 56 9.6 Successors and Assigns; Participations; Purchasing Lenders...... 56 9.7 Adjustments; Setoff............................................. 59 9.8 Counterparts.................................................... 60 9.9 Severability.................................................... 60 9.10 Integration..................................................... 60 9.11 GOVERNING LAW................................................... 60 9.12 Alternative Dispute Resolution.................................. 60 9.13 Acknowledgements................................................ 62 9.14 Intercreditor Agreement......................................... 62 9.15 Headings........................................................ 62 9.16 Copies of Certificates, Etc..................................... 62 9.17 Confidentiality................................................. 62 9.18 Amendment and Restatement....................................... 62 iii
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Exhibits A Form of Revolving Note B Form of Swing Line Note C Form of Assignment and Acceptance D Form of No Default/Representation Certificate E Form of Covenant Compliance Certificate F Form of Continuation Notice G Forms of Letter of Credit Requests (Commercial Letters of Credit and Standby Letters of Credit) H Form of Swing Line Loan Participation Certificate I Form of Notice of Revolving Borrowing J Form of Borrowing Base Certificate K Form of Notice of Swing Line Borrowing L Form of Term Note Schedules 2.3 Certain Fees Applicable to Commercial Letters of Credit 3.1 Foreign Qualification Jurisdictions 3.5A Liens Against Assets of Na Pali 3.5B Operating Names/Trade Names 3.7 Litigation 3.19 Subsidiaries 6.2 Existing Indebtedness 6.7 Existing Investments
iv 6 REVOLVING CREDIT AND TERM LOAN AGREEMENT THIS REVOLVING CREDIT AND TERM LOAN AGREEMENT, dated as of October 6, 2000, among (1) QUIKSILVER, INC., a Delaware corporation (the "Borrower"), (2) the several banks and other financial institutions from time to time parties to this Agreement (the "Lenders"), (3) UNION BANK OF CALIFORNIA, N.A., as administrative agent for the Lenders hereunder (in such capacity, the "Agent") and co-lead arranger, (4) THE CHASE MANHATTAN BANK, as syndication agent and co-lead arranger (in such capacity, the "Syndication Agent"), and (5) FLEET NATIONAL BANK, as documentation agent (in such capacity, the "Documentation Agent"). Recital The Borrower, certain of the Lenders, the Agent, the Syndication Agent and the Documentation Agent have entered into a Revolving Credit Agreement dated as of April 25, 2000, as amended by a First Amendment to Revolving Credit Agreement dated July 18, 2000 (said Agreement, as so amended, herein called the "Old Credit Agreement"), pursuant to which such Lenders made up to $100,000,000 of revolving credit available to the Borrower. The parties to the Old Credit Agreement, together with certain additional lenders, now wish to amend and restate the Old Credit Agreement for the purpose, among others, of adding a $25,000,000 term loan facility thereto. NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, the parties hereto hereby agree as follows: ARTICLE 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accountants": Deloitte & Touche, LLP, or such other firm of independent certified public accountants of recognized national standing as shall be selected by the Borrower and satisfactory to the Agent and the Majority Lenders. "Accounts": the unpaid portion of obligations owing to the Borrower, payable in Dollars, arising out of the sale of Inventory by the Borrower. "Acquisitions": any transaction, or any series of transactions, consummated after the Closing Date, in which the Borrower or any Subsidiary (in one transaction or in a series of transactions) (a) acquires any business or all or substantially all of the assets of any Person or any division or business unit thereof, whether through purchase of assets, merger or otherwise, (b) directly or indirectly acquires control of at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors or (c) directly or indirectly acquires control of a majority ownership in any partnership or joint venture. 7 "Affiliate": as to any Person, any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote securities having 5% or more of the ordinary voting power for the election of directors (or the equivalent) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Agent": as defined in the preamble hereto. "Aggregate Revolving Loan Commitment": the sum of the Revolving Loan Commitments set forth on the signature pages hereto, or in the Assignment and Acceptance pursuant to which a Lender becomes a party hereto, as the same may be adjusted from time to time pursuant to the provisions hereof. The aggregate amount of the Revolving Loan Commitments as of the Closing Date is $100,000,000. "Agreement": this Revolving Credit and Term Loan Agreement, as amended, waived, supplemented or otherwise modified from time to time. "Applicable Lending Office": for any Lender, its offices for LIBOR Loans, Base Rate Loans and participations in Letters of Credit, specified below its signature on the signature pages hereof or in the Assignment and Acceptance pursuant to which it became a party hereto, any of which offices may, upon 10 days' prior written notice to the Agent and the Borrower, be changed by such Lender. "Applicable Revolving Loan Margin": for each Type of Revolving Loan, as set forth below:
Revolving Loan Leverage Level LIBOR Margin Base Rate Margin -------------------------------------- --------------- ----------------- 1 ((less than or equal to) 0.75) 1.00% per annum 0 2 (>0.75 (less than or equal to) 1.00) 1.25% per annum 0 3 (>1.00 (less than or equal to) 1.50) 1.50% per annum 0 4 (>1.50 (less than or equal to) 1.75) 1.75% per annum 0 5 (>1.75) 2.00% per annum 0
"Applicable Term Loan Margin": for each Type of Term Loan, as set forth below:
Term Loan Leverage Level LIBOR Margin Base Rate Margin -------------------------------------- --------------- ----------------- 1 ((less than or equal to) 0.75) 1.25% per annum 0 2 (>0.75 (less than or equal to) 1.00) 1.50% per annum 0 3 (>1.00 (less than or equal to) 1.50) 1.75% per annum 0 4 (>1.50 (less than or equal to) 1.75) 2.00% per annum 0 5 (>1.75) 2.25% per annum 0
Notwithstanding the foregoing, during the period from and including the Closing Date to but excluding the fifth day after the day on which the Agent receives certified financial statements and a Covenant Compliance Certificate in accordance with Section 5.1(a) for the Borrower's -2- 8 fiscal year ending on October 31, 2000, the Applicable Term Loan Margin for LIBOR Loans shall be 2.00% per annum. "Asset Disposition": the sale, sale and leaseback, transfer, conveyance, exchange, long-term lease accorded sales treatment under GAAP or similar disposition (including by means of a merger, consolidation, amalgamation, joint venture or other substantive combination) of any of the Properties, business or assets (other than marketable securities, including "margin stock" within the meaning of Regulation U, liquid investments and other financial instruments but, including the assignment of any lease, license or permit relating to the Properties) of the Borrower or any of its Subsidiaries to any Person or Persons other than to the Borrower or any of its Subsidiaries; provided, however, that Asset Dispositions shall not include the sale of Inventory in the ordinary course of business. "Assignment and Acceptance": an Assignment and Acceptance substantially in the form of Exhibit C to this Agreement. "Available Revolving Loan Commitment": with respect to each Lender on the date of determination thereof, the amount by which (a) the Revolving Loan Commitment of such Lender on such date exceeds (b) the principal sum of such Lender's (i) Revolving Loans outstanding, (ii) Revolving Loan Commitment Percentage of the aggregate Letter of Credit Amount of all Letters of Credit outstanding and (iii) Revolving Loan Commitment Percentage of the aggregate amount of unreimbursed drawings under all Letters of Credit on such date. "Base Rate": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Reference Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. "Reference Rate" shall mean the rate of interest per annum publicly announced from time to time by Union Bank of California, N.A. as its "reference rate" in effect at its office in Los Angeles, California. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. If, for any reason, the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Reference Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Reference Rate or the Federal Funds Effective Rate, respectively. "Base Rate Loans": Loans the rate of interest applicable to which is based upon the Base Rate. "Borrower": as defined in the preamble hereto. -3- 9 "Borrowing Base": as at any date, an amount determined by the Agent by reference to the most recent Borrowing Base Certificate, which is equal to the sum of the following, without duplication: (a) 80% of Eligible Accounts; plus (b) 40% of Eligible Inventory (provided that such percentage shall be increased to 50% with respect to any calculation of the Borrowing Base during the months of November through April of each year); plus (c) 40% of outstanding and undrawn commercial Letters of Credit issued hereunder for the account of the Borrower (provided that such percentage shall be increased to 50% with respect to any calculation of the Borrowing Base during the months of November through April of each year). "Borrowing Base Certificate": a certificate executed by a Responsible Officer of the Borrower substantially in the form of Exhibit J hereto. "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in the State of California are authorized or required by law to close and which, in the case of a LIBOR Loan, is a Eurodollar Business Day. "Capital Expenditures": for any period, collectively, for any Person, the aggregate of all expenditures which are made during such period (whether paid in cash or accrued as liabilities), and all contractual commitments for such expenditures which are entered into during such period (provided that if any such commitment is included in one fiscal year, the actual payment in a later fiscal year shall not be included in such later fiscal year), by such Person, for property, plant or equipment and which would be reflected as additions to property, plant or equipment on a balance sheet of such Person prepared in accordance with GAAP (including all Capitalized Lease Obligations). "Capitalized Lease Obligations": obligations for the payment of rent for any real or personal property under leases or agreements to lease that, in accordance with GAAP, have been or should be capitalized on the books of the lessee and, for purposes hereof, the amount of any such obligation shall be the capitalized amount thereof determined in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation), any and all warrants, options or rights to purchase, or any other securities convertible into, any of the foregoing. "Closing Date": the date on which the conditions precedent set forth in Section 4.1 have been satisfied. "Code": the Internal Revenue Code of 1986, as amended from time to time. "Collateral": all of the property (tangible or intangible, but excluding trademarks, trade names and other intellectual property rights) purported to be subject to the lien or security interest purported to be created by any security agreement, pledge agreement, assignment, -4- 10 mortgage, deed of trust, or other security document heretofore or hereafter executed by the Borrower as security for all or part of the Obligations. "Collateral Documents": the Security Agreement, the Na Pali Security Agreement, the QAPL Share Mortgage, all notices of security interests in deposit accounts requested by the Agent pursuant to the Security Agreement, all Form UCC-1 Financing Statements (including any amendments thereto) filed against the Borrower and any other documents encumbering the Collateral or evidencing or perfecting a security interest therein for the benefit of the Lenders. "Commonly Controlled Entity": as to any Person, an entity, whether or not incorporated, which is under common control with such Person within the meaning of Section 4001 of ERISA or is part of a group which includes such Person and which is treated as a single employer under Section 414 of the Code. "Consideration": with respect to any Acquisition, the aggregate consideration, in whatever form (including cash payments, the principal amount of promissory notes and Indebtedness assumed, and the fair market value of other property delivered) paid, delivered or assumed by the Borrower or any Subsidiary for such Acquisition and the expenses associated therewith, including all brokerage commissions, legal fees and similar expenses. "Continuation Notice": a request for continuation or conversion of a Loan as set forth in Section 2.7, substantially in the form of Exhibit F. "Contractual Obligation": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Covenant Compliance Certificate": a certificate of the Chief Financial Officer of the Borrower substantially in the form of Exhibit E hereto. "Debt Offering": the issuance or sale of any debt securities by the Borrower or any Domestic Subsidiary. "Default": any of the events specified in Article 7, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Dollars" and "$": dollars in lawful currency of the United States. "Domestic Subsidiary": each Subsidiary organized under the laws of the United States or any state thereof. "Drawing Lender": as defined in Section 2.3(c). "EBITDA": for the Borrower and its Subsidiaries on a consolidated basis, for the fiscal quarter most recently ended and the immediately preceding three fiscal quarters, Net Income after eliminating extraordinary gains and losses, plus (i) provisions for income taxes, (ii) depreciation and amortization and (iii) Interest Expense; provided, however, that calculation of EBITDA shall include the foregoing with respect to QIPL on a historical basis to the extent that financial information supporting the same is provided by the Borrower to the Agent and agreed to by the Agent in the exercise of its reasonable discretion. -5- 11 "Eligible Accounts": those Accounts, (net of (x) finance charges and (y) the "allowance for doubtful accounts" figure set forth on a consolidated basis as disclosed on the Borrowing Base Certificate), for which invoices have been issued and which are due and payable to the Borrower, have been validly assigned to the Agent for the benefit of the Lenders and strictly comply with all of the Borrower's warranties and representations to the Agent and the Lenders; provided, however, that Eligible Accounts shall not include the following: (i) any Account with respect to which the account debtor is not a legal entity formed under the laws of, and having its principal place of business in, the United States or Canada, provided that up to an aggregate of $6,000,000 of such Accounts at any time shall be included as Eligible Accounts; (ii) any Account with respect to which the Agent does not hold a perfected first priority Lien; and (iii) any Account with respect to which the account debtor is a Subsidiary or an Affiliate of the Borrower. "Eligible Inventory": the net book value of Inventory owned by the Borrower (and not by any Subsidiary), such value (a) to be determined on a first-in first-out basis and at the lower of cost or market in conformity with GAAP and (b) not to exceed $85,000,000 in the aggregate at any time, provided that such Inventory (i) is held for sale by the Borrower and is normally and currently saleable in the ordinary course of the Borrower's business, (ii) is of good and merchantable quality, free from defects, (iii) is located in the United States or Canada at locations of which the Agent has been notified in writing or is in transit to the Borrower (including by ship), and (iv) is subject to a perfected first-priority Lien in favor of the Agent, except in the case of Inventory located on a ship and in transit to the Borrower, to the extent, if any, that such Inventory may not be so subject. "Environmental Control Statutes": as defined in Section 3.12(a). "Equity Offering": the sale or issuance (or reissuance) by the Borrower or any Domestic Subsidiary of any equity interests or beneficial interests (common stock, preferred stock, partnership interests, member interests or otherwise) or any options, warrants, convertible securities or other rights to purchase such equity interests or beneficial interests; provided, however, that the term "Equity Offering" shall not include any such sale or issuance (or reissuance) solely to officers, employees, directors and/or consultants of the Borrower and/or any Subsidiary pursuant to one or more employee stock option or stock purchase plans. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate": as to any Person, each trade or business including such Person, whether or not incorporated, which together with such Person would be treated as a single employer under Section 4001(a)(14) of ERISA. "Eurodollar Business Day": shall mean any day on which banks are open for dealings in Dollar deposits in the London Inter-bank Market. "Event of Default": any of the events specified in Article 7, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. -6- 12 "Excluded Taxes": all taxes imposed on or by reference to the net income of the Agent or any Lender or its Applicable Lending Office by any Governmental Authority and all franchise taxes, taxes on doing business or taxes measured by capital or net worth imposed on the Agent or on any Lender or its Applicable Lending Office by any Governmental Authority. "Federal Funds Effective Rate": as defined in the definition of "Base Rate" contained in this Section 1.1. "Field Exam": an examination of the Borrower's books, records and accounting procedures conducted by a third-party examiner selected by the Agent. "Fixed Charge Coverage Ratio": for the Borrower and its Subsidiaries on a consolidated basis for the fiscal quarter most recently ended and the immediately preceding three fiscal quarters, the ratio of (a) EBITDA minus (i) income taxes paid, minus (ii) Capital Expenditures not financed through long-term debt or long-term Capitalized Lease Obligations to (b) Fixed Charges for such period. "Fixed Charges": for the Borrower and its Subsidiaries on a consolidated basis, the sum of (i) Interest Expense and (ii) regularly scheduled principal payments due within twelve months on Funded Debt (excluding optional and mandatory prepayments due under Sections 2.5 and 2.6), including the principal component of Capitalized Lease Obligations. "Foreign Subsidiary": each Subsidiary other than a Domestic Subsidiary. "Funded Debt": the sum of the outstanding principal balance of all Indebtedness of the Borrower and its Subsidiaries described in clauses (i), (ii), (iii) and (iv) of the definition of "Indebtedness" set forth herein. Notwithstanding the foregoing, Funded Debt shall not include trade payables and accrued expenses incurred by the Borrower and its Subsidiaries in accordance with customary practices and in the ordinary course of business of the Borrower and its Subsidiaries. "GAAP": generally accepted accounting principles in the United States in effect from time to time. If, at any time, GAAP changes in a manner which will materially affect the calculations determining compliance by the Borrower with any of the covenants in Section 6.1, such covenants shall continue to be calculated in accordance with GAAP in effect prior to such changes in GAAP. "Governmental Authority": any nation or government, any federal, state or other political subdivision thereof and any federal, state or local entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), any obligation of (a) the guaranteeing person or (b) another Person (including any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counter-indemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") of any other third Person (the "primary obligor") in any manner, whether directly or indirectly, including any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance -7- 13 or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lesser of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "Guarantees": each guarantee made by a Guarantor in favor of the Agent for the benefit of the Lenders, in form and substance satisfactory to the Agent, as the same may be amended, modified or restated from time to time in accordance with the terms hereof. "Guarantor Collateral": all of the property (tangible or intangible) purported to be subject to the lien or security interest purported to be created by any security agreement, pledge agreement, assignment, mortgage, deed of trust or other security document heretofore or hereafter executed by any Guarantor as security for all or part of the Obligations or the Guarantees. "Guarantor Collateral Documents": the Guarantor Security Agreements, all notices of security interests in deposit accounts requested by the Agent pursuant to the Guarantor Security Agreements, Form UCC-1 Financing Statements and amendments thereto and any other document encumbering the Guarantor Collateral or evidencing or perfecting a security interest therein in favor of the Agent for the benefit of the Lenders executed by any Guarantor. "Guarantors": each Subsidiary which executes a Guarantee in favor of the Agent. "Guarantor Security Agreements": each security agreement made by a Subsidiary in favor of the Agent for the benefit of the Lenders in form and substance satisfactory to the Agent, as the same may be amended, modified or restated from time to time in accordance with the terms hereof. "Hedging Agreements": as defined in the definition of "Hedging Obligations" in this Section 1.1. "Hedging Obligations": of any Person, any and all obligations of such Person, whether absolute or contingent and howsoever and whensoever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (i) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, commodity prices, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including dollar- -8- 14 denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants or any similar derivative transactions ("Hedging Agreements"), and (ii) any and all cancellations, buy-backs, reversals, terminations or assignments of any of the foregoing. "Indebtedness": of any Person, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including, in the case of the Borrower and its Subsidiaries, the deferred purchase price payable by QAPL to the former shareholders of QIPL for the acquisition of the stock of QIPL by QAPL), (ii) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (iii) all indebtedness created or arising under any conditional-sale or other title-retention agreement with respect to property acquired by such Person, (iv) all Capitalized Lease Obligations of such Person, (v) all Hedging Obligations of such Person, (vi) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit, airway release, steamship guaranty or similar facilities, (vii) all Guarantee Obligations of such Person in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to secure a credit against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (i), (ii), (iii), (iv), (v) or (vi) above and (viii) all liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. "Insolvency": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. "Intercreditor Agreement": the Intercreditor Agreement dated as of April 28, 2000 between the Agent, on behalf of the Lenders, on the one hand, and the Leasehold Improvement Lender, on the other hand, as it may be amended, modified or restated from time to time. "Interest Expense": as of any date, for the fiscal quarter most recently ended and the immediately preceding three fiscal quarters, the difference between (a) the sum of (i) the amount of all interest on Funded Debt which was paid, payable and/or accrued for such period and (ii) all commitment, standby letter of credit, commercial letter of credit or line of credit fees paid, payable and/or accrued for such period to any lender in exchange for such lender's commitment to lend and (b) the amount of all noncash interest expense incurred by the Borrower and its Subsidiaries in connection with the Borrower's acquisition of QIPL through QAPL. "Interest Payment Date": (a) as to any Base Rate Loan, the last day of each January, April, July and October to occur while any such Loan is outstanding, (b) as to any LIBOR Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any LIBOR Loan having an Interest Period longer than three months, each day which is at the end of each three month-period within such Interest Period after the first day of such Interest Period and the last day of such Interest Period and (d) for each of (a), (b) and (c) above, the day on which any such Loan becomes due and payable in full or is paid or prepaid in full. -9- 15 "Interest Period": with respect to any LIBOR Loan: (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or Continuation Notice, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such LIBOR Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Agent not less than three Eurodollar Business Days prior to the last day of the then current Interest Period with respect thereto; provided, however, that, all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period pertaining to a LIBOR Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period for any Loan that would otherwise extend beyond the date final payment is due on such Loan shall end on the date of such final payment; and (iii) any Interest Period pertaining to a LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "Inventory": that portion of the Borrower's inventory which is finished goods, raw materials and work in process. "Lease Expense": for any period, the aggregate minimum rental obligations payable in respect of such period under leases of real and/or personal property (net of income from subleases thereof), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet or in the notes thereto. "Leasehold Improvement Lender": Union Bank of California, N.A., in its individual capacity, as lender of the Leasehold Improvement Loan, and any successor or assigns thereof. "Leasehold Improvement Loan": the term loan in the original principal amount of $12,300,000 made by the Leasehold Improvement Lender to the Borrower and referred to in the Intercreditor Agreement. "Lender" or "Lenders": as defined in the preamble hereto and in Section 8.8. "Letter of Credit": as defined in Section 2.1(a). -10- 16 "Letter of Credit Amount": the stated maximum amount available to be drawn under a particular Letter of Credit, airway release or steamship guaranty, as such amount may be reduced or reinstated from time to time in accordance with the terms of such Letter of Credit. "Letter of Credit Request": a request by the Borrower for the issuance of a Letter of Credit, on the Agent's standard form of standby or commercial letter of credit application and agreement, as applicable, the current forms of which are attached hereto as Exhibit G, and containing terms and conditions satisfactory to the Agent in its sole discretion. "LIBOR": with respect to each day during each Interest Period pertaining to a LIBOR Loan, the rate of interest determined by the Agent to be the rate per annum at which deposits in dollars would be offered to the Agent by leading banks in the London Interbank Market at or about 9:00 a.m., Los Angeles time, two Eurodollar Business Days prior to the beginning of such Interest Period, for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its LIBOR Loan to be outstanding during such Interest Period. "LIBOR Adjusted Rate": with respect to each day during each Interest Period pertaining to a LIBOR Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): LIBOR --------------------------------- 1.00 - LIBOR Reserve Requirements "LIBOR Loans": Loans the rate of interest applicable to which is based upon LIBOR. "LIBOR Reserve Requirements": for any day as applied to a LIBOR Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of the Federal Reserve System. "Lien": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any Capitalized Lease Obligation having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction in respect of any of the foregoing). "Loan": a Revolving Loan, a Swing Line Loan or a Term Loan. "Loan Documents": this Agreement, the Notes, any Letter of Credit Requests that are executed by the Borrower, the Letters of Credit, the Collateral Documents, the Guarantor Collateral Documents, the Guarantees, the Intercreditor Agreement, any Hedging Agreements and any other agreement executed by an Obligor in connection herewith or therewith, including -11- 17 UCC-1 Financing Statements and any fee letters, as such agreements and documents may be amended, supplemented and otherwise modified from time to time in accordance with the terms hereof. "Majority Lenders": Lenders with outstanding Loans and/or participations in outstanding Letters of Credit and/or unreimbursed drawings under Letters of Credit having an unpaid principal balance equal to or more than 66-2/3% of the sum of (i) the unpaid principal balance of all Loans outstanding, (ii) the aggregate Letter of Credit Amount of all Letters of Credit outstanding and (iii) the aggregate amount of unreimbursed drawings under all Letters of Credit, excluding from such calculation Lenders which have failed or refused to fund a Loan or a Letter of Credit drawing (and as to which such failure or refusal is continuing) when required to do so; provided, however, that, if no such Loans, Letters of Credit or drawings are outstanding, then "Majority Lenders" shall mean Lenders having Revolving Loan Commitments equal to or more than 66-2/3% of the Aggregate Revolving Loan Commitment, excluding from such calculation Lenders which have failed or refused to fund a Loan or a Letter of Credit drawing (and as to which such failure or refusal is continuing) when required to do so. "Margin Stock": as defined in Regulation U. "Material Adverse Effect": a material adverse effect on (a) the business, operations, property, condition or prospects (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower, any Material Domestic Subsidiary or any Material Foreign Subsidiary to perform its respective obligations under the Loan Documents or (c) the validity or enforceability of the Loan Documents or the rights or remedies of the Agent and the Lenders hereunder or thereunder. "Material Domestic Subsidiary": as of any date, a Domestic Subsidiary that (a) has a net worth (excluding in the determination thereof any Indebtedness of such Domestic Subsidiary to the Borrower or another Subsidiary) of at least 5% of the Borrower's consolidated net worth as of the last day of the most recently ended fiscal quarter of the Borrower, (b) has annual revenue (or annualized revenue in the case of any Person that has not been a Subsidiary for a full year) of at least 5% of the Borrower's consolidated revenue for the 12-month period ended as of the most recently ended fiscal quarter of the Borrower or (c) has annual net income (or annualized net income in the case of any Person that has not been a Subsidiary for a full year) of at least 5% of the Borrower's consolidated net income for the 12-month period ended as of the most recently ended fiscal quarter of the Borrower. "Material Foreign Subsidiary": a Foreign Subsidiary having at any time a net worth equal to 10% or more of the Borrower's consolidated net worth. "Maximum Leverage Ratio": for the Borrower and its Subsidiaries on a consolidated basis, the ratio of Funded Debt to EBITDA. "Multiemployer Plan": a plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Na Pali": Na Pali S.A.S., a French corporation and a Subsidiary of the Borrower. -12- 18 "Na Pali Security Agreement": means the Pledge over Financial Instrument (Share) Account dated as of May 31, 2000 made by the Borrower and Na Pali in favor of Agent for the benefit of the Lenders, as the same may be amended, restated or otherwise modified from time to time. "Net Income": for the Borrower and its Subsidiaries on a consolidated basis, net income as determined in accordance with GAAP. "Net Proceeds": With respect to any Equity Offering or Debt Offering by the Borrower or any Domestic Subsidiary, the net amount equal to the aggregate amount received in cash (including any cash received by way of deferred payment pursuant to a note receivable, other noncash consideration or otherwise, but only as and when such cash is so received) in connection with such Equity Offering or Debt Offering, minus the reasonable fees, commissions and other out-of-pocket expenses incurred by the Borrower or such Domestic Subsidiary, as applicable, in connection with such Equity Offering or Debt Offering (other than amounts payable to Affiliates of the Person making such Equity Offering or Debt Offering). "Note": a Revolving Note, the Swing Line Note or a Term Note, as the case may be, and "Notes" shall mean the Revolving Notes, the Swing Line Note and/or the Term Notes, as the case may be. "Obligations": the unpaid principal of and interest on (including interest accruing after the maturity of the Revolving Loans, the Swing Line Loans and the Term Loans and interest accruing on or after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding and whether or not at a default rate) the Notes, the obligation to reimburse drawings under Letters of Credit (including the contingent obligation to reimburse any drawings under outstanding Letters of Credit), and all other obligations and liabilities of the Borrower to the Agent and the Lenders, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Notes, the Letters of Credit, any other Loan Document and any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including all reasonable fees and disbursements of counsel, and the allocated reasonable cost of internal counsel, to the Agent or the Lenders that are required to be paid by the Borrower pursuant to the terms of this Agreement) or otherwise. "Obligor": the Borrower, each Subsidiary, each Guarantor and any other Person (other than a Lender) obligated under any Loan Document. "Old Credit Agreement": as defined in the Recital to this Agreement. "Organic Documents": relative to any entity, its certificate of incorporation, articles of incorporation, certificate of formation, certificate of organization or partnership agreement, and its by-laws, operating agreement or limited liability company agreement, or the equivalent documents of any entity. "Participants": as defined in Section 9.6(b). -13- 19 "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA or any successor thereto. "Person": any individual, firm, partnership, joint venture, corporation, association, limited liability company, business enterprise trust, unincorporated organization, government or department or agency thereof or other entity, whether acting in an individual, fiduciary or other capacity. "Plan": as to any Person, any plan (other than a Multiemployer Plan) subject to Title IV of ERISA maintained for employees of such Person or any ERISA Affiliate of such Person (and any such plan no longer maintained by such Person or any of such Person's ERISA Affiliates to which such Person or any of such Person's ERISA Affiliates has made or was required to make any contributions within any of the five preceding years). "Prohibited Transaction": with respect to any Plan, a prohibited transaction (as defined in Section 406 of ERISA) with respect to such Plan. "Properties": the collective reference to the real and personal property owned, leased, used, occupied or operated by the Borrower and its Subsidiaries. "Purchasing Lenders": as defined in Section 9.6(c). "QAPL": Quiksilver Australia Pty Ltd, a corporation organized under the laws of the State of Victoria, Australia. "QAPL Share Mortgage": the Equitable Mortgage of Shares dated August 31, 2000 between the Borrower and the Agent. "QIPL": Quiksilver International Pty Ltd, a corporation organized under the laws of the State of Victoria, Australia. "Register": as defined in Section 9.6(d). "Regulation D": Regulation D of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "Regulation U": Regulation U of the Board of Governors of the Federal Reserve System, as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof and any successor regulation thereto. "Reorganization": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under PBGC regulations. "Requirement of Law": as to any Person, the Organic Documents of such Person, and any law, treaty, rule or regulation, determination or policy statement or interpretation of an -14- 20 arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": with respect to any Person, the chief executive officer, the president, the managing member or members (as applicable, with respect to any limited liability company), any executive vice president, any senior vice president or any vice president or, with respect to financial matters, the chief financial officer, the vice president of finance, treasurer or controller. "Restricted Payments": as defined in Section 6.6. "Revolving Borrowing Notice": a notice from the Borrower to the Agent requesting a borrowing of Revolving Loans, substantially in the form of Exhibit I hereto. "Revolving Loan": as defined in Section 2.1(a). "Revolving Loan Commitment": with respect to each Lender, its commitment, if any, listed as its "Revolving Loan Commitment" on the signature pages hereto, or in the Assignment and Acceptance pursuant to which a Lender becomes a party hereto, to make Revolving Loans and participate in Letters of Credit hereunder through its Applicable Lending Office, as the same shall be adjusted from time to time pursuant to this Agreement. "Revolving Loan Commitment Expiration Date": June 28, 2002 or such earlier date as the Aggregate Revolving Loan Commitment shall expire (whether by acceleration, reduction to zero or otherwise). "Revolving Loan Commitment Percentage": with respect to each Lender, the percentage equivalent of the ratio which such Lender's Revolving Loan Commitment bears to the Aggregate Revolving Loan Commitment, as such Lender's Revolving Loan Commitment and the Aggregate Revolving Loan Commitment may be adjusted from time to time pursuant to the terms hereof. "Revolving Loan Leverage Level": if the Maximum Leverage Ratio shall be less than or equal to 0.75:1, the Revolving Loan Leverage Level shall be 1; if the Maximum Leverage Ratio shall be greater than 0.75:1 and less than or equal to 1.00:1, the Revolving Loan Leverage Level shall be 2; if the Maximum Leverage Ratio shall be greater than 1.00:1 and less than or equal to 1.50:1, the Revolving Loan Leverage Level shall be 3; if the Maximum Leverage Ratio shall be greater than 1.50:1 and less than or equal to 1.75:1, the Revolving Loan Leverage Level shall be 4; and if the Maximum Leverage Ratio shall be greater than 1.75:1, the Revolving Loan Leverage Level shall be 5. "Revolving Note": as defined in Section 2.1(c). "Security Agreement": the Security Agreement dated as of April 28, 2000 made by the Borrower in favor of the Agent, for the benefit of the Lenders, as the same may be amended, restated or otherwise modified from time to time. "Single Employer Plan": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. -15- 21 "Solvent": when used with respect to any Person, that: (a) the present fair salable value of such Person's assets is in excess of the total amount of the probable liability on such Person's liabilities; (b) such Person is able to pay its debts as they become due; and (c) such Person does not have unreasonably small capital to carry on such Person's business as theretofore operated and all businesses in which such Person is about to engage. "Subsidiary": as to any Person at any time of determination, a corporation, partnership or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries or Subsidiaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Swing Line Borrowing Notice": a notice from the Borrower to the Agent requesting a borrowing of Swing Line Loans, substantially in the form of Exhibit K hereto. "Swing Line Commitment": as defined in Section 2.2(a). "Swing Line Lender": means Union Bank of California, N.A. "Swing Line Loan Participation Certificate": a certificate executed by the Swing Line Lender substantially in the form of Exhibit H. "Swing Line Loans": has the meaning assigned to that term in Section 2.2(a). "Swing Line Note": has the meaning assigned to that term in Section 2.2(b). "Taxes": as defined in Section 2.15(a). "Termination Event": (i) a Reportable Event, (ii) the institution of proceedings to terminate a Single Employer Plan by the PBGC under Section 4042 of ERISA, (iii) the appointment by the PBGC of a trustee to administer any Single Employer Plan or (iv) the existence of any other event or condition that would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment by the PBGC of a trustee to administer, any Single Employer Plan. "Term Loan": as defined in Section 2.4(a). "Term Loan Leverage Level": if the Maximum Leverage Ratio shall be less than or equal to 0.75:1, the Term Loan Leverage Level shall be 1; if the Maximum Leverage Ratio shall be greater than 0.75:1 and less than or equal to 1.00:1, the Term Loan Leverage Level shall be 2; if the Maximum Leverage Ratio shall be greater than 1.00:1 and less than or equal to 1.50:1, the Term Loan Leverage Level shall be 3; if the Maximum Leverage Ratio shall be greater than -16- 22 1.50:1 and less than or equal to 1.75:1, the Term Loan Leverage Level shall be 4; and if the Maximum Leverage Ratio shall be greater than 1.75:1, the Term Loan Leverage Level shall be 5. "Term Note" and "Term Notes": as defined in Section 2.4(c). "Tranche": the collective reference to LIBOR Loans the Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such LIBOR Loans shall originally have been made on the same day). "Transferee": as defined in Section 9.6(f). "Type": as to any Loan, its nature as a Base Rate Loan or a LIBOR Loan. 1.2 Other Definitional Provisions. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the Notes, any other Loan Document or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein, in the Notes, in any other Loan Document, and in any certificate or other document made or delivered pursuant hereto or thereto, accounting terms not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation". (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. ARTICLE 2. AMOUNT AND TERMS OF LOANS AND LETTERS OF CREDIT; COMMITMENT AMOUNTS 2.1 Revolving Loans and Letters of Credit; Revolving Loan Commitment Amounts. (a) Subject to the terms and conditions hereof, each Lender severally agrees to (i) make loans on a revolving credit basis through its Applicable Lending Office to the Borrower from time to time from and including the Closing Date to but excluding the Revolving Loan Commitment Expiration Date (each a "Revolving Loan" and, collectively, the "Revolving Loans") in accordance with the provisions of this Agreement and subject to Section 2.3(c), and (ii) participate through its Applicable Lending Office in letters of credit, airway releases and steamship guarantees issued for the account of the Borrower pursuant to Section 2.3 from time to time from and including the Closing Date to but excluding the Revolving Loan Commitment Expiration Date (each a "Letter of Credit" and, collectively, the "Letters of Credit"); provided, however, that (A) the sum of (1) the aggregate principal amount of all Revolving Loans -17- 23 outstanding, (2) the aggregate principal amount of all Swing Line Loans outstanding, (3) the aggregate Letter of Credit Amount of all Letters of Credit outstanding and (4) the aggregate amount of unreimbursed drawings under all Letters of Credit shall not exceed either the Aggregate Revolving Loan Commitment or the Borrowing Base at any time, (B) the sum of (1) the aggregate Letter of Credit Amount of all Letters of Credit outstanding and (2) the aggregate amount of unreimbursed drawings under all Letters of Credit shall not exceed $60,000,000 at any time and (C) the sum of (1) the aggregate Letter of Credit Amount of all standby Letters of Credit outstanding and (2) the aggregate amount of unreimbursed drawings under all standby Letters of Credit shall not exceed $10,000,000 at any time. Within the limits of each Lender's Revolving Loan Commitment, the Borrower may borrow, have Letters of Credit issued for the Borrower's account, prepay Revolving Loans, reborrow Revolving Loans, and have additional Letters of Credit issued for the Borrower's account after the expiration of previously issued Letters of Credit. Revolving Loan advances requested by the Borrower shall be in an aggregate amount of at least $500,000 in the case of Base Rate Loans and in the aggregate amount of $3,000,000 or an integral multiple of $100,000 in excess thereof in the case of LIBOR Loans. The principal amount of each (A) Revolving Loan of a Lender and (B) participation of a Lender in a Letter of Credit shall be in an amount equal to the product of (i) such Lender's Revolving Loan Commitment Percentage (expressed as a fraction) and (ii) the total amount of the Revolving Loans or the Letter of Credit requested by the Borrower in each instance; provided, however, that in no event shall any Lender be obligated to make a requested Revolving Loan or participate in a requested Letter of Credit if after giving effect to such Revolving Loan or such participation the sum of such Lender's (x) Revolving Loans outstanding, (y) Revolving Loan Commitment Percentage of the aggregate Letter of Credit Amount of all Letters of Credit outstanding and (z) Revolving Loan Commitment Percentage of the aggregate amount of unreimbursed drawings under all Letters of Credit would exceed its Revolving Loan Commitment or if the amount of such requested Revolving Loan or such Lender's Revolving Loan Commitment Percentage of such requested Letter of Credit is in excess of such Lender's Available Revolving Loan Commitment. (b) Subject to Sections 2.11 and 2.13, the Revolving Loans may from time to time be (i) LIBOR Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Agent in accordance with either Section 2.1(d) or 2.7. Each Lender may make or maintain its Revolving Loans or participate in Letters of Credit to or for the account of the Borrower by or through any Applicable Lending Office. (c) The Revolving Loans made by each Lender to the Borrower shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit A (a "Revolving Note"), with appropriate insertions therein as to payee, date and principal amount, payable to the order of such Lender and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of all Revolving Loans made by such Lender to the Borrower pursuant to Section 2.1(a) or 2.3(c), with interest thereon as prescribed in Sections 2.9 and 2.10. Each Lender is hereby authorized (but not required) to record the date and amount of each payment or prepayment of principal of its Revolving Loans made to the Borrower, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of LIBOR Loans, the length of each Interest Period with respect thereto, in the books and records of such Lender, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. The failure of any Lender to make any such recordation or notation -18- 24 in the books and records of the Lender (or any error in such recordation or notation) shall not affect the obligations of the Borrower hereunder or under the Revolving Notes. Each Revolving Note shall (i) be dated the effective date thereof, (ii) provide for the payment of interest in accordance with Sections 2.9 and 2.10 and (iii) be stated to be payable on the Revolving Loan Commitment Expiration Date. (d) The Borrower shall give the Agent irrevocable written notice (which notice must be received by the Agent prior to 10:00 a.m., Los Angeles time, one Business Day prior to each proposed borrowing date or, if all or any part of the Revolving Loans are requested to be made as LIBOR Loans, three Eurodollar Business Days prior to each proposed borrowing date) requesting that the Lenders make the Revolving Loans on the proposed borrowing date and specifying (i) the aggregate amount of Revolving Loans requested to be made, (ii) subject to Section 2.1(b), whether the Revolving Loans are to be LIBOR Loans, Base Rate Loans or a combination thereof and (iii) if the Revolving Loans are to be entirely or partly LIBOR Loans, the respective amounts of each such Type of Revolving Loan and the respective lengths of the initial Interest Periods therefor. On receipt of such notice, the Agent shall promptly notify each Lender thereof. On the proposed borrowing date, not later than 12:00 noon, Los Angeles time, each Lender shall make available to the Agent at its office specified in Section 9.2 the amount of such Lender's pro rata share of the aggregate borrowing amount (as determined in accordance with the second paragraph of Section 2.1(a)) in immediately available funds. The Agent may, in the absence of notification from any Lender that such Lender has not made its pro rata share available to the Agent on such date, credit the account of the Borrower on the books of such office of the Agent with the aggregate amount of Revolving Loans. If any Lender does not make available to the Agent the amount required pursuant to this Section 2.1(d), the Agent shall be entitled to recover such amount on demand from the Lender, together with interest thereon for each day from the date of non-payment until such amount is paid in full at the Federal Funds Effective Rate for the first two Business Days and at the Base Rate thereafter. (e) Neither the Agent nor any Lender shall be responsible for the obligation or Available Revolving Loan Commitment of any other Lender hereunder, nor will the failure of any Lender to comply with the terms of this Agreement relieve any other Lender or the Borrower of its obligations under this Agreement and the Revolving Notes. (f) Subject to Section 2.3(c), the Revolving Loan Commitment of each Lender and the Aggregate Revolving Loan Commitment shall terminate on the Revolving Loan Commitment Expiration Date. All outstanding Revolving Loans shall be due and payable, to the extent not previously paid in accordance with the terms hereof, on the Revolving Loan Commitment Expiration Date. 2.2 Swing Line Loans; Swing Line Commitment. (a) Subject to the terms and conditions hereof, the Swing Line Lender agrees to make loans through its Applicable Lending Office to the Borrower from time to time from and including the Closing Date to but excluding the date which is five Business Days prior to the Revolving Loan Commitment Expiration Date (each a "Swing Line Loan" and, collectively, the "Swing Line Loans") in an aggregate principal amount not to exceed at any time outstanding the lesser of (i) $5,000,000 and (ii) the unused portion of the Revolving Loan Commitment of the Swing Line Lender (the "Swing Line Commitment"). Within the limits of the Swing Line Commitment, the Borrower may borrow Swing Line Loans, prepay Swing Line Loans and -19- 25 reborrow Swing Line Loans. All outstanding Swing Line Loans shall be due and payable, to the extent not previously paid in accordance with the terms hereof, on the Revolving Loan Commitment Expiration Date. (b) The Swing Line Loans shall be evidenced by a promissory note of the Borrower substantially in the form of Exhibit B (the "Swing Line Note"), with appropriate insertions therein as to payee, date and principal amount, payable to the order of the Swing Line Lender and representing the obligation of the Borrower to pay the aggregate unpaid principal amount of the Swing Line Loans, with interest thereon as prescribed in Sections 2.9 and 2.10. The Swing Line Lender is hereby authorized (but not required) to record the borrowing date of each Swing Line Loan, the amount thereof and the date and amount of each payment or prepayment of principal thereof, in the books and records of the Swing Line Lender, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. The failure of the Swing Line Lender to make any such recordation or notation (or any error in such recordation or notation) shall not affect the obligations of the Borrower hereunder or under the Swing Line Note. The Swing Line Note shall (x) be dated the effective date thereof, (y) be stated to mature on the Revolving Loan Commitment Expiration Date and (z) provide for the payment of interest in accordance with Sections 2.9 and 2.10. (c) The Borrower shall give the Agent irrevocable notice (which notice may be telephonic, to be confirmed promptly in writing), which notice must be received by the Agent prior to 10:00 a.m., Los Angeles time, on the requested borrowing date (which shall be a Business Day) specifying the amount of the requested Swing Line Loan, which shall be in a minimum amount of $100,000. Written notice of borrowing shall be in the form of Exhibit K attached hereto. On receipt of such notice, the Agent shall promptly notify the Swing Line Lender thereof. The proceeds of each Swing Line Loan will then be made available to the Borrower by the Swing Line Lender by crediting the account of the Borrower on the books of the Agent at its office specified in Section 9.2. (d) The Swing Line Lender, at any time in its sole and absolute discretion, may on behalf of the Borrower (which hereby irrevocably directs the Swing Line Lender to so act on its behalf) request each Lender to make a Revolving Loan in an amount equal to such Lender's Revolving Loan Commitment Percentage of the principal amount of the Swing Line Loans (the "Refunded Swing Line Loans") outstanding on the date such notice is given. Unless any of the events described in Section 7(g) shall have occurred (in which event the procedures of Section 2.2(e) shall apply) and regardless of whether the conditions precedent set forth in this Agreement to the making of a Revolving Loan are then satisfied, each Lender shall make the proceeds of its Revolving Loan available to the Swing Line Lender at its office specified in Section 9.2, not later than 12:00 noon, Los Angeles time. The proceeds of such Revolving Loans shall be immediately applied to repay the Refunded Swing Line Loans. (e) If, prior to refunding a Swing Line Loan with a Revolving Loan pursuant to Section 2.2(d), one of the events described in Section 7(g) shall have occurred, then, subject to the provisions of Section 2.2(f), each Lender will, on the date such Revolving Loan was to have been made, purchase from the Swing Line Lender an undivided participation interest in the Swing Line Loan in an amount equal to its Revolving Loan Commitment Percentage of such Swing Line Loan. Upon request, each Lender will promptly transfer to the Swing Line Lender, in immediately available funds, the amount of its participation, and upon receipt thereof the -20- 26 Swing Line Lender will deliver to such Lender a Swing Line Loan Participation Certificate dated the date of receipt of such funds and in such amount. (f) Each Lender's obligation to make Revolving Loans in accordance with Section 2.2(d) and to purchase participating interests in accordance with Section 2.2(e) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of any Event of Default; (C) any adverse change in the condition (financial or otherwise) of the Borrower or any other Person; (D) any breach of this Agreement by the Borrower or any other Person; (E) any inability of the Borrower to satisfy the conditions precedent to borrowing set forth in this Agreement on the date upon which such participating interest is to be purchased or (F) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If any Lender does not make available to the Swing Line Lender the amount required pursuant to Section 2.2(d) or (e), as the case may be, the Swing Line Lender shall be entitled to recover such amount on demand from such Lender, together with interest thereon for each day from the date of non-payment until such amount is paid in full at the Federal Funds Effective Rate for the first two Business Days and at the Base Rate thereafter. Notwithstanding the foregoing provisions of this Section 2.2(f), no Lender shall be required to make a Revolving Loan to the Borrower for the purpose of refunding a Swing Line Loan pursuant to Section 2.2(d) or to purchase a participating interest in a Swing Line Loan pursuant to Section 2.2(e) if an Event of Default has occurred and is continuing and, prior to the making by the Swing Line Lender of such Swing Line Loan, the Swing Line Lender has received written notice from such Lender specifying that such Event of Default has occurred and is continuing, describing the nature thereof and stating that, as a result thereof, such Lender shall cease to make such Refunded Swing Line Loans and purchase such participating interests, as the case may be; provided, however, that the obligation of such Lender to make such Refunded Swing Line Loans and to purchase such participating interests shall be reinstated upon the earlier to occur of (y) the date upon which such Lender notifies the Swing Line Lender that its prior notice has been withdrawn and (z) the date upon which the Event of Default specified in such notice no longer is continuing. (g) The Swing Line Commitment of the Swing Line Lender shall terminate on the Revolving Loan Commitment Expiration Date. (h) Notwithstanding anything in this Section 2.2 to the contrary, the Swing Line Lender may, in its sole discretion and in lieu of the Swing Line Loan procedures set forth in this Section 2.2, make available to the Borrower its "Credit Sweep" program (or another program having comparable features and procedures) pursuant to which, at the close of business on each Business Day, if there then would be a debit balance in the Borrower's principal demand deposit account (No. 450-8801013) maintained with the Swing Line Lender, the Swing Line Lender will credit such demand deposit account in an amount such that, giving effect thereto, such demand deposit account reflects a credit balance of at least $0; provided, however, that no such credit shall be in an amount less than $1. Each such credit shall constitute a Swing Line Loan for all purposes of this Agreement, but the minimum borrowing requirements, notice of borrowing requirements and funding procedures of Section 2.2(c) shall not apply thereto. The Swing Line Lender may, in its sole discretion, terminate availability of such program to the Borrower, effective (if no Default then exists) upon 30 days' prior written notice to the Borrower or (if a -21- 27 Default exists) upon notice to the Borrower. Upon such a termination, the procedures otherwise applicable to Swing Line Loans in this Section 2.2 shall again apply. 2.3 Issuance of Letters of Credit. (a) Subject to the limitations on Letters of Credit set forth in Section 2.1(a), the Borrower shall be entitled to request the issuance of standby Letters of Credit and/or commercial Letters of Credit from time to time from and including the Closing Date to but excluding the date which is two Business Days prior to the Revolving Loan Commitment Expiration Date, by giving the Agent a Letter of Credit Request at least three Business Days before the requested date of issuance of such Letter of Credit (which shall be a Business Day). Any Letter of Credit Request received by the Agent later than 12:00 noon, Los Angeles time, shall be deemed to have been received on the next Business Day. Each Letter of Credit Request shall be made in writing or in an electronic format approved by the Agent, shall be signed by a Responsible Officer or such other employee designee as is reflected on the certificate delivered to the Agent pursuant to Section 4.1, shall be irrevocable and shall be effective upon receipt by the Agent. Provided that a valid Letter of Credit Request has been received by the Agent and upon fulfillment of the other applicable conditions set forth in Section 4.2, the Agent will issue the requested Letter of Credit from its office specified in Section 9.2. 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. (b) Immediately upon the issuance of each Letter of Credit, the Agent shall be deemed to have sold and transferred to each Lender, and each Lender shall be deemed to have purchased and received from the Agent, in each case irrevocably and without any further action by any party, an undivided interest and participation in such Letter of Credit, each drawing thereunder and the obligations of the Borrower under this Agreement in respect thereof in an amount equal to the product of (i) such Lender's Revolving Loan Commitment Percentage and (ii) the maximum amount available to be drawn under such Letter of Credit (assuming compliance with all conditions to drawing). The Agent shall prepare a monthly (or, if reasonably requested by any Lender, more frequent) report advising each Lender of the issuance of each Letter of Credit, the Letter of Credit Amount of such Letter of Credit, any change in the face amount or expiration date of such Letter of Credit, the cancellation or other termination of such Letter of Credit and any drawing under such Letter of Credit. (c) The payment by the Agent of a draft drawn under any Letter of Credit shall constitute for all purposes of this Agreement the making by the Agent in its individual capacity as a Lender hereunder (in such capacity, the "Drawing Lender") of a Base Rate Loan in the amount of such payment (but without any requirement of compliance with the conditions set forth in Section 4.2). In the event that any such Loan by the Drawing Lender resulting from a drawing under any Letter of Credit is not repaid by the Borrower by 11:00 a.m., Los Angeles time, on the day of payment of such drawing, the Agent shall promptly notify each other Lender. Each Lender shall, on the day of such notification (or if such notification is not given by 12:00 noon, Los Angeles time, on such day, then on the next succeeding Business Day), make a Base Rate Loan, which shall be used to repay the applicable portion of the Base Rate Loan of the Drawing Lender with respect to such Letter of Credit drawing, in an amount equal to the amount of such Lender's participation in such drawing for application to repay the Drawing Lender (but without any requirement of compliance with the applicable conditions set forth in Section 4.2) -22- 28 and shall deliver to the Agent for the account of the Drawing Lender, on the day of such notification (or if such notification is not given by 12:00 noon, Los Angeles time, on such day, then on the next succeeding Business Day) and in immediately available funds, the amount of such Base Rate Loan. In the event that any Lender fails to make available to the Agent for the account of the Drawing Lender the amount of such Base Rate Loan, the Drawing Lender shall be entitled to recover such amount on demand from such Lender, together with interest thereon for each day from the date of non-payment until such amount is paid in full at the Federal Funds Effective Rate for the first two Business Days and at the Base Rate thereafter. With respect to any Letter of Credit issued in accordance with the terms hereof under which a drawing occurs on or after the Revolving Loan Commitment Expiration Date and is not reimbursed by the Borrower by the time specified above, (i) the Drawing Lender shall be obligated to make a Base Rate Loan in the amount of such drawing and (ii) each Lender shall be obligated to make a Revolving Loan in an amount equal to such Lender's participation in such drawing for application to repay the Drawing Lender (each such Loan, a "Post-Maturity Loan"), in each case in accordance with this Section 2.3(c) and notwithstanding the occurrence of the Revolving Loan Commitment Expiration Date or any other provision of this Agreement to the contrary. Each Post-Maturity Loan shall be, for all intents and purposes a Revolving Loan hereunder, provided that such Post-Maturity Loan shall be due and payable on the day which is two Business Days after such Loan is made. (d) The obligations of the Borrower with respect to any Letter of Credit, any Letter of Credit Request and any other agreement or instrument relating to any Letter of Credit and any Base Rate Loan made under Section 2.3(c) shall be absolute, unconditional and irrevocable and shall be paid strictly in accordance with the terms of the aforementioned documents under all circumstances, including the following: (i) any lack of validity or enforceability of any Letter of Credit, this Agreement or any other Loan Document; (ii) the existence of any claim, setoff, defense or other right that the Borrower may have at any time against any beneficiary or transferee of any Letter of Credit (or any Person for whom any such beneficiary or transferee may be acting), the Agent, any Lender (other than the defense of payment to a Lender in accordance with the terms of this Agreement) or any other Person, whether in connection with this Agreement, any other Loan Document, the transactions contemplated hereby or thereby or any unrelated transaction; (iii) any statement or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect, or any statement therein being untrue or inaccurate in any respect whatsoever; and (iv) any exchange, release or non-perfection of any Collateral, Guarantor Collateral or other collateral, or any release, amendment or waiver of or consent to departure from any Guarantee, other Loan Document or other guaranty, for any of the Obligations of the Borrower in respect of the Letters of Credit. (e) The Borrower shall pay to the Agent, with respect to each Letter of Credit issued hereunder, the following fees: -23- 29 (i) for each commercial Letter of Credit, for the account of the Agent, the issuance and amendment fees set forth on Schedule 2.3; (ii) for each commercial Letter of Credit, for the account of the Lenders, the negotiation fees set forth on Schedule 2.3; (iii) for each standby Letter of Credit, for the account of the Lenders, for the period from and including the day such Letter of Credit is issued to but excluding the day such Letter of Credit expires, a letter of credit fee equal to the product of (x) the Applicable Revolving Loan Margin for LIBOR Loans and (y) the Letter of Credit Amount of such Letter of Credit from time to time, such letter of credit fee to be payable quarterly in arrears on the last day of each January, April, July and October and on the expiration date of such Letter of Credit; and (iv) with respect to each Letter of Credit issued hereunder, for the account of Agent, from time to time such additional fees and charges (including cable charges) as are generally associated with letters of credit, in accordance with the Agent's standard internal charge guidelines (as such guidelines may change from time to time) and the related Letter of Credit Request. (f) The Borrower agrees to the provisions in the Letter of Credit Request forms; provided, however, that the terms of the Loan Documents shall take precedence if there is any inconsistency between the terms of the Loan Documents and the terms of said forms. (g) The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Agent nor any Lender nor any of their respective officers or directors shall be liable or responsible for (i) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; or (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereof, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged. In furtherance and not in limitation of the foregoing, the Agent may accept any document that appears on its face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. 2.4 Term Loans. (a) Subject to the terms and conditions hereof, each Lender agrees severally to make a single term loan (each a "Term Loan") to the Borrower on the Closing Date in the amount shown as such Lender's "Term Loan" on the signature pages hereof, provided that the aggregate amount of the Term Loans shall not exceed $25,000,000. The Term Loans shall be made initially as LIBOR Loans, upon notice received by the Agent from the Borrower at least three Eurodollar Business Days before the day on which the Term Loans are to be made; provided, however, that, notwithstanding any provisions of this Agreement to the contrary, during the period from and including the Closing Date to but excluding January 31, 2001, the Term Loans shall bear interest at the rate per annum equal to the sum of (i) LIBOR for an Interest Period of four months plus (ii) the Applicable Term Loan Margin. On the proposed borrowing date, not later than 12:00 noon, Los Angeles time, each Lender shall make available to the Agent at its office specified in Section 9.2 the amount of such Lender's Term Loan in -24- 30 immediately available funds. Amounts borrowed under this Section 2.4(a) and repaid or prepaid may not be reborrowed. (b) Subject to Sections 2.11 and 2.13, the Term Loans may from time to time be (i) LIBOR Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Agent in accordance with either Section 2.4(a) or Section 2.7. Each Lender may make or maintain its Term Loan to the Borrower by or through any Applicable Lending Office. (c) The Term Loan made by each Lender to the Borrower shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit L (a "Term Note"), with appropriate insertions therein as to payee, date and principal amount, payable to the order of such Lender and representing the obligation of the Borrower to pay the unpaid principal amount of the Term Loan made by such Lender to the Borrower, with interest thereon as prescribed in Sections 2.9 and 2.10. Each Lender is hereby authorized (but not required) to record the date and amount of each payment or prepayment of principal of its Term Loan made to the Borrower, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of LIBOR Loans, the length of each Interest Period with respect thereto, in the books and records of such Lender, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. The failure of any Lender to make any such recordation or notation in the books and records of the Lender (or any error in such recordation or notation) shall not affect the obligations of the Borrower hereunder or under the Term Notes. Each Term Note shall (i) be dated the effective date thereof, (ii) provide for the payment of interest in accordance with Sections 2.9 and 2.10 and (iii) be stated to be payable in accordance with the terms of Section 2.4(e). (d) Neither the Agent nor any Lender shall be responsible for the obligation of any other Lender to make a Term Loan hereunder, nor will the failure of any Lender to comply with the terms of this Agreement relieve any other Lender or the Borrower of its obligations under this Agreement and the Term Notes. (e) The Borrower will repay the Term Loans in 16 quarterly installments of $1,562,500 each, payable on the last Business Day of each January, April, July and October, commencing on January 31, 2001 and ending on October 29, 2004. 2.5 Optional Prepayments; Optional Commitment Reductions. (a) The Borrower may, on the last day of any Interest Period with respect thereto in the case of any Revolving Loans that are maintained as LIBOR Loans, or at any time and from time to time in the case of any Revolving Loans that are maintained as Base Rate Loans, prepay such Revolving Loans and/or permanently reduce the Aggregate Revolving Loan Commitment, in whole or in part, without premium or penalty, upon at least three Business Days' irrevocable written notice in the case of LIBOR Loans and upon at least one Business Day's irrevocable written notice in the case of Base Rate Loans, from the Borrower to the Agent, specifying the date and amount of prepayment and/or commitment reduction, and whether, if a prepayment, the prepayment is of LIBOR Loans, Base Rate Loans or a combination thereof and, if of a combination thereof, the amount allocable to each. All prepayments of Revolving Loans under this Section 2.5(a) shall be applied first to outstanding Swing Line Loans and then to outstanding Revolving Loans. Upon receipt of any such notice from the Borrower, the Agent -25- 31 shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable by the Borrower on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of Revolving Loans shall be in the aggregate principal amount of $500,000 or an integral multiple of $300,000 in excess thereof. (b) The Borrower may, on the last day of any Interest Period with respect thereto in the case of any portion of the Term Loans maintained as LIBOR Loans, or at any time and from time to time in the case of any portion of the Term Loans maintained as Base Rate Loans, prepay such portion, in whole or in part, without premium or penalty, upon at least three Business Days' irrevocable written notice in the case of LIBOR Loans and upon at least one Business Day's irrevocable written notice in the case of Base Rate Loans, from the Borrower to the Agent, specifying the date and amount of prepayment, and whether the prepayment is of LIBOR Loans, Base Rate Loans or a combination thereof and, if of a combination thereof, the amount allocable to each. All prepayments of Term Loans under this Section 2.5(b) shall be applied to the scheduled repayment installments of the Term Loans in inverse order of maturity. Upon receipt of any such notice from the Borrower, the Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable by the Borrower on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of Term Loans shall be in the aggregate principal amount of $500,000 or an integral multiple of $300,000 in excess thereof. 2.6 Mandatory Prepayments. (a) If at any time the sum of (A) the aggregate principal amount of all Revolving Loans outstanding, (B) the aggregate principal amount of all Swing Line Loans outstanding, (C) the aggregate Letter of Credit Amount of all Letters of Credit outstanding and (D) the aggregate amount of unreimbursed drawings under all Letters of Credit exceeds the Aggregate Revolving Loan Commitment and/or the Borrowing Base, then, in either case, the Borrower shall immediately, without notice or request by the Agent, prepay the Revolving Loans and/or, if such sum exceeds the Borrowing Base, pledge additional cash collateral to the Agent to secure reimbursement of amounts available to be drawn under outstanding Letters of Credit, in an aggregate amount equal to such excess. Each prepayment of Revolving Loans pursuant to this Section 2.6(a) shall be applied first to outstanding Swing Line Loans and thereafter to outstanding Revolving Loans. (b) On the day of receipt by the Borrower or any of its Domestic Subsidiaries of any Net Proceeds with respect to an Equity Offering, the Borrower shall prepay the Term Loans and the Leasehold Improvement Loan pro rata in the aggregate amount equal to 100% of such Net Proceeds. On or prior to the date of any such Equity Offering, the Borrower will provide to the Agent the calculations used by the Borrower in determining the amount of any such prepayment under this Section 2.6(b). (c) On the day of receipt by the Borrower or any of its Domestic Subsidiaries of any Net Proceeds with respect to a Debt Offering (which Debt Offering must be permitted by Section 6.2 or otherwise consented to by the Majority Lenders in their sole discretion), the Borrower shall prepay the Term Loans and the Leasehold Improvement Loan pro rata in the aggregate amount equal to 100% of such Net Proceeds. On or prior to the date of any such Debt -26- 32 Offering, the Borrower will provide to the Agent the calculations used by the Borrower in determining the amount of any such prepayment under this Section 2.6(c). (d) Each prepayment pursuant to this Section 2.6 shall be accompanied by payment in full of all accrued interest thereon to and including the date of such prepayment, together with any additional amounts owing pursuant to Section 2.16. 2.7 Conversion and Continuation Options. (a) The Borrower may elect from time to time to convert LIBOR Loans to Base Rate Loans, by the Borrower giving the Agent at least two Business Days' prior irrevocable written notice of such election pursuant to a Continuation Notice, provided that any such conversion of LIBOR Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert Base Rate Loans (other than Swing Line Loans) to LIBOR Loans by the Borrower giving the Agent at least three Eurodollar Business Days' prior irrevocable written notice of such election pursuant to a Continuation Notice. Any such notice of conversion to LIBOR Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Agent shall promptly notify each Lender thereof. All or any part of outstanding LIBOR Loans and Base Rate Loans may be converted as provided herein, provided that (i) any such conversion may only be made if, after giving effect thereto, Section 2.8 shall not have been contravened, (ii) no Revolving Loan may be converted into a LIBOR Loan after the date that is one month prior to the Revolving Loan Commitment Expiration Date and (iii) the Borrower shall not have the right to elect to convert to a LIBOR Loan if a Default shall have occurred and be continuing. (b) Any LIBOR Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving notice to the Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such LIBOR Loan; provided, however, that no LIBOR Loan may be continued as such (i) if, after giving effect thereto, Section 2.8 would be contravened, (ii) after the date that is one month prior to the Revolving Loan Commitment Expiration Date or (iii) if a Default shall have occurred and be continuing; and further provided, however, that, if the Borrower shall fail to give any required notice as described above in this Section or if such continuation is not permitted pursuant to the preceding proviso, such LIBOR Loan shall be automatically converted to a Base Rate Loan on the last day of such then-expiring Interest Period. 2.8 Minimum Amounts of Tranches. All borrowings, conversions and continuations of LIBOR Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the LIBOR Loans comprising each Tranche shall be equal to $3,000,000 or a whole multiple of $100,000 in excess thereof and, in any case, there shall not be more than 8 Tranches. 2.9 Interest Rates and Payment Dates. (a) Each Revolving Loan maintained as a LIBOR Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the LIBOR Adjusted Rate plus the Applicable Revolving Loan Margin. Each Term Loan or portion thereof -27- 33 maintained as a LIBOR Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the LIBOR Adjusted Rate plus the Applicable Term Loan Margin. (b) Each Revolving Loan maintained as a Base Rate Loan shall bear interest at a rate per annum equal to the Base Rate plus the Applicable Revolving Loan Margin. Each Term Loan or portion thereof maintained as a Base Rate Loan shall bear interest at a rate per annum equal to the Base Rate plus the Applicable Term Loan Margin. (c) Each Swing Line Loan shall be made and maintained as a Base Rate Loan, and shall not be converted into any other Type of loan. (d) If any Event of Default shall have occurred and be continuing, all amounts outstanding hereunder shall bear interest at a rate per annum which is the sum of the rate otherwise applicable pursuant to Section 2.9(a), (b) or (c) plus 2% per annum, from the date of the occurrence of such Event of Default until such Event of Default is no longer continuing (after as well as before judgment). (e) Interest shall be payable in arrears on each Interest Payment Date; provided, however, that interest accruing pursuant to paragraph (d) of this Section shall be payable on demand. (f) For purposes of determining (i) the Applicable Revolving Loan Margin for Revolving Loans, (ii) the Applicable Revolving Loan Margin for the standby letter of credit fees referred to in Section 2.3(e)(iii), (iii) the Applicable Term Loan Margin for Term Loans and (iv) the Maximum Leverage Ratio for the unused-commitment fees referred to in Section 2.17, interest rates on the Loans and such fees shall be calculated on the basis of the Maximum Leverage Ratio set forth in the most recent Covenant Compliance Certificate received by the Agent in accordance with Section 5.1(a) or (b). For accrued and unpaid interest and fees only (no changes being made for interest or fee payments previously made), changes in interest rates on the Loans or in such letter of credit fees attributable to changes in the Applicable Revolving Loan Margin (with respect to Revolving Loans and letter of credit fees), changes in the Applicable Term Loan Margin (with respect to Term Loans) and changes in the Maximum Leverage Ratio (with respect to unused-commitment fees) caused by changes in the Maximum Leverage Ratio shall be calculated upon the delivery of a Covenant Compliance Certificate, and such change shall be effective on Base Rate Loans, LIBOR Loans and such fees from the day which is five days after receipt by the Agent of such Covenant Compliance Certificate. If, for any reason, the Borrower shall fail to deliver a Covenant Compliance Certificate when due in accordance with Section 5.1(a) or (b), and such failure shall continue for a period of ten days, the Revolving Loan Leverage Level shall be deemed to be Revolving Loan Leverage Level 5 (for purposes of determining the Applicable Revolving Loan Margin on Revolving Loans and Letter of Credit fees), the Term Loan Leverage Level shall be deemed to be Term Loan Leverage Level 5 (for purposes of determining the Applicable Term Loan Margin) and the applicable rate shall be deemed to be the highest rate set forth in Section 2.17 (for purposes of determining unused-commitment fees), as applicable, in each case retroactive to the date on which the Borrower should have delivered such Covenant Compliance Certificate, and shall continue until a Covenant Compliance Certificate indicating a different Revolving Loan Leverage Level and Term Loan Leverage Level is delivered to the Agent. -28- 34 2.10 Computation of Interest and Fees. (a) Interest on Loans, unused-commitment fees and all other Obligations of the Borrower shall be calculated on the basis of a 360-day year for the actual days elapsed. The Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a LIBOR Adjusted Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or the LIBOR Reserve Requirements shall become effective as of the opening of business on the day on which such change in the Base Rate is announced or such change in the LIBOR Reserve Requirements becomes effective, as the case may be. The Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. 2.11 Inability to Determine Interest Rate. In the event that, prior to the first day of any Interest Period, (a) the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower absent manifest error) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the LIBOR Adjusted Rate for such Interest Period or (b) the Agent shall have received notice from the Majority Lenders acting in good faith that the LIBOR Adjusted Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Agent shall give telecopy or telephonic notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given, (i) any LIBOR Loans requested to be made on the first day of such Interest Period shall accrue interest at the Base Rate, (ii) Loans that were to have been converted on the first day of such Interest Period to LIBOR Loans shall be continued as Base Rate Loans and (iii) any outstanding LIBOR Loans shall be converted, on the first day of such Interest Period, to Base Rate Loans. Until such notice has been withdrawn by the Agent, no further LIBOR Loans shall be made or continued as such, nor shall the Borrower have the right to convert Base Rate Loans to LIBOR Loans. 2.12 Pro Rata Treatment and Payments. Each borrowing by the Borrower from the Lenders hereunder, and any reduction of the Aggregate Revolving Loan Commitment, shall be made pro rata according to the respective Revolving Loan Commitment Percentages of the Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving Loans shall be made pro rata according to the respective outstanding principal and interest amounts of the Revolving Loans then held by the Lenders, and each payment (including each prepayment) by the Borrower on account of principal of and interest on the Term Loans shall be made pro rata according to the respective outstanding principal and interest amounts of the Term Loans then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder and under the Notes, whether on account of principal, interest, fees or otherwise, shall be made without setoff, deduction or counterclaim and shall be made prior to 11:00 a.m., Los Angeles time, on the due date thereof to the Agent, for the account of the applicable Lenders, at the Agent's office specified in Section 9.2, in Dollars and in immediately available funds. The Agent shall distribute such payments to the applicable Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the LIBOR Loans) becomes due and payable on a -29- 35 day other than a Business Day, such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a LIBOR Loan becomes due and payable on a day other than a Eurodollar Business Day, the maturity thereof shall be extended to the next succeeding Eurodollar Business Day (and interest shall continue to accrue thereon at the applicable rate) unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Eurodollar Business Day. 2.13 Illegality. Notwithstanding any other provision herein, if any change after the Closing Date in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender or Applicable Lending Office to make or maintain LIBOR Loans as contemplated by this Agreement, (a) the commitment of such Lender hereunder to make LIBOR Loans, continue LIBOR Loans as such and convert Base Rate Loans to LIBOR Loans shall forthwith be suspended during such period of illegality and (b) the Loans of such Lender or Applicable Lending Office then outstanding as LIBOR Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Loans or within such earlier period as required by law. If any such conversion of a LIBOR Loan occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Borrower shall pay to such Lender such amounts, if any, as may be required pursuant to Section 2.16. To the extent that a Lender's LIBOR Loans have been converted to Base Rate Loans pursuant to this Section 2.13, all payments and prepayments of principal that otherwise would be applied to such Lender's LIBOR Loans shall be applied instead to its Base Rate Loans. 2.14 Increased Costs. (a) In the event that any change after the Closing Date in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law but, if not having the force of law, generally applicable to and complied with by banks and financial institutions of the same general type as such Lender in the relevant jurisdiction) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirements against assets held by, letters of credit or guarantees issued by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender or Applicable Lending Office which is not otherwise included in the determination of the LIBOR Adjusted Rate hereunder; or (ii) shall impose on such Lender or Applicable Lending Office any other condition; and the result of any of the foregoing is to increase the cost to the Agent of issuing or maintaining any Letter of Credit by an amount which the Agent deems to be material, or to such Lender or Applicable Lending Office by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining LIBOR Loans, or purchasing or maintaining any participation in a Letter of Credit, or to reduce any amount receivable hereunder in respect -30- 36 thereof, then, in any such case, the Borrower shall immediately pay to the Agent, for its own account or on behalf of such Lender or Applicable Lending Office, as applicable, upon the demand of the Agent for itself or at the request of such Lender, as applicable, any additional amounts necessary to compensate such Lender or the Agent, as applicable, for such increased cost or reduced amount receivable. If the Agent, any Lender or any Applicable Lending Office becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the Borrower, through the Agent, of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this Section submitted by the Agent or such Lender or Applicable Lending Office, through the Agent, to the Borrower shall be conclusive evidence of the accuracy of the information so recorded, absent manifest error. This covenant shall survive the termination of this Agreement, expiration of the Letters of Credit and the payment of the Notes and all other amounts payable hereunder. (b) If, after the Closing Date, the introduction of or any change in any applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, affects the amount of capital required or expected to be maintained by any Lender or any corporation controlling any Lender, and such Lender (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) determines that the amount of capital maintained by such Lender or such corporation which is attributable to or based upon the Loans, the Letters of Credit, the Revolving Loan Commitments or this Agreement must be increased as a consequence of such introduction or change by an amount deemed by such Lender to be material, then, upon demand of the Agent at the request of such Lender, the Borrower shall immediately pay to the Agent on behalf of such Lender, additional amounts sufficient to compensate such Lender or such corporation for the increased costs to such Lender or corporation of such increased capital. Any such demand shall be accompanied by a certificate of such Lender setting forth in reasonable detail the computation of any such increased costs, which certificate shall be conclusive, absent manifest error. This covenant shall survive the termination of this Agreement, expiration of the Letters of Credit and the payment of the Notes and all other amounts payable hereunder. 2.15 Taxes. (a) All payments made by the Borrower in respect of the Obligations shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority or any political subdivision or taxing authority thereof or therein, other than Excluded Taxes (all such non-Excluded Taxes being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts payable to the Agent or any Lender in respect of the Obligations, the amounts so payable to the Agent or such Lender shall be increased to the extent necessary to yield to the Agent or such Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the Notes. The Agent or a Lender, as the case may be, shall deliver to the Borrower a certificate in good faith setting forth the amount of such Taxes, the calculation of such Taxes and an explanation of the requirement therefor, all in reasonable detail, and such certificate shall be conclusive, absent manifest error. Whenever any Taxes are payable by the Borrower, as promptly as possible thereafter, the Borrower shall send to the Agent, for its own -31- 37 account or for the account of such Lender, as the case may be, a copy of an original official receipt received by the Borrower showing payment thereof or such other evidence of payment reasonably satisfactory to the Agent. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental taxes, interest or penalties (and related reasonable fees and expenses of counsel) that may become payable by the Agent or any Lender as a result of any such failure. The agreements in this Section shall survive the termination of this Agreement, the expiration of the Letters of Credit and the payment of the Notes and all other amounts payable hereunder. (b) Each Lender that is not organized under the laws of the United States of America or a state thereof agrees that it will deliver to the Borrower and the Agent (i) two duly completed copies of United States Internal Revenue Service Form W-9, W-8BEN or W-8ECI (as applicable to it). Each such Lender also agrees to deliver to the Borrower and the Agent two further copies of the said Form W-9, W-8BEN or W-8ECI (as applicable to it), or successor applicable forms or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower and the Agent, and such extensions or renewals thereof as may reasonably be requested by the Borrower or the Agent, unless in any such case an event beyond the control of such Lender (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advised the Borrower and the Agent. Each such Lender shall certify, pursuant to such Forms, that it is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. 2.16 Indemnity. The Borrower agrees to indemnify each Lender against, to hold each Lender harmless from, and to pay each Lender within 5 Business Days of such Lender's demand the amount of, any liability, loss or expense arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained (including reasonable fees and expenses of counsel) which such Lender may sustain or incur as a consequence of (a) default by the Borrower in payment when due of the principal amount of or interest on any LIBOR Loan, (b) default by the Borrower in making a borrowing of, conversion into or continuation of LIBOR Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (c) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (d) the making by the Borrower of a prepayment or conversion of LIBOR Loans on a day which is not the last day of an Interest Period with respect thereto (including any prepayment required as a result of acceleration of the Loans under Article 7). A Lender's certificate as to such liability, loss or expense shall be deemed conclusive, absent manifest error. This covenant shall survive the termination of this Agreement, the expiration of the Letters of Credit and the payment of the Notes and all other amounts payable hereunder. 2.17 Unused-Commitment Fees. The Borrower agrees to pay to the Lenders an unused-commitment fee to be shared pro rata among the Lenders with respect to the Revolving Loan Commitments for the period from and including the Closing Date to but excluding the Revolving Loan Commitment Expiration Date, based on the daily aggregate Available -32- 38 Revolving Loan Commitments from time to time in effect and computed at the applicable per annum rate set forth below:
Revolving Loan Leverage Level Fee Rate 1 (<0.75) 0.250% - 2 (>0.75 <1.00) 0.250% - 3 (>1.00 <1.50) 0.375% - 4 (>1.50 <1.75) 0.375% - 5 (>1.75) 0.500%
Such fee shall be payable quarterly in arrears on the last day of each January, April, July and October and on the Revolving Loan Commitment Expiration Date, commencing on the first such date to occur after the Closing Date. 2.18 Mitigation of Costs. If any Lender, by changing its Applicable Lending Office or taking any other reasonable action, so long as making such change or taking such other action is not disadvantageous to it in any financial, regulatory or other respect, can mitigate any adverse effect on the Borrower under Section 2.11, 2.13, 2.14 or 2.15, such Lender shall take such action. ARTICLE 3. REPRESENTATIONS AND WARRANTIES To induce the Lenders to enter into this Agreement and to make the Loans and participate in the Letters of Credit, and to induce the Agent to issue the Letters of Credit, the Borrower hereby represents and warrants to the Agent and each Lender that: 3.1 Organization and Good Standing. The Borrower and each Subsidiary (a) is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, (b) has all requisite power and authority (corporate, partnership, limited liability company and otherwise) to own its properties and to conduct its business as now conducted and as currently proposed to be conducted and (c) is duly qualified to conduct business as a foreign organization, and is currently in good standing, in each state and other jurisdiction in which its failure to be so qualified or in good standing could reasonably be expected to have a Material Adverse Effect. Each state and other jurisdiction in which the Borrower or any Subsidiary is organized or is qualified to conduct business is listed on Schedule 3.1. 3.2 Power and Authority. The Borrower has all requisite power and authority under applicable Requirements of Law to borrow hereunder. The Borrower and each Subsidiary has all requisite power and authority under applicable Requirements of Law to execute, deliver and perform the obligations under the Loan Documents to which it is a party. All actions, waivers and consents (corporate, regulatory and otherwise) necessary for the Borrower and each Subsidiary to execute, deliver and perform the Loan Documents to which it is a party have been taken and/or received. 3.3 Validity and Legal Effect. This Agreement constitutes, and the other Loan Documents to which the Borrower or any Subsidiary is a party constitute (or will constitute when executed and delivered), the legal, valid and binding obligations of the Borrower and each -33- 39 Subsidiary enforceable against it in accordance with the terms thereof, except as enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or other similar laws affecting creditors' rights generally or by equitable principles relating to enforceability. 3.4 No Violation of Laws or Agreements. The execution, delivery and performance of the Loan Documents (a) will not violate or contravene any material Requirement of Law, (b) will not result in any material breach or violation of, or constitute a material default under, any agreement or instrument by which the Borrower, any Subsidiary or any of its respective property may be bound, and (c) will not result in or require the creation of any Lien (other than pursuant to the Loan Documents) upon or with respect to any properties of the Borrower or any Subsidiary, whether such properties are now owned or hereafter acquired. 3.5 Title to Assets; Existing Encumbrances. The Borrower and each Subsidiary have good and marketable title to all Properties purported to be owned thereby, free and clear of any Liens, except (i) the Liens granted to the Agent for the benefit of the Lenders under the Loan Documents and (ii) the Liens against the assets of Na Pali set forth on Schedule 3.5A. The property and assets of the Borrower and its Subsidiaries are in good order and repair (ordinary wear and tear excepted) and are fully covered by the insurance required under the Loan Documents. Neither the Borrower nor any Domestic Subsidiary has used (or permitted the filing of any financing statement under) any legal or operating name at any time during the twelve consecutive calendar months immediately preceding the execution of this Agreement, except as identified on Schedule 3.5B. 3.6 Taxes and Assessments. The Borrower and each Subsidiary has timely filed all required tax returns and reports (federal, state and local) or has properly filed for extensions of the time for the filing thereof. The Borrower does not have knowledge of any deficiency, penalty or additional assessment due or appropriate in connection with any such taxes. All taxes (federal, state and local) imposed upon the Borrower or any Subsidiary or any of its properties, operations or income have been paid and discharged prior to the date when any interest or penalty would accrue for the nonpayment thereof, except for those taxes being contested in good faith by appropriate proceedings diligently prosecuted and with adequate reserves reflected on the financial statements in accordance with GAAP. There are no taxes imposed on the Borrower or its Subsidiaries by any political subdivision or taxing authority due or payable either on or by virtue of the execution and delivery by the Borrower, the Agent, or the Lenders of this Agreement or any other Loan Document to which the Borrower or the Subsidiaries are party, or on any payment to be made by the Borrower pursuant hereto or thereto. 3.7 Litigation and Legal Proceedings. Except as disclosed on Schedule 3.7, there is no litigation, claim, investigation, administrative proceeding, labor controversy or similar action that is pending or, to the best of the Borrower's knowledge, threatened (i) with respect to any Loan Document or the transactions contemplated thereby or (ii) against the Borrower or any Subsidiary that, if adversely resolved, could reasonably be expected to have a Material Adverse Effect. 3.8 Accuracy of Financial Information. (a) All information previously furnished to the Agent and the Lenders that was prepared by or on behalf of the Borrower concerning the financial condition and operations of the Borrower and its Subsidiaries, including the audited consolidated financial statements of -34- 40 the Borrower as of October 31, 1999 for the fiscal year then ended and the unaudited consolidated financial statements of the Borrower as of July 31, 2000 for the 9-month fiscal period then ended, (A) has been prepared in accordance with GAAP consistently applied, (B) is true, accurate and complete in all material respects, (C) fairly presents the financial condition of the organizations covered thereby as of the dates and for the periods covered thereby and (D) discloses all material liabilities (contingent and otherwise) of the Borrower and its Subsidiaries. (b) Since July 31, 2000 there has been no event or condition resulting in a Material Adverse Effect. 3.9 Accuracy of Other Information. All information contained in any material application, schedule, report, certificate, or any other document given to the Agent or any Lender by the Borrower or any other Person in connection with the Loan Documents is in all material respects true, accurate and complete, and no such Person has omitted to state therein (or failed to include in any such document) any material fact or any fact necessary to make such information not misleading. All projections given to the Agent or any Lender by the Borrower or any other Person on behalf of the Borrower have been prepared with a reasonable basis and in good faith making use of such information as was available at the date such projection was made. The projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by the Borrower to be reasonable at the time made and as of the Closing Date, it being recognized that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. 3.10 Compliance with Laws Generally. The Borrower and each Subsidiary is in compliance in all material respects with all Requirements of Law applicable to it, its operations and its properties. 3.11 ERISA Compliance. (a) The Borrower and each Subsidiary is in compliance in all material respects with all applicable provisions of ERISA, and all rules, regulations and orders implementing ERISA. (b) Neither the Borrower, nor any Subsidiary or any ERISA Affiliate thereof maintains or contributes to (or has maintained or contributed to) any Multiemployer Plan under which the Borrower, any Subsidiary or any ERISA Affiliate thereof could have any withdrawal liability. (c) Neither the Borrower, nor any Subsidiary or any ERISA Affiliate thereof sponsors or maintains any defined benefit pension plan under which there is an accumulated funding deficiency within the meaning of Section 412 of the Code, whether or not waived. (d) The liability for accrued benefits under each defined benefit pension plan that will be sponsored or maintained by the Borrower, any Subsidiary or any ERISA Affiliate thereof (determined on the basis of the actuarial assumptions utilized by the PBGC) does not exceed the aggregate fair market value of the assets under each such defined benefit pension plan. -35- 41 (e) The aggregate liability of the Borrower, each Subsidiary and each ERISA Affiliate thereof arising out of or relating to a failure of any employee benefit plan within the meaning of Section 3(2) of ERISA to comply with provisions of ERISA or the Code will not have a Material Adverse Effect. (f) There does not exist any unfunded liability (determined on the basis of actuarial assumptions utilized by the actuary for the plan in preparing the most recent annual report) of the Borrower, any Subsidiary or any ERISA Affiliate thereof under any plan, program or arrangement providing post-retirement, life or health benefits. (g) No Reportable Event and no Prohibited Transaction (as defined in ERISA) has occurred or is occurring with respect to any plan with which the Borrower or any Subsidiary is associated. 3.12 Environmental Compliance. (a) The Borrower and each Subsidiary has received all permits and filed all notifications necessary under and is otherwise in compliance in all material respects with all national, federal, state and local laws, rules and regulations, whether domestic or foreign, governing the control, removal, storage, transportation, spill, release or discharge of hazardous or toxic wastes, substances and petroleum products, including as provided in the provisions of and the regulations under (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986, (ii) the Solid Waste Disposal Act, (iii) the Clean Water Act and the Clean Air Act, (iv) the Hazardous Materials Transportation Act, (v) the Resource Conservation and Recovery Act of 1976 and (vi) the Federal Water Pollution Control Act Amendments of 1972 (all of the foregoing enumerated and non-enumerated statutes, including any applicable state or local statutes, all as amended, collectively, the "Environmental Control Statutes"). (b) Neither the Borrower nor any Subsidiary has given any written or oral notice to the Environmental Protection Agency ("EPA") or any state or local agency with regard to any actual or imminently threatened removal, storage, transportation, spill, release or discharge of hazardous or toxic wastes, substances or petroleum products either (i) on properties owned or leased by the Borrower or such Subsidiary or (ii) otherwise in connection with the conduct of its business and operations. (c) Neither the Borrower nor any Subsidiary has received notice that it is potentially responsible for costs of clean-up of any actual or imminently threatened spill, release or discharge of hazardous or toxic wastes or substances or petroleum products pursuant to any Environmental Control Statute. (d) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of the Borrower, threatened, under any Environmental Control Statute to which the Borrower or any of its Subsidiaries is named as a party with respect to the Properties or the business conducted at the Properties, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Control Statute with respect to the Properties or such business. -36- 42 3.13 Federal Regulations. No Letter of Credit and no part of the proceeds of any Loans are intended to be or will be used, directly or indirectly for any purpose which violates the provisions of the Regulations of the Board of Governors of the Federal Reserve System. If requested by any Lender or the Agent, the Borrower will furnish to the Agent and each Lender a statement to the foregoing effect in conformity with the requirements of Form U-1 referred to in Regulation U. 3.14 Fees and Commissions. Except as required by Section 2.17 or the letter referred to in Section 4.1(e), neither the Borrower nor any Subsidiary owes or will owe any fees or commissions of any kind in connection with this Agreement or the transactions contemplated hereby, and the Borrower does not know of any claim (or any basis for any claim) for any fees or commissions in connection with this Agreement or such transactions. 3.15 Solvency. Immediately prior to, upon and immediately following the execution of this Agreement and the funding of the Loans and the issuance of any Letters of Credit to be funded or issued on the Closing Date, the Borrower, both individually and together with its Subsidiaries, was, is and will be Solvent. 3.16 Investment Company Act; Other Regulations. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 3.17 Nature of Business. Neither the Borrower nor any Subsidiary is engaged in any business other than the ownership and operation of retail apparel stores, the marketing, advertising and promotion of consumer products, the design and arrangement of apparel manufacturing and the importing of apparel and accessories. 3.18 Ranking of Loans. This Agreement and the other Loan Documents to which the Borrower is a party, when executed, and the Loans, when borrowed are and will be the direct and general obligations of the Borrower. The Borrower's obligations hereunder and thereunder rank and will rank at least pari passu in priority of payment to all other senior Indebtedness of the Borrower. 3.19 Subsidiaries. The Borrower has no Subsidiaries other than those listed on Schedule 3.19. ARTICLE 4. CONDITIONS PRECEDENT 4.1 Conditions to Closing Date. The agreement of each Lender to make the Term Loans and any Revolving Loans requested to be made by it on the Closing Date and to participate in any Letters of Credit to be issued on the Closing Date and the agreement of the Agent to issue any Letters of Credit requested to be issued on the Closing Date are subject to the satisfaction, immediately prior to or concurrently with the making of such Loans and/or the issuance of and participation in such Letters of Credit on the Closing Date, of the following conditions precedent: (a) Revolving Credit and Term Loan Agreement. The Agent shall have received this Agreement, duly executed and delivered by the Borrower and the Lenders. -37- 43 (b) Other Loan Documents. The Agent shall have received the Notes and all UCC-1 Financing Statements and other agreements or instruments required to create or perfect a security interest in the Collateral executed in connection herewith, in each case executed and delivered by an officer of the Borrower. (c) Corporate Proceedings. The Agent shall have received a copy of the resolutions of the Board of Directors of the Borrower authorizing (i) the execution, delivery and performance of the Loan Documents to which it is or will be a party and (ii) the borrowings contemplated hereunder, certified by the Secretary or an Assistant Secretary of the Borrower as of the Closing Date, which certificate states that such resolutions thereby certified have not been amended, modified, revoked or rescinded and are in full force and effect. (d) Organic Documents. The Agent shall have received copies of the Organic Documents of the Borrower, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary of the Borrower. (e) Fees and Costs. The Agent shall have received payment of all fees, costs and expenses, including legal fees (if requested by the Agent) and the fees set forth in the fee side letter executed by the Borrower and the Agent in connection herewith, accrued and unpaid and otherwise due and payable on or before the Closing Date by the Borrower in connection with this Agreement. (f) Legal Opinion. The Agent shall have received the executed legal opinion of Hewitt & McGuire, LLP, counsel to the Borrower, in form and substance satisfactory to the Agent. (g) Lien Searches. The Agent shall have received such UCC and other Lien searches as it shall deem necessary. (h) Good-Standing Certificates. With respect to the Borrower, the Agent shall have received a certificate, dated a recent date, of the Secretary of State of the state of formation of such Obligor and each other jurisdiction where such Obligor is required to be qualified to do business under such jurisdiction's law, certifying as to the existence and good standing of, and the payment of taxes by, each Obligor in such state. (i) No Default/Representations. No Default shall have occurred and be continuing on the Closing Date or would occur after giving effect to the Loans requested to be made, or Letters of Credit requested to be issued, on the Closing Date, and the representations and warranties contained in this Agreement and each other Loan Document and certificate or other writing delivered to the Lenders in satisfaction of the conditions set forth in this Section 4.1 prior to or on the Closing Date shall be correct in all material respects on and as of the Closing Date, and the Agent shall have received a certificate of the Borrower to such effect in the form of Exhibit D, dated as of the Closing Date and executed by a Responsible Officer of the Borrower. (j) Financial Information. The Agent shall have received (i) a Borrowing Base Certificate as of August 31, 2000 and (ii) a certificate of the Chief Financial Officer of the Borrower setting forth the Maximum Leverage Ratio as of July 31, 2000 (which shall be used in determining the initial Applicable Revolving Loan Margin and Applicable Term Loan Margin). -38- 44 (k) Additional Proceedings. The Agent shall have received such other approvals, opinions and documents as any Lender, through the Agent, may reasonably request, and all legal matters incident to the making of such Loans and issuance of such Letters of Credit shall be satisfactory to the Agent. 4.2 Conditions to Each Loan or Letter of Credit. The agreement of each Lender to make each Loan, and the agreement of the Agent to issue each Letter of Credit, requested to be made or issued by it is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan or the issuance of such Letter of Credit, of the following conditions precedent: (a) Representations and Warranties; No Default. The following statements shall be true, and the Borrower's acceptance of the proceeds of such Loan or its delivery of an executed Letter of Credit Request shall be deemed to be a representation and warranty of the Borrower on the date of such Loan or as of the date of issuance of such Letter of Credit, as applicable, that: (i) The representations and warranties contained in this Agreement and in each other Loan Document and certificate or other writing delivered to the Lenders prior to, on or after the Closing Date pursuant hereto and on or prior to the date for such Loan or the issuance of such Letter of Credit are correct on and as of such date in all material respects as though made on and as of such date except to the extent that such representations and warranties expressly relate to an earlier date; and (ii) No Default has occurred and is continuing or would result from the making of the Loan to be made on such date or the issuance of such Letter of Credit as of such date. (b) Legality. The making of such Loan or the issuance of such Letter of Credit, as applicable, shall not contravene any law, rule or regulation applicable to any Lender or the Borrower or any other Obligor. (c) Revolving Borrowing Notice, Swing Line Borrowing Notice, Letter of Credit Request. The Agent shall have received a Revolving Borrowing Notice, Swing Line Borrowing Notice or Letter of Credit Request, as applicable, pursuant to the provisions of this Agreement from the Borrower. ARTICLE 5. AFFIRMATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, so long as any Commitment remains in effect, any Note remains outstanding and unpaid, any other amount is owing to any Lender or the Agent hereunder or any Letter of Credit remains outstanding: 5.1 Financial Statements. (a) Within 105 days after the end of each fiscal year, the Borrower shall deliver to the Lenders a complete set of audited annual consolidated financial statements of the Borrower and unaudited consolidating financial statements with respect to the Borrower, its -39- 45 Domestic Subsidiaries and Na Pali, including a balance sheet, an income statement and a cash flow statement (with accompanying notes and schedules) and a capital expenditure schedule for such fiscal year segmented by domestic and foreign operations. Such financial statements (i) must be prepared in accordance with GAAP consistently applied and (ii) must be certified without qualification by the Accountants. Together with the audited financial statements, the Agent must also receive (A) a certificate signed by such Accountants, at the time of the completion of the annual audit, stating that the financial statements fairly present the consolidated financial condition of the Borrower as of the date thereof and for the periods covered thereby, (B) a certificate executed by the Chief Financial Officer of the Borrower certifying that the financial statements fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and for the period covered thereby and that as of the date of such certificate such officer has obtained no knowledge of any Default except as specified in such certificate and (C) a Covenant Compliance Certificate. (b) Within 60 days after the end of each of the Borrower's first three fiscal quarters, the Borrower shall deliver to the Lenders the consolidated financial statements of the Borrower and unaudited consolidating financial statements with respect to the Borrower, its Domestic Subsidiaries and Na Pali for such quarter, including a balance sheet, an income statement and a cash flow statement (with accompanying notes and schedules). Such financial statements shall be prepared in accordance with GAAP consistently applied. Together with the quarterly financial statements, the Lenders must also receive (i) a certificate executed by the Chief Financial Officer of the Borrower (A) stating that the financial statements fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and for the period covered thereby and (B) certifying that as of the date of such certificate such officer has obtained no knowledge of any Default except as specified in such certificate and (ii) a Covenant Compliance Certificate; and (c) Within 30 days after the end of each month, the Borrower shall deliver to the Agent, for distribution to the Lenders, a Borrowing Base Certificate as of the end of such month. 5.2 Certificates; Other Information. The Borrower shall furnish to the Agent, for distribution to the Lenders: (a) within 10 days after the same are filed, copies of all financial statements and reports which the Borrower or any Subsidiary may make to, or file with, the Securities and Exchange Commission or any successor Governmental Authority; (b) promptly but, in any event, within 10 days after receipt thereof, copies of all financial reports (including management letters), if any, submitted to the Borrower or any Subsidiary by the Accountants in connection with any annual or interim audit of the books thereof; (c) as soon as possible and in any event within five Business Days after the occurrence of a Default or, in the good faith determination of a Responsible Officer of the Borrower, a Material Adverse Effect, the written statement by a Responsible Officer of the Borrower, setting forth the details of such Default or Material Adverse Effect and the action which the Borrower proposes to take with respect thereto; -40- 46 (d) (A) as soon as possible and in any event within 30 days after the Borrower knows or has reason to know that any Termination Event with respect to any Plan has occurred, a statement of a Responsible Officer of the Borrower describing such Termination Event and the action, if any, which the Borrower proposes to take with respect thereto, (B) promptly and in any event within ten days after receipt thereof by the Borrower or any ERISA Affiliate of the Borrower from the PBGC, copies of each notice received by the Borrower or such ERISA Affiliate of the PBGC's intention to terminate any Plan or to have a trustee appointed to administer any Plan, (C) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan maintained for or covering employees of the Borrower or any Subsidiary if the present value of the accrued benefits under the Plan exceeds its assets by an amount in excess of $500,000 and (D) promptly and in any event within ten days after receipt thereof by the Borrower or any ERISA Affiliate of the Borrower from a sponsor of a Multiemployer Plan or from the PBGC, a copy of each notice received by the Borrower or such ERISA Affiliate concerning the imposition or amount of withdrawal liability under Section 4202 of ERISA or indicating that such Multiemployer Plan may enter reorganization status under Section 4241 of ERISA; (e) promptly after the commencement thereof, but in any event not later than 10 days after service of process with respect thereto on, or the obtaining of knowledge by, the Borrower or any Subsidiary, notice of (i) each material action, suit or proceeding before any Governmental Authority and (ii) any claim under any Environmental Control Statute; (f) promptly upon any Subsidiary's becoming a Material Domestic Subsidiary or a Material Foreign Subsidiary, or upon the Borrower's direct or indirect creation or acquisition of a Material Domestic Subsidiary or a Material Foreign Subsidiary, notice of the same; and (g) promptly, such additional financial information as any Lender, through the Agent, may from time to time reasonably request. 5.3 Payment of Obligations. The Borrower shall, and shall cause each of its Subsidiaries to, pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its obligations of whatever nature (including all taxes, assessments, governmental charges and levies), except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or such Subsidiaries, as the case may be. 5.4 Conduct of Business; Maintenance of Existence and Licenses; Contractual Obligations. The Borrower shall, and shall cause each of its Subsidiaries to, (i) continue to engage in business of the same general type as conducted by the Borrower and such Subsidiaries as of the Closing Date, (ii) preserve, renew and keep in full force and effect its corporate or other legal existence, unless the Board of Directors of any Subsidiary other than a Material Domestic Subsidiary or a Material Foreign Subsidiary determines that the preservation of its corporate or other legal existence is no longer desirable, and the loss thereof could not reasonably be expected to have a Material Adverse Effect, (iii) maintain all rights, registrations, licenses, privileges and franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to so maintain would not have a Material Adverse Effect, and (iv) comply with all -41- 47 Contractual Obligations except to the extent that failure to comply therewith would not have a Material Adverse Effect. 5.5 Maintenance of Property; Insurance. The Borrower shall, and shall cause each of its Subsidiaries to, keep all property useful or necessary in its business in good working order and condition (ordinary wear and tear excepted); maintain with financially sound and reputable insurance companies or associations insurance on such of its property in at least such amounts and against such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to the Agent evidence of the continued effectiveness of such insurance at all times (but with respect to Foreign Subsidiaries, only upon request by the Agent). All such policies of insurance on the property of the Borrower and the Domestic Subsidiaries shall contain an endorsement, in form and substance satisfactory to the Agent, (i) showing the Agent, on behalf of the Lenders, as additional insured or loss payee, as appropriate, and (ii) providing that the insurance companies will give the Agent at least 20 days' prior written notice before any such policy or policies of insurance shall be materially altered or canceled. All policies of insurance required to be maintained under this Agreement shall be in customary form and with insurers reasonably acceptable to the Agent and all such policies shall be in such amounts as shall be customary for similar companies in the same or similar business in the same geographical area. The Borrower shall deliver to the Agent insurance certificates certified by the Borrower's insurance brokers, as to the existence and effectiveness of each policy of insurance and evidence of payment of all premiums then due and payable therefor. In addition, the Borrower shall notify the Agent promptly of any occurrence causing a material loss of any insured Property and the estimated (or actual, if available) amount of such loss. In addition, the Borrower shall cause the insurance policies maintained by it and the Domestic Subsidiaries to be in conformity with the following: (i) Each policy for liability insurance shall provide for all losses to be paid on behalf of the Agent and the Borrower or Domestic Subsidiary (as the case may be), as their respective interests may appear, and each policy for property damage insurance shall, to the extent applicable to equipment and inventory, provide for all losses (except for losses of less than $1,000,000 per occurrence, which may be paid directly to the Borrower or such Domestic Subsidiary, as applicable) to be paid directly to the Agent. (ii) Reimbursement under any liability insurance maintained by the Borrower or its Subsidiaries pursuant to this Section 5.5 may be paid directly to the Person who shall have incurred liability covered by such insurance. In the case of any loss involving damage to equipment or inventory as to which clause (iii) of this Section 5.5 is not applicable, the Borrower will make or cause to be made the necessary repairs to or replacements of such equipment or inventory, and any proceeds of insurance maintained by the Borrower or its Domestic Subsidiaries pursuant to this Section 5.5 shall be paid by the insurer or the Agent, as applicable, to the Borrower or the applicable Domestic Subsidiary, upon presentation of invoices and other evidence of obligations, as reimbursement for the costs of such repairs or replacements. Any such payment by the Agent shall not be unreasonably withheld or delayed. (iii) Upon the occurrence and during the continuance of a Default, all insurance proceeds in respect of any equipment or inventory shall be paid to the Agent and applied in repayment of the Loans in such order as the Agent may reasonably determine, but in any event pro rata among the Lenders. -42- 48 5.6 Inspection of Property; Books and Records; Discussions. The Borrower shall, and shall cause each of its Subsidiaries to, (a) keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all material Requirements of Law shall be made of all material dealings and transactions in relation to its business and activities and (b) upon reasonable notice and at such reasonable times during usual business hours, permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its Accountants, including for the purpose of conducting Field Exams, which shall be conducted at least annually. 5.7 Environmental Laws. The Borrower shall, and shall cause each of its Subsidiaries to: (a) Comply in all material respects with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Control Statutes and obtain and comply in all material respects with any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Control Statutes; (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Control Statutes and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Control Statutes except to the extent that the same are being contested in good faith by appropriate proceedings; and (c) Defend, indemnify and hold harmless the Agent and the Lenders, and their respective employees, agents, officers and directors, from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under any Environmental Control Statutes applicable to the operations of the Borrower or any of its Subsidiaries, or the Borrower's or any of its Subsidiaries' interest in Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. This indemnity shall continue in full force and effect regardless of the termination of this Agreement, the expiration of the Letter of Credit and the payment of the Notes and all other amounts payable hereunder. 5.8 Use of Proceeds. The Borrower will use the proceeds of the Revolving Loans and the Swing Line Loans solely to provide funds for working capital, capital expenditures, acquisitions permitted by Section 6.7(d) and general corporate purposes of the Borrower and its Domestic Subsidiaries. The Borrower will use the proceeds of the Term Loans solely to refinance existing indebtedness under the Old Credit Agreement that was incurred to finance a portion of the purchase price and related transaction expenses for the acquisition referred to in Section 6.7(g). Commercial Letters of Credit shall be used only for the purpose of supporting purchases of inventory by the Borrower and its Domestic Subsidiaries. Standby Letters of Credit shall be used only to provide support for direct business activities of the Borrower as agreed to -43- 49 by the Agent. Notwithstanding anything herein to the contrary, no Loan or Letter of Credit shall be used for the purchasing or carrying of any Margin Stock. 5.9 Compliance With Laws, Etc. The Borrower shall comply, and shall cause each of its Subsidiaries to comply, in all material respects with all applicable Requirements of Law. 5.10 Guarantees, Etc. (a) The Borrower will cause each of its Material Domestic Subsidiaries to execute and deliver to the Agent, promptly upon request thereby, (i) a Guarantee guaranteeing the Obligations, (ii) a Guarantor Security Agreement granting to the Agent, for the benefit of the Lenders, a security interest in the tangible and intangible personal property (excluding trademarks, trade names and other intellectual- property rights) of such Domestic Subsidiary, together with appropriate Lien searches requested by the Agent indicating the Lenders' first priority Lien on such personal property and (iii) UCC-1 Financing Statements, duly executed by such Subsidiary, in form and substance satisfactory to the Agent and, in connection with such deliveries, cause to be delivered to the Agent (A) a favorable written opinion of counsel satisfactory to the Agent as to such matters relating thereto as any Lender through the Agent may reasonably request, in form and substance satisfactory to the Agent, (B) such other agreements, instruments, approvals or other documents as any Lender through the Agent may reasonably request, and (C) copies of the organizational documents, resolutions and incumbency certificates of such Domestic Subsidiary. (b) The Borrower will, and will cause each Material Foreign Subsidiary and each Subsidiary holding any equity interest in a Material Foreign Subsidiary to, deliver to the Agent, promptly upon request thereby, (i) a pledge of 65% of the equity interests in such Foreign Subsidiary (or such greater amount of such equity interests as shall not cause the Borrower to incur material adverse tax consequences under United States tax law), (ii) such agreements, certificates, filings, notices, consents and other actions as the Agent may request to evidence and perfect such pledge and (iii) an executed legal opinion of local counsel to the Borrower, such Foreign Subsidiary and such Subsidiary in form and substance, and from a firm of attorneys, reasonably acceptable to the Agent; provided, however, that no such deliveries shall be required with respect to any Material Foreign Subsidiary which is wholly-owned by a Foreign Subsidiary with respect to which the Borrower has complied with this Section 5.10(b). ARTICLE 6. NEGATIVE COVENANTS The Borrower hereby agrees that from and after the Closing Date, so long as any Commitment remains in effect, any Note remains outstanding and unpaid, any other amount is owing to any Lender or the Agent hereunder or any Letter of Credit remains outstanding: 6.1 Financial Condition Covenants. The Borrower shall not: (a) Maximum Leverage Ratio Permit the Maximum Leverage Ratio of the Borrower and its Subsidiaries on a consolidated basis, as of the end of any fiscal quarter of the Borrower, to exceed 2.00:1. -44- 50 (b) Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio of the Borrower and its Subsidiaries on a consolidated basis, as of the end of any fiscal quarter of the Borrower, to be less than 1.25:1. (c) Minimum Profitability. Permit, with respect to the Borrower and its Subsidiaries on a consolidated basis, a net loss to exist for any two consecutive fiscal quarters of the Borrower. (d) Commitments and Indebtedness of Na Pali. Permit Na Pali and its Subsidiaries to have outstanding at any time credit commitments thereto (including commitments in the form of borrowing commitments, commitments to issue letters of credit and bank overdraft line commitments), and Indebtedness resulting therefrom or otherwise, in an aggregate principal amount in excess of $105,000,000. 6.2 Limitation on Indebtedness. The Borrower shall not create, incur, assume or suffer to exist any Indebtedness, and shall not permit any of its Domestic Subsidiaries, QAPL or QIPL to create, incur, assume or suffer to exist any Indebtedness, except for: (a) Indebtedness created hereunder and under the other Loan Documents; (b) Indebtedness of the Borrower outstanding on the Closing Date and listed on Schedule 6.2; (c) Indebtedness (i) evidenced by performance bonds issued in the ordinary course of business or reimbursement obligations in respect thereof, provided that such Indebtedness, when combined with Indebtedness permitted by Section 6.2(h), does not exceed $5,000,000 in aggregate principal amount at any time outstanding, (ii) evidenced by a letter of credit facility related to insurance associated with claims for work-related injuries or (iii) for bank overdrafts incurred in the ordinary course of business that are promptly repaid; (d) trade credit incurred to acquire goods, supplies and services incurred in the ordinary and normal course of business; (e) Lease Expenses; (f) Indebtedness of the Borrower with respect to the Leasehold Improvement Loan; (g) Indebtedness of QAPL to the former shareholders of QIPL for the deferred purchase price for the acquisition of the shares of QIPL by QAPL, and Indebtedness of the Borrower in respect of its guaranty of such Indebtedness of QAPL; and (h) Indebtedness of the Borrower in addition to the foregoing, provided that such Indebtedness, when combined with Indebtedness permitted by Section 6.2(c)(i), does not exceed $5,000,000 in aggregate principal amount at any time outstanding. 6.3 Limitation on Liens. The Borrower shall not, and shall not permit any of its Domestic Subsidiaries, QAPL or QIPL to, create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues (including trademarks and copyrights), whether now owned or hereafter acquired, except for: -45- 51 (a) Liens created hereunder or under any of the other Loan Documents; (b) Liens existing on any Property at the time of its acquisition and not created in anticipation of such acquisition; (c) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower, its Domestic Subsidiaries, QAPL or QIPL, as the case may be, in conformity with GAAP or accounting principles generally accepted in Australia, as applicable; (d) Liens created by operation of law not securing the payment of Indebtedness for money borrowed or guaranteed, including carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 45 days or which are being contested in good faith by appropriate proceedings; (e) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (f) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, would not cause a Material Adverse Effect; (h) Liens in favor of the Leasehold Improvement Lender securing the Leasehold Improvement Loan, which Liens are subject to the terms of the Intercreditor Agreement; and (i) Liens securing Indebtedness incurred after the date hereof to purchase, or to finance the purchase of, fixed assets, provided that (i) any such Lien is limited to the fixed asset or assets acquired or financed, and any subsequent improvements thereto, and (ii) such Indebtedness is otherwise permitted under Section 6.2(h). 6.4 Limitation on Fundamental Changes. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), except as permitted by Section 5.4, or create or acquire any Subsidiary, or convey, sell, lease, assign, transfer or otherwise dispose of all or substantially all of its property, business or assets, except that the Borrower may consummate Acquisitions permitted by Section 6.7(d). 6.5 Limitation on Sale of Assets. The Borrower shall not, and shall not permit any of its Subsidiaries to, make any Asset Disposition unless (i) such Asset Disposition is for fair market value, (ii) the consideration for such Asset Disposition is all cash, (iii) no Default has occurred and is continuing or would result from such Asset Disposition and (iv) the -46- 52 consideration for such Asset Disposition, when aggregated with the consideration for all previous Asset Dispositions during the same calendar year, does not exceed $10,000,000. 6.6 Limitation on Dividends. The Borrower shall not, and shall not permit any of its Subsidiaries to, (a) if a corporation, declare or pay any dividend (other than dividends payable solely in common stock of the Borrower or its Subsidiaries) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or its Subsidiaries or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, and (b) if a partnership or a limited liability company, make any distribution with respect to the ownership interests therein, or, in either case, any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary (such declarations, payments, setting apart, purchases, redemptions, defeasance, retirements, acquisitions and distributions being herein called "Restricted Payments"); provided, however, that (i) the Borrower and its Subsidiaries shall be permitted to make Restricted Payments so long as no Default has occurred and is continuing (with the exception that redemptions shall not exceed the sum of $20,000,000 from the Closing Date to but excluding the Revolving Loan Commitment Expiration Date) and (ii) the Subsidiaries shall in any case be permitted to pay cash dividends to the Borrower. 6.7 Limitation on Investments, Loans and Advances. The Borrower shall not, and shall not permit any of its Subsidiaries to, make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in (any of the foregoing, an "investment"), any Person, or otherwise make any Acquisition, except for: (a) the Borrower's ownership interest in its Subsidiaries; (b) investments in marketable securities, liquid investments and other financial instruments that are acquired for investment purposes and may be readily sold or otherwise liquidated, that have a value which may be readily established and which are investment grade; (c) extensions of trade credit in the ordinary course of business; (d) Acquisitions of Persons or businesses in the same line of business as that described in Section 3.17, provided that (i) no Default has occurred and is continuing or would result from the consummation of such Acquisition (and the Borrower shall have delivered to the Agent a Covenant Compliance Certificate showing pro forma calculations assuming such Acquisition had been consummated), (ii) the aggregate Consideration therefor shall not exceed $10,000,000, (iii) the Agent shall have received, reviewed and approved all documents requested by the Agent to insure that the Lenders have a first priority security interest in, and assignment of, all personal property assets and interests acquired (excluding intellectual property), including consents of third parties if reasonably requested, and (iv) such Acquisition is not opposed by the Person to be, or whose business is to be, acquired; (e) investments existing on the Closing Date and listed on Schedule 6.7; -47- 53 (f) loans and advances to officers and employees of the Borrower or any Subsidiary, provided that such loans and advances do not exceed $1,000,000 in aggregate principal amount at any time outstanding; and (g) acquisition of all of the shares of capital stock of QIPL by QAPL. 6.8 Transactions with Affiliates. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any transaction, including any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate or with any Subsidiary that has not executed a Guarantee and Guarantor Collateral Documents, unless such transaction is in the ordinary course of the Borrower's or such Subsidiary's business and is upon terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person not an Affiliate or a Subsidiary. 6.9 Fiscal Year. The Borrower shall not permit its fiscal year or the fiscal year of any of its Subsidiaries to end on a day other than October 31. 6.10 Sale-Leaseback Transactions. The Borrower shall not, and shall not permit any of its Subsidiaries to, sell, assign or otherwise transfer any of its Properties, rights or assets (whether now owned or hereafter acquired) to any Person and thereafter directly or indirectly lease back the same or similar property for consideration exceeding $5,000,000 in the aggregate in any calendar year. 6.11 Unfunded Liabilities. The Borrower shall not permit unfunded liabilities for any and all Plans maintained for or covering employees of the Borrower or any Subsidiary to exceed $500,000 in the aggregate at any time. 6.12 Hedging Obligations. The Borrower shall not, and shall not permit any of its Subsidiaries to, enter into any Hedging Arrangement, except that the Borrower or any Subsidiary may enter into any Hedging Arrangement that (a) is of a non-speculative nature, (b) is for the purpose of hedging the Borrower's or such Subsidiary's reasonably estimated interest rate, foreign currency or commodity exposure and (c) in the case of the Borrower or any Domestic Subsidiary, is with a Lender. ARTICLE 7. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal on any Note when due, or the Borrower shall fail to pay any interest on any Note, any fee referred to in this Agreement or the letter referred to in Section 4.1(e) or any other amount payable hereunder when due; or (b) Any representation or warranty made or deemed made by any Obligor herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or -48- 54 (c) The Borrower shall default in the observance or performance of any agreement contained in Section 5.2(c), 5.6, 5.8 or 5.10 or in any provision of Article 6; or (d) Any Obligor shall default in the observance or performance of any other material agreement contained in this Agreement or the other Loan Documents (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after the earlier of (i) notice thereof from the Agent to the Borrower and (ii) actual knowledge thereof by a Responsible Officer of such Obligor; or (e) Any material provision of any Loan Document shall at any time for any reason be declared null and void, or the validity or enforceability of any Loan Document shall at any time be contested by any Obligor, or a proceeding shall be commenced by any Obligor, or by any Governmental Authority or other Person having jurisdiction over any Obligor, seeking to establish the invalidity or unenforceability thereof, or any Obligor shall deny that it has any liability or obligation purported to be created under any Loan Document; or (f) Any Obligor shall (i) default in any payment of principal or interest, regardless of the amount, due in respect of any (A) Indebtedness (other than the Notes), issued under the same indenture or other agreement, if the original principal amount of Indebtedness covered by such indenture or agreement is $750,000 or greater or (B) Guarantee Obligation with respect to an amount of $750,000 or greater, in either case beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness or Guarantee Obligation was created, whether or not such default has been waived by the holders of such Indebtedness or Guarantee Obligation; or (ii) default in the observance or performance of any other material agreement or condition relating to any such Indebtedness or Guarantee Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guarantee Obligation to become payable or such Indebtedness to be required to be defeased or purchased; or any "Event of Default" under the Term Loan Agreement (as defined in the Intercreditor Agreement) shall occur; provided, however, that any default by an Obligor under a Guarantee Obligation with respect to a real property lease shall not constitute a Default under this Section 7(f) if such Obligor is contesting the validity of such default in good faith by appropriate proceedings, such Obligor is maintaining reserves in conformity with GAAP with respect thereto and such default could not reasonably be expected to have a Material Adverse Effect; or (g) (i) Any Obligor shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or any Obligor shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Obligor any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or -49- 55 appointment or (B) remains undismissed, undischarged, unstayed or unbonded for a period of 60 days; or (iii) there shall be commenced against any Obligor any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any Obligor shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Obligor shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due or there shall be a general assignment for the benefit of creditors; or (h) (i) Any Person shall engage in any non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee would reasonably be expected to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA (other than a standard termination) or (v) the Borrower or any Commonly Controlled Entity would reasonably be expected to incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan; and in each case regarding clauses (i) through (v) above, such event or condition, together with all other such events or conditions, if any, would reasonably be expected to subject any Obligor to any tax, penalty or other liabilities in the aggregate to exceed $500,000; or (i) One or more judgments or decrees shall be entered against any Obligor involving in the aggregate a liability (not paid or fully covered by insurance) of $250,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days from the entry thereof or in any event five days before the date of any sale pursuant to such judgment or decree; or any non-monetary judgment or order shall be entered against any Obligor that is reasonably likely to have a Material Adverse Effect and either (i) enforcement proceedings shall have been commenced by any Person upon such judgment which has not been stayed pending appeal or (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (j) Any material provision of any Loan Document, after delivery thereof pursuant to the provisions hereof, shall, for any reason, cease to be valid or enforceable in accordance with its terms, or any security interest created under any Loan Document shall, for any reason, cease to be a valid and perfected first-priority Lien (except as permitted by Section 6.3) in any material portion of the Collateral, the Guarantor Collateral or the property purported to be covered thereby; or (k) Any event or condition shall occur which the Majority Lenders reasonably believe could have a Material Adverse Effect; -50- 56 then, and in any such event, (A) if such event is an Event of Default specified in paragraph (g) above, automatically the Revolving Loan Commitments and the commitment to issue Letters of Credit shall immediately terminate and the Loans made to the Borrower hereunder (with accrued interest thereon) and all other Obligations shall immediately become due and payable and, to the extent any Letters of Credit are then outstanding, the Borrower shall make a cash collateral deposit, to be held by the Agent as collateral under the Security Agreement, in the amount equal to the aggregate Letter of Credit Amount of such Letters of Credit and (B) if such event is any other Event of Default, with the consent of the Majority Lenders the Agent may, or upon the request of the Majority Lenders the Agent shall, take any or all of the following actions: (i) by notice to the Borrower declare the Revolving Loan Commitments and the commitment to issue Letters of Credit to be terminated forthwith, whereupon the Revolving Loan Commitments and the commitment to issue Letters of Credit shall immediately terminate; and (ii) by notice to the Borrower, declare the Loans (with accrued interest thereon) and all other Obligations under this Agreement and the Notes to be due and payable forthwith, whereupon (x) the same shall immediately become due and payable and (y) to the extent any Letters of Credit are then outstanding, the Borrower shall make a cash collateral deposit, to be held by the Agent as collateral under the Security Agreement, in an amount equal to the aggregate Letter of Credit Amount of the Letters of Credit outstanding. In all cases, with the consent of the Majority Lenders, the Agent may enforce any or all of the Liens and security interests and other rights and remedies created pursuant to any Loan Document or available at law or in equity. Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the Borrower. ARTICLE 8. THE AGENT 8.1 Appointment. Each Lender hereby irrevocably designates and appoints Union Bank of California, N.A. as Agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes Union Bank of California, N.A., as the Agent for such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 8.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 8.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any -51- 57 other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower, any Subsidiary or any other Obligor or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or the Notes or any other Loan Document or for any failure of the Borrower, any Subsidiary or any other Obligor to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower, any Subsidiary or any other Obligor. 8.4 Reliance by the Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including counsel to the Borrower), the Accountants and independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Lenders or all Lenders, as it deems appropriate, or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense (except to the extent incurred as a result of the Agent's gross negligence or willful misconduct) which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the Notes and the other Loan Documents in accordance with a request of the Majority Lenders or all Lenders, as may be required, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. 8.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default hereunder unless the Agent has received notice from a Lender or the Borrower referring to this Agreement, describing such Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall use its best efforts to give prompt notice thereof to the Lenders; provided, however, that no failure or delay by the Agent in giving such notice shall relieve any Lender of any obligation hereunder or give rise to any liability of the Agent. The Agent shall take such action with respect to such Default as shall be reasonably directed by the Majority Lenders or all Lenders as appropriate; provided, however, that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Lenders or as the Agent shall believe necessary to protect the Lenders' interests in the Collateral or the Guarantor Collateral. -52- 58 8.6 Non-Reliance on the Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of the Borrower, any Subsidiary or any other Obligor, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower, each Subsidiary and the other Obligors and made its own decision to make its Loans, and participate in Letters of Credit, hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower, its Subsidiaries and the other Obligors. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower, any Subsidiary or any other Obligor which may come into the possession of the Agent or any of its respective officers, directors, employees, agents, attorneys-in-fact or Affiliates. 8.7 Indemnification. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrower, its Subsidiaries or the other Obligors and without limiting the obligation of such Persons to do so), ratably according to the respective amounts of their Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs (including the allocated cost of internal counsel), expenses or disbursements of any kind whatsoever which may at any time (including at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent, in its capacity as Agent, but not as a Lender hereunder, in any way relating to or arising out of this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting from the Agent's gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Notes and all other amounts payable hereunder and the expiration of the Letters of Credit. 8.8 The Agent in Its Individual Capacity. The Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower, any Subsidiary and the other Obligors (including the extension of the Leasehold Improvement Loan to the Borrower) as though the Agent were not the Agent hereunder and under the other Loan Documents. With respect to the Agent, the Loans made or renewed and the Letters of Credit issued or participated in by the Agent, and any Note issued to the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and -53- 59 may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 8.9 Successor Agent. The Agent may resign as Agent upon 30 days' notice to the Lenders. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Majority Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall be approved by the Borrower (which consent shall not be unreasonably withheld), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent and the term "Agent" shall mean such successor agent, effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Notes. After any retiring Agent's resignation as Agent, the provisions of this Section shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. In addition, after the replacement of an Agent hereunder, the retiring Agent shall remain a party hereto and shall continue to have all the rights and obligations of an Agent under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. 8.10 Syndication Agent and Documentation Agent. Neither the Syndication Agent, in its capacity as such, nor the Documentation Agent, in its capacity as such, shall have any rights, powers, duties or obligations under this Agreement or any of the other Loan Documents. ARTICLE 9. MISCELLANEOUS 9.1 Amendments and Waivers. Neither this Agreement, any Note, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section. With the prior written consent of the Majority Lenders and the Borrower (and, in the case of any Loan Document other than this Agreement, the relevant Obligor), the Borrower may, from time to time, enter into written amendments, supplements or modifications hereto and to the Notes and the other Loan Documents for the purposes of adding any provisions to this Agreement or the Notes or the other Loan Documents or changing in any manner the rights of the Lenders, the Borrower or any other Obligor hereunder or thereunder or waiving, on such terms and conditions as may be specified in such instrument, any of the requirements of this Agreement or the Notes or the other Loan Documents or any Default and its consequences; provided, however, that no such waiver and no such amendment, supplement or modification shall (i) (a) reduce the amount or extend the maturity of any Note or any installment due thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce the amount or extend the time of payment of any fee, indemnity or reimbursement payable to any Lender hereunder, or change the amount of any Lender's Revolving Loan Commitment, or amend, modify or waive any provision of Section 2.5 or 2.6, in each case without the written consent of the Lender affected thereby; or (b) amend, modify or waive any provision of this Section 9.1 or reduce the percentage specified in or otherwise modify the definition of Majority Lenders, or consent to the assignment or transfer by any Obligor of any of its rights and obligations under this Agreement and the other Loan Documents (except as permitted under Section 6.4); or (c) release any Obligor from any liability under its respective Loan Documents; or (d) release any material portion of the Collateral or any material portion of -54- 60 the Guarantor Collateral, except for any Asset Disposition permitted by this Agreement or any other Loan Document; or (e) amend, modify or waive, directly or indirectly, any of the provisions of Section 2.1(e), 2.12, 2.13 or 7(g); or (f) amend, modify or waive, directly or indirectly, the definition of "Borrowing Base" in Section 1.1; (g) amend, modify or waive any provision of this Agreement requiring the consent or approval of all Lenders, in each case set forth in clauses (i)(b) through (i)(g) above without the written consent of all the Lenders; or (ii) change the amount of the Swing Line Commitment or amend, modify or waive any provision of Section 4.2 with respect to the making of a Swing Line Loan, without the written consent of the Swing Line Lender; or (iii) amend, modify or waive any provision of Article 8 without the written consent of the then Agent, or any provision affecting the rights and duties of the Agent as the issuer of Letters of Credit without the consent of the then Agent. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Borrower, the other Obligors, the Lenders, the Agent and all future holders of the Notes. In the case of any waiver, the Borrower, the other Obligors, the Lenders and the Agent shall be restored to their former position and rights hereunder and under the outstanding Notes and any other Loan Documents, and any Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default, or impair any right consequent thereon. 9.2 Notices. All notices, requests and demands or other communications to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or 3 days after being deposited in the United States mail, certified and postage prepaid and return receipt requested, or, in the case of telecopy notice, when received, in each case addressed as follows in the case of the Borrower and the Agent, and as set forth on the signature page hereto, or in the Assignment and Acceptance pursuant to which a Person becomes a party hereto, in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes: The Borrower: Quiksilver, Inc. 15202 Graham Street Huntington Beach, California 92649 Attention: Steven L. Brink Telecopy: (714) 889-2322 The Agent: Union Bank of California, N.A., as Agent 18300 Von Karman Avenue, Suite 310 Irvine, California 92612 Attention: Margaret Furbank Telecopy: (949) 553-7122 provided, however, that any notice, request or demand to or upon the Agent or the Lenders pursuant to Section 2.1, 2.2, 2.3, 2.5 or 2.7 shall not be effective until received. 9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and -55- 61 privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes. 9.5 Payment of Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Agent for all its reasonable costs and out-of-pocket expenses (including travel and other expenses incurred by it or its agents in connection with performing due diligence with regard hereto) incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the Notes and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including syndication efforts in connection with this Agreement, the reasonable fees and disbursements of counsel to the Agent (including the allocated costs of internal counsel to the Agent) and Field Exams, (b) to pay or reimburse the Agent and each Lender for all its reasonable costs and out-of-pocket expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the Notes, the other Loan Documents and any such other documents or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or any insolvency or bankruptcy proceeding, including reasonable fees and disbursements of legal counsel and financial advisors to the Agent and each Lender (including the allocated costs of internal counsel to the Agent), (c) to pay, indemnify and hold harmless each Lender and the Agent from any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the Notes, the other Loan Documents and any such other documents and (d) to pay, and indemnify and hold harmless each Lender and the Agent from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs (including the allocated cost of internal counsel and the reasonable legal fees and disbursements of outside counsel to the Lenders and the Agent), expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the Notes and the other Loan Documents, the Acquisitions or the use of the proceeds of the Loans or the Letters of Credit and any such other documents (all the foregoing, collectively, the "indemnified liabilities"), provided, however, that the Borrower shall have no obligation hereunder to the Agent or any Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Agent or such Lender. The agreements in this Section shall survive repayment of the Notes and all other amounts payable hereunder. The Agent and the Lenders agree to provide reasonable details and supporting information concerning any costs and expenses required to be paid by the Borrower pursuant to the terms hereof. 9.6 Successors and Assigns; Participations; Purchasing Lenders. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Notes and their respective successors -56- 62 and assigns, except that the Borrower may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its commercial banking or finance business and in accordance with applicable law, at any time sell to one or more lenders or financial institutions ("Participants") participating interests in any Loan owing to such Lender, any Letter of Credit participated in by such Lender, any Note held by such Lender, any Revolving Loan Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents; provided, however, that the holder of any such participation, other than an Affiliate of such Lender, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting the extension of the maturity of any portion of the principal amount of a Loan or Commitment, the expiration of a Letter of Credit or any portion of interest or fees related thereto allocated to such participation or a reduction of the principal amount or principal payment amount of or the rate of interest payable on the Loans or any fees related thereto or reduction of the amount to be reimbursed under any Letter of Credit, or a release of any Obligor or any substantial portion of the Collateral or the Guarantor Collateral or any increase in participation amounts. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Note and the participant in any such Letter of Credit for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. The Borrower agrees that if amounts outstanding under this Agreement and the Notes are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Note to the same extent as if the amount continuing of its participating interest were owing directly to it as a Lender under this Agreement or any Note; provided, however, that such Participant shall only be entitled to such right of setoff if it shall have agreed in the agreement pursuant to which it shall have acquired its participating interest to share with the Lenders the proceeds thereof as provided in Section 9.7. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.14, 2.15 and 2.16 with respect to its participation in the Revolving Loan Commitments and the Loans and the Letters of Credit outstanding from time to time; provided, however, that no Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its commercial banking or finance business and in accordance with applicable law, at any time sell to any of its Affiliates, to any Lender or any Affiliate thereof or to one or more additional lenders or financial institutions, which additional lenders or financial institutions shall be subject to the consent of the Borrower (such consent not to be unreasonably withheld and not to be required if a Default has occurred and is continuing) and the Agent (such consent not to be unreasonably withheld) ("Purchasing Lenders"), all or any part of its rights and obligations under this Agreement, the Notes and the other Loan Documents pursuant to an Assignment and Acceptance, executed by such Purchasing Lender and such transferor Lender and delivered to the Agent for its acceptance -57- 63 and recording in the Register (as defined in (d) below); provided, however, that any such sale must result in the Purchasing Lender having at least $10,000,000 in aggregate amount of obligations (or, if less, the entire remaining amount of the selling Lender's obligations) under this Agreement, the Notes and the other Loan Documents. Upon such execution, delivery, acceptance and recording, from and after the transfer effective date determined pursuant to such Assignment and Acceptance, (x) the Purchasing Lender thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Revolving Loan Commitment as set forth therein, and (y) the transferor Lender thereunder shall, to the extent of such assigned portion and as provided in such Assignment and Acceptance, be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all or the remaining portion of a transferor Lender's rights and obligations under this Agreement, such transferor Lender shall cease to be a party hereto). Such Assignment and Acceptance shall be deemed to amend this Agreement to the extent, and only to the extent, necessary to reflect the addition of such Purchasing Lender and the resulting adjustment of Revolving Loan Commitment Percentages arising from the purchase by such Purchasing Lender of all or a portion of the rights and obligations of such transferor Lender under this Agreement, the Notes and the other Loan Documents. On or prior to the transfer effective date determined pursuant to such Assignment and Acceptance, the Borrower, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note or Notes to the order of such Purchasing Lender in an amount equal to the Revolving Loan Commitments assumed by it pursuant to such Assignment and Acceptance, and if the transferor Lender has retained a Revolving Loan Commitment hereunder, new Notes to the order of the transferor Lender in an amount equal to the Revolving Loan Commitments retained by it hereunder. Such new Notes shall be dated the Closing Date and shall otherwise be in the form of the Notes replaced thereby. The Notes surrendered by the transferor Lender shall be returned by the Agent to the Borrower marked "canceled." (d) The Agent shall maintain at its address referred to in Section 9.2 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders and the Revolving Loan Commitments of, and principal amount of the Revolving Loans owing to, and, if applicable, the Letters of Credit participated in by, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as the owner of the Revolving Loans and the participant in the Letters of Credit, if applicable, recorded therein for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by a transferor Lender and Purchasing Lender (and, in the case of a Purchasing Lender that is not then a Lender or an Affiliate thereof, by the Borrower and the Agent) together with payment to the Agent (except in the case of a Lender assigning to its Affiliate) of a registration and processing fee of $3,000, the Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. -58- 64 (f) The Borrower authorizes each Lender to disclose to any Participant or Purchasing Lender (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning the Borrower and its Subsidiaries and Affiliates which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or any other Loan Document or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Subsidiaries and Affiliates prior to becoming a party to this Agreement. (g) If, pursuant to this Section, any interest in this Agreement, any Letter of Credit or any Note is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any state thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, (i) to represent to the transferor Lender and the Agent (for the benefit of the transferor Lender, the Agent and the Borrower) that under applicable law and treaties no taxes will be required to be withheld by the Agent, the Borrower or the transferor Lender with respect to any payments to be made to such Transferee in respect of the Revolving Loans or the Letters of Credit, (ii) to furnish to the transferor Lender, the Agent and the Borrower U.S. Internal Revenue Service Form W-9, W-8BEN or W-8ECI (as applicable to it) (wherein such Transferee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of the transferor Lender, the Agent and the Borrower) to provide the transferor Lender, the Agent and the Borrower a new Form W-9, W-8BEN or W-8ECI (as applicable to it) upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with applicable U.S. laws and regulations and amendments duly executed and completed by such Transferee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (h) Nothing herein shall prohibit any Lender from pledging or assigning any of its rights under its Notes, or, if applicable, its participation in any Letter of Credit, to any Federal Reserve Bank in accordance with applicable law. 9.7 Adjustments; Setoff. (a) If any Lender (a "benefited Lender") shall at any time receive any payment of all or part of its Revolving Loans, its participations in Letters of Credit, or interest thereon, or fees, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by setoff, pursuant to events or proceedings of the nature referred to in Section 7(g), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Revolving Loans, its participations in Letters of Credit, or interest thereon, or fees, such benefited Lender shall purchase for cash from the other Lenders such portion of each such other Lender's Revolving Loans, participations in Letters of Credit, or fees, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrower agrees that each Lender so purchasing a portion of another Lender's Revolving Loans or its participations in Letters of Credit may exercise all rights of payment (including rights of setoff) with respect to such portion as fully as if such Lender were the direct holder of such portion. -59- 65 (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, exercisable upon the occurrence and during the continuance of an Event of Default, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, to set off and appropriate and apply against the Obligations any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof or bank controlling such Lender to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such setoff and application. 9.8 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. 9.9 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.10 Integration. This Agreement represents the entire agreement of the Borrower, the Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 9.11 GOVERNING LAW. THIS AGREEMENT AND THE NOTES AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA (WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES). 9.12 Alternative Dispute Resolution. (a) Claims Subject to Judicial Reference; Selection of Referee. All Claims, including any and all questions of law or fact relating thereto, shall, at the written request of any Party, be determined by Reference. The Parties shall select a single neutral referee, who shall be a retired state of federal judge with at least five years of judicial experience in civil matters. In the event that the Parties cannot agree upon a referee, the referee shall be appointed by the court. The Parties shall equally bear the fees and expenses of the referee unless the referee otherwise provides in the statement of decision. (b) Waiver of Jury Trial. In connection with a Reference or any other action or proceeding, whether brought in state or federal court, the Parties hereby expressly, -60- 66 intentionally and deliberately waive any right they may otherwise have to trial by jury of any Claim. (c) Conduct of Reference. Except as provided in this Section 9.12, the Reference shall be conducted pursuant to Applicable State Law. The referee shall determine all issues relating to the applicability, interpretation, legality and enforceability of this Section 9.12. (d) Provisional Remedies, Self-Help and Foreclosure. No provision of this Section 9.12 shall limit the right of any party to (i) exercise self-help remedies including setoff, (ii) foreclose against or sell any Collateral or Guarantor Collateral, by power of sale or otherwise or (iii) obtain or oppose provisional or ancillary remedies from a court of competent jurisdiction before, after or during the pendency of the Reference. The exercise of, or opposition to, any such remedy does not waive the right of any Party to Reference pursuant to this Section 9.12. (e) Limitation on Damages. In the event that punitive damages are permitted under Applicable State Law, the amount thereof shall not exceed a sum equal to three times the amount of actual damages as determined by the referee. (f) Severability. In the event that any provision of this Section 9.12 is found to be illegal or unenforceable, the remainder of this Section 9.12 shall remain in full force and effect. (g) Miscellaneous. In the event that multiple Claims are asserted, some of which are found not subject to this Section 9.12, the Parties agree to stay the proceedings of the Claims not subject to this Section 9.12 until all other Claims are resolved in accordance with this Section. In the event that Claims are asserted against multiple parties, some of whom are not subject to this Section, the Parties agree to sever the Claims subject to this Section 9.12 and resolve them in accordance with this Section 9.12. In the event of any challenge to the legality or enforceability of this Section 9.12, the prevailing Party shall be entitled to recover the costs and expenses, including reasonable attorneys' fees, incurred by it in connection therewith. Applicable State Law shall govern the interpretation of this Section 9.12. (h) Defined Terms. As used in this Section 9.12, the following terms shall have the respective meanings set forth below: "Applicable State Law": the law of the State of California; provided, however, that if any Party seeks to (i) exercise self-help remedies, including setoff, (ii) foreclose against or sell any Collateral or Guarantor Collateral, by power of sale or otherwise or (iii) obtain or oppose provisional or ancillary remedies from a court of competent jurisdiction before, after or during the pendency of the Reference, the law of the state where such Collateral or Guarantor Collateral, as the case may be, is located shall govern the exercise of or opposition to such rights and remedies. "Claim": any claim, cause of action, action, dispute or controversy between or among the Parties, whether sounding in contract, tort or otherwise, which arises out of or relates to: (i) any of the Loan Documents; (ii) any negotiations or communications relating to any of the Loan Documents, whether or not incorporated into the Loan Documents or any indebtedness evidenced thereby; or (iii) any alleged agreements, promises, representations or transactions in connection therewith. -61- 67 "Party": any Obligor, any Lender or the Agent. "Reference": a judicial reference conducted pursuant to this Section 9.12 in accordance with Applicable State Law, as in effect at the time the referee is selected pursuant to Section 9.12(a). 9.13 Acknowledgements. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the Notes and the other Loan Documents; (b) neither the Agent nor any Lender has any fiduciary relationship to the Borrower solely by virtue of any of the Loan Documents, and the relationship pursuant to the Loan Documents between the Agent and the Lenders, on one hand, and the Borrower on the other hand, is solely that of creditor and debtor; and (c) no joint venture exists among the Lenders or among the Borrower, on one hand and the Lenders, on the other hand. 9.14 Intercreditor Agreement. By executing this Agreement as a Lender, or by becoming a Lender hereunder pursuant to an Assignment and Acceptance, each Lender hereby agrees to the terms of the Intercreditor Agreement, acknowledges that certain of its rights hereunder shall be subject thereto, and consents to the execution thereof by the Agent on behalf of such Lender. 9.15 Headings. Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 9.16 Copies of Certificates, Etc. Whenever the Borrower is required to deliver notices, certificates, opinions, statements or other information hereunder to the Agent for delivery to any Lender (including under Article 4), it shall do so in such number of copies as the Agent shall reasonably specify. 9.17 Confidentiality. The Agent and the Lenders shall take normal and reasonable precautions to maintain the confidentiality of all non-public information obtained pursuant to the requirements of this Agreement which has been identified as such by the Borrower, but may, in any event, make disclosures (i) reasonably required by any bona fide transferee, assignee or participant in connection with the contemplated transfer or assignment of any Revolving Loan Commitments or Revolving Loans or participations therein or participations in Letters of Credit or (ii) as required or requested by any governmental agency or representative thereof or as required pursuant to legal process or (iii) to its attorneys and accountants or (iv) as required by law or (v) in connection with litigation involving any Lender, provided that (a) such transferee, assignee or participant agrees to comply with the provisions of this Section 9.17 unless specifically prohibited by applicable law or court order and (b) in no event shall any Lender be obligated or required to return any materials furnished by the Borrower or the Subsidiary. 9.18 Amendment and Restatement. -62- 68 (a) This Agreement is an amendment and restatement of the Old Credit Agreement. On and after the effective date of this Agreement, (i) each reference in the other Loan Documents to "the Credit Agreement," "thereunder," "thereof," "therein" or any other expression of like import referring to the Old Credit Agreement shall mean and be a reference to this Agreement and (ii) all "Loans" (including "Interest Periods" of outstanding "LIBOR Loans"), "Letters of Credit" and amounts outstanding under the Old Credit Agreement shall be deemed to be Loans, Letters of Credit and amounts outstanding under this Agreement. (b) Except as the Old Credit Agreement is amended and restated herein and except for the replacement of the "Notes" (other than the "Swing Line Note") under the Old Credit Agreement with the Notes hereunder, the 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 and all of the Collateral described therein do and shall continue to secure the payment of all of the Obligations. (c) The execution, delivery and effectiveness of this Agreement 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. -63- 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. BORROWER QUIKSILVER, INC. By: ________________________________________ Name: Steven L. Brink Title: Chief Financial Officer AGENT UNION BANK OF CALIFORNIA, N.A., as Agent By: ________________________________________ Name: ______________________________________ Title: _____________________________________ S-1 70 LENDERS UNION BANK OF CALIFORNIA, N.A., as a Lender By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Revolving Loan Commitment: $26,400,000 (Swing Line Commitment: $ 5,000,000) Term Loan: $ 6,600,000 Address for Notices (a) For Credit 18300 Von Karman Avenue, Suite 310 Irvine, California 92612 Attention: Margaret Furbank Telephone: (949) 553-6853 Facsimile (949) 553-7122 (b) For Operations 1980 Saturn Street, Monterey Park, California 91755 Attention: Ruby Gonzales Telephone: (323) 720-7055 Facsimile: (323) 724-6198 Approved Lending Offices Applicable Lending Office for Base Rate Loans: 18300 Von Karman Avenue, Suite 310 Irvine, California 92612 Applicable Lending Office for LIBOR Loans: 18300 Von Karman Avenue, Suite 310 Irvine, California 92612 Applicable Lending Office for Participations in Letters of Credit: 1980 Saturn Street Monterey Park, California 91755 S-2 71 THE CHASE MANHATTAN BANK, as a Lender By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Revolving Loan Commitment: $17,600,000 Term Loan: $ 4,400,000 Address for Notices (a) For Credit 1375 Broadway, 8th Floor New York, New York 10018 Attention: Robbie Weissenberg Telephone: (212) 827-4447 Facsimile: (212) 827-4497 (b) For Operations (Other Than Letters of Credit) 1375 Broadway, 8th Floor New York, New York 10018 Attention: Millie Nogueras Telephone: (212) 827-4437 Facsimile: (212) 827-4479 (c) For Letters of Credit Global Trade Services 4 Chase MetroTech Center 8 Brooklyn, New York 11245 Attention: Mildred Bowens Telephone: (718) 242-4907 Facsimile: (718) 242-6535 Approved Lending Offices Applicable Lending Office for Base Rate Loans: 1375 Broadway, 8th Floor New York, New York 10018 Applicable Lending Office for LIBOR Loans: 1375 Broadway, 8th Floor New York, New York 10018 S-3 72 Applicable Lending Office for Participations in Letters of Credit: Global Trade Services 4 Chase MetroTech Center 8 Brooklyn, New York 11245 S-4 73 FLEET NATIONAL BANK By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Revolving Loan Commitment: $17,600,000 Term Loan: $ 4,400,000 Address for Notices (a) For Credit 150 Federal Street, MADE 10008F Boston, Massachusetts 02110 Attention: Stephen J. Garvin, Director Telephone: (617) 434-9399 Facsimile: (617) 434-6685 (b) For Operations One Federal Street Boston, Massachusetts 02110 Attention: Dwayne Nelson Telephone: (617) 346-4223 Facsimile: (617) 346-0597 Approved Lending Offices Applicable Lending Office for Base Rate Loans: One Federal Street Boston, Massachusetts 02110 Applicable Lending Office for LIBOR Loans: One Federal Street Boston, Massachusetts 02110 Applicable Lending Office for Participations in Letters of Credit: One Federal Street Boston, Massachusetts 02110 S-5 74 SUNTRUST BANK By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Revolving Loan Commitment: $14,000,000 Term Loan: $ 3,500,000 Address for Notices (a) For Credit 303 Peachtree Street, 3rd Floor Mail Code 1904 Atlanta, Georgia 30308 Attention: John D'Amico Telephone: (404) 658-4110 Facsimile: (404) 575-2594 (a) For Operations P.O. Box 4418 Atlanta, Georgia 30302 Attention: Sheryl Simmons Telephone: (404) 658-4909 Facsimile: (404) 230-1940 Approved Lending Offices Applicable Lending Office for Base Rate Loans: 303 Peachtree Street, 3rd Floor Atlanta Georgia 30308 Applicable Lending Office for LIBOR Loans: 303 Peachtree Street, 3rd Floor Atlanta Georgia 30308 Applicable Lending Office for Participations in Letters of Credit: 303 Peachtree Street, 3rd Floor Atlanta Georgia 30308 S-6 75 U.S. BANK NATIONAL ASSOCIATION By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Revolving Loan Commitment: $10,400,000 Term Loan: $ 2,600,000 Address for Notices (a) For Credit 4100 Newport Place Newport Beach, California 92660 Attention: Kurt Mair Telephone: (949) 863-2433 Facsimile: (949) 863-2335 (b) For Operations 4100 Newport Place Newport Beach, California 92660 Attention: Patti Brant Telephone: (949) 863-2470 Facsimile: (949) 863-2335 Approved Lending Offices Applicable Lending Office for Base Rate Loans: 4100 Newport Place Newport Beach, California 92660 Applicable Lending Office for LIBOR Loans: 4100 Newport Place Newport Beach, California 92660 Applicable Lending Office for Participations in Letters of Credit: 4100 Newport Place Newport Beach, California 92660 S-7 76 ISRAEL DISCOUNT BANK OF NEW YORK By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Revolving Loan Commitment: $8,000,000 Term Loan: $2,000,000 Address for Notices (a) For Credit 206 North Beverly Drive Beverly Hills, California 90210 Attention: Eileen Lewis Telephone: (310) 860-6332 Facsimile: (310) 859-1021 (b) For Operations 206 North Beverly Drive Beverly Hills, California 90210 Attention: Claudia Ryan Telephone: (310) 860-6328 Facsimile: (310) 859-1021 Approved Lending Offices Applicable Lending Office for Base Rate Loans: 206 North Beverly Drive Beverly Hills, California 90210 Applicable Lending Office for LIBOR Loans: 206 North Beverly Drive Beverly Hills, California 90210 Applicable Lending Office for Participations in Letters of Credit: 206 North Beverly Drive Beverly Hills, California 90210 S-8 77 PACIFIC CENTURY BANK, N.A. By: ________________________________________ Name: ______________________________________ Title: _____________________________________ Revolving Loan Commitment: $6,000,000 Term Loan: $1,500,000 Address for Notices (a) For Credit 16030 Ventura Boulevard Encino, California 91436 Attention: Jill Schuberth Telephone: (818) 379-1286 or 1252 Facsimile: (818) 379-1620 (b) For Operations (Other Than Letters of Credit) 2633 Cherry Avenue Signal Hill, California 90806 Attention: Simin Saadati Telephone: (562) 988-9605 Facsimile: (562) 426-9170 (c) For Letters of Credit 2633 Cherry Avenue Signal Hill, California 90806 Attention: Jacques Naffaa Telephone: (562) 988-9861 Facsimile: (562) 426-1897 Approved Lending Offices Applicable Lending Office for Base Rate Loans: 2633 Cherry Avenue Signal Hill, California 90806 Applicable Lending Office for LIBOR Loans: 2633 Cherry Avenue Signal Hill, California 90806 S-9 78 Applicable Lending Office for Participations in Letters of Credit: 2633 Cherry Avenue Signal Hill, California 90806 S-10 79 SCHEDULE 2.3 CERTAIN FEES APPLICABLE TO COMMERCIAL LETTERS OF CREDIT Issuance of Commercial Letters of Credit: A fee equal to the greater of (i) 1/12% of the initial Letter of Credit Amount of the Letter of Credit and (ii) $75, payable upon issuance thereof. Amendment of Commercial Letters of Credit: A fee equal to the greater of (i) 1/12% of the Letter of Credit Amount of the Letter of Credit at the time of amendment and (ii) $60, payable upon each amendment thereof Negotiation of Commercial Letters of Credit: A fee equal to the greater of (i) 1/8% of the amount of the Letter of Credit negotiated and (ii) $80, payable upon such negotiation 80 SCHEDULE 3.1 FOREIGN QUALIFICATION JURISDICTIONS None 81 SCHEDULE 3.5A LIENS AGAINST ASSETS OF NA PALI France Banque Nationale de Paris Societe Generale Credit Agricole Banque Populaire du Sud Ouest Natexis Indosuez Bami Ste Generale Champs Elysee Ste Generale Rivoli Italy Credito Italiano, BPCI Holland ING England Barclays Bank Spain Bankinter Germany Dresdner Bank 82 SCHEDULE 3.5B OPERATING NAMES/TRADE NAMES None 83 SCHEDULE 3.7 LITIGATION None 84 SCHEDULE 3.19 SUBSIDIARIES Domestic Subsidiaries QS Retail, Inc. Mervin Manufacturing, Inc. Mt. Waimea, Inc. Quiksilver Wetsuits, Inc. Hawk Designs, Inc. Foreign Subsidiaries Quiksilver Australia Pty Ltd Quiksilver International Pty Ltd Pavilion Pty Ltd Na Pali S.A.S. Freestyle S.A. Kokolo SARL Emerald Coast Europe Infoborn SARL Cariboo, Eurl Lanai Gen X Publishing Ltd. Molokai Ltd. Emerald Coast Limited Kauai GmbH Sumbawa SL Haapiti, SRL 85 SCHEDULE 6.2 EXISTING INDEBTEDNESS None 86 SCHEDULE 6.7 EXISTING INVESTMENTS None EX-10.3 3 a68848ex10-3.txt EXHIBIT 10.3 1 EXHIBIT 10.3 October 12, 2000 Union Bank of California, N.A. 18300 Von Karman Avenue, Suite 310 Irvine, California, 92612 Attention: Margaret Furbank Vice President Re: Second Amendment to Term Loan Agreement Ladies and Gentlemen: We refer to the Term Loan Agreement dated as of April 25, 2000 between Quiksilver, Inc. (the "Borrower") and Union Bank of California, N.A. (the "Lender"), as amended by the First Amendment to Term Loan Agreement dated July 18, 2000 (said Agreement, as so amended, herein called the "Loan Agreement"). Terms defined in the Loan Agreement and not otherwise defined herein have the same respective meanings when used herein, and the rules of interpretation set forth in Section 1.2 of the Loan Agreement are incorporated herein by reference. 1. Effective as of the date of this letter amendment but subject to the terms and conditions hereof, the Loan Agreement is hereby amended as set forth below. (a) Section 1.1 of the Loan Agreement is amended by adding the following defined terms in appropriate alphabetical order: "`Debt Offering': the issuance or sale of any debt securities by the Borrower or any Domestic Subsidiary." "`Equity Offering': the sale or issuance (or reissuance) by the Borrower or any Domestic Subsidiary of any equity interests or beneficial interests (common stock, preferred stock, partnership interests, member interests or otherwise) or any options, warrants, convertible securities or other rights to purchase such equity interests or beneficial interests; provided, however, that the term `Equity Offering' shall not include any such sale or issuance (or reissuance) solely to officers, employees, directors and/or consultants of the Borrower and/or any Subsidiary pursuant to one or more employee stock option or stock purchase plans." 2 Union Bank of California, N.A. October 12, 2000 Page 2 "`Field Exam': an examination of the Borrower's books, records and accounting procedures conducted by a third-party examiner selected by the Lender." "`Net Proceeds': With respect to any Equity Offering or Debt Offering by the Borrower or any Domestic Subsidiary, the net amount equal to the aggregate amount received in cash (including any cash received by way of deferred payment pursuant to a note receivable, other noncash consideration or otherwise, but only as and when such cash is so received) in connection with such Equity Offering or Debt Offering, minus the reasonable fees, commissions and other out-of-pocket expenses incurred by the Borrower or such Domestic Subsidiary, as applicable, in connection with such Equity Offering or Debt Offering (other than amounts payable to Affiliates of the Person making such Equity Offering or Debt Offering)." "`QAPL': Quiksilver Australia Pty Ltd, a corporation organized under the laws of the State of Victoria, Australia." "`QIPL': Quiksilver International Pty Ltd, a corporation organized under the laws of the State of Victoria, Australia." (b) The definitions of "EBITDA," "Indebtedness," "Interest Expense," "Na Pali," "Revolving Loan Facility" and "Term Loan Maturity Date" in Section 1.1 of the Loan Agreement are amended in full to read as follows: "`EBITDA': for the Borrower and its Subsidiaries on a consolidated basis, for the fiscal quarter most recently ended and the immediately preceding three fiscal quarters, Net Income after eliminating extraordinary gains and losses, plus (i) provisions for income taxes, (ii) depreciation and amortization and (iii) Interest Expense; provided, however, that calculation of EBITDA shall include the foregoing with respect to QIPL on a historical basis to the extent that financial information supporting the same is provided by the Borrower to the Lender and agreed to by the Lender in the exercise of its reasonable discretion." "`Indebtedness': of any Person, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (including, in the case of the Borrower and its Subsidiaries, the deferred purchase price payable by QAPL to the former shareholders of QIPL for the acquisition of the stock of QIPL by QAPL), (ii) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (iii) all 3 Union Bank of California, N.A. October 12, 2000 Page 3 indebtedness created or arising under any conditional-sale or other title-retention agreement with respect to property acquired by such Person, (iv) all Capitalized Lease Obligations of such Person, (v) all Hedging Obligations of such Person, (vi) all obligations, contingent or otherwise, of such Person under acceptance, letter of credit, airway release, steamship guaranty or similar facilities, (vii) all Guarantee Obligations of such Person in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to secure a credit against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (i), (ii), (iii), (iv), (v) or (vi) above and (viii) all liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA." "`Interest Expense': as of any date, for the fiscal quarter most recently ended and the immediately preceding three fiscal quarters, the difference between (a) the sum of (i) the amount of all interest on Funded Debt which was paid, payable and/or accrued for such period and (ii) all commitment, standby letter of credit, commercial letter of credit or line of credit fees paid, payable and/or accrued for such period to any lender in exchange for such lender's commitment to lend and (b) the amount of all noncash interest expense incurred by the Borrower and its Subsidiaries in connection with the Borrower's acquisition of QIPL through QAPL." "`Na Pali': Na Pali S.A.S., a French corporation and a Subsidiary of the Borrower." "`Revolving Loan Facility': the revolving credit and term loan facility in the maximum principal amount of $125,000,000 made available to the Borrower pursuant to the Revolving Credit and Term Loan Agreement dated as of October 6, 2000 among the Borrower, the several banks and other financial institutions from time to time parties thereto, Union Bank of California, N.A., as administrative agent and co-lead arranger, The Chase Manhattan Bank, as syndication agent and co-lead arranger, and Fleet National Bank, as documentation agent." "`Term Loan Maturity Date': October 29, 2004 or such earlier date as the Term Loan shall become due and payable (whether by acceleration or otherwise)." (c) Section 2.1(c) of the Loan Agreement is amended in full to read as follows: 4 Union Bank of California, N.A. October 12, 2000 Page 4 "(c) The Borrower shall repay the principal of the Term Loan in (i) fifty-four monthly installments of $102,500 each, payable on the first Business Day of each month, commencing on May 1, 2000, and (ii) a final installment in the amount of all principal of the Term Loan outstanding on the Term Loan Maturity Date, payable on the Term Loan Maturity Date. No amount repaid hereunder shall be available for reborrowing." (d) Section 2.2 of the Loan Agreement is amended in full to read as follows: "2.2 Prepayments. (a) The Borrower may, subject to Section 2.12, prepay the Term Loan in whole or in part, without premium or penalty, provided the Borrower pays to the Lender any additional amount due to the Lender under any Interest Rate Agreement, upon at least three Business Days' irrevocable written notice from the Borrower to the Lender specifying the date and amount of prepayment. If any such notice is given, the amount specified in such notice shall be due and payable by the Borrower on the date specified therein, together with accrued interest to such date on the amount prepaid. Partial prepayments of the Term Loan shall be in the minimum principal amount of $100,000. No amount prepaid hereunder shall be available for reborrowing. (b) On the day of receipt by the Borrower or any of its Domestic Subsidiaries of any Net Proceeds with respect to an Equity Offering, the Borrower shall prepay the Term Loan and the `Term Loans' under the Revolving Credit Facility pro rata in the aggregate amount equal to 100% of such Net Proceeds. On or prior to the date of any such Equity Offering, the Borrower will provide to the Lender the calculations used by the Borrower in determining the amount of any such prepayment under this Section 2.2(b). (c) On the day of receipt by the Borrower or any of its Domestic Subsidiaries of any Net Proceeds with respect to a Debt Offering (which Debt Offering must be permitted by Section 6.2 or otherwise consented to by the Lender in its sole discretion), the Borrower shall prepay the Term Loan and the `Term Loans' under the Revolving Credit Facility pro rata in the aggregate amount equal to 100% of such Net Proceeds. On or prior to the date of any such Debt Offering, the Borrower will provide to the Lender the calculations used by the Borrower in determining the amount of any such prepayment under this Section 2.2(c). 5 Union Bank of California, N.A. October 12, 2000 Page 5 (d) Each prepayment pursuant to this Section 2.2 shall be accompanied by payment in full of all accrued interest thereon to and including the date of such prepayment, together with any additional amounts owing pursuant to Section 2.12." (e) Sections 5.1(a) and (b) of the Loan Agreement are amended in full to read as follows: "(a) Within 105 days after the end of each fiscal year, the Borrower shall deliver to the Lender a complete set of audited annual consolidated financial statements of the Borrower and unaudited consolidating financial statements with respect to the Borrower, each Domestic Subsidiary (to the extent included in the Borrower's consolidating financial statements before October 6, 2000), each Material Domestic Subsidiary, QAPL, Na Pali and each other Material Foreign Subsidiary, including a balance sheet, an income statement and a cash flow statement (with accompanying notes and schedules) and a capital expenditure schedule for such fiscal year segmented by domestic and foreign operations. Such financial statements (i) must be prepared in accordance with GAAP consistently applied and (ii) must be certified without qualification by the Accountants. Together with the audited financial statements, the Lender must also receive (A) a certificate signed by the Accountants, at the time of the completion of the annual audit, stating that the financial statements fairly present the consolidated financial condition of the Borrower as of the date thereof and for the periods covered thereby, (B) a certificate executed by the Chief Financial Officer of the Borrower certifying that the financial statements fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and for the period covered thereby and that as of the date of such certificate such officer has obtained no knowledge of any Default except as specified in such certificate and (C) a Covenant Compliance Certificate. (b) Within 60 days after the end of each of the Borrower's first three fiscal quarters, the Borrower shall deliver to the Lender the unaudited quarterly consolidated financial statements of the Borrower and unaudited consolidating financial statements with respect to the Borrower, each Domestic Subsidiary (to the extent included in the Borrower's consolidating financial statements before October 6, 2000), each Material Domestic Subsidiary, QAPL, Na Pali and each other Material Foreign Subsidiary, including a balance sheet, an income statement and a cash flow statement (with accompanying notes and schedules). Such financial statements shall be prepared in accordance with GAAP consistently applied. Together with the quarterly financial statements, 6 Union Bank of California, N.A. October 12, 2000 Page 6 the Lender must also receive (i) a certificate executed by the Chief Financial Officer of the Borrower (A) stating that the financial statements fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and for the period covered thereby and (B) certifying that as of the date of such certificate such officer has obtained no knowledge of any Default except as specified in such certificate and (ii) a Covenant Compliance Certificate." (f) Section 5.6 of the Loan Agreement is amended by adding ", including for the purpose of conducting Field Exams, which shall be conducted at least annually" immediately before the period at the end of the section. (g) Section 6.1(a) of the Loan Agreement is amended by deleting the number "1.75" therein and substituting the number "2.00." (h) Section 6.1(d) of the Loan Agreement is amended by deleting the amount "$95,000,000" therein and substituting the amount "$105,000,000." (i) Section 6.2 of the Loan Agreement is amended in full to read as follows: "6.2 Limitation on Indebtedness. The Borrower shall not create, incur, assume or suffer to exist any Indebtedness, and shall not permit any of its Domestic Subsidiaries, QAPL or QIPL to create, incur, assume or suffer to exist any Indebtedness, except for: (a) Indebtedness created hereunder and under the other Loan Documents; (b) Indebtedness of the Borrower outstanding on the Closing Date and listed on Schedule 6.2; (c) Indebtedness (i) evidenced by performance bonds issued in the ordinary course of business or reimbursement obligations in respect thereof, provided that such Indebtedness, when combined with Indebtedness permitted by Section 6.2(h), does not exceed $5,000,000 in aggregate principal amount at any time outstanding, (ii) evidenced by a letter of credit facility related to insurance associated with claims for work-related injuries or (iii) for bank overdrafts incurred in the ordinary course of business that are promptly repaid; 7 Union Bank of California, N.A. October 12, 2000 Page 7 (d) trade credit incurred to acquire goods, supplies and services incurred in the ordinary and normal course of business; (e) Lease Expenses; (f) Indebtedness of the Borrower and its Domestic Subsidiaries with respect to the Revolving Loan Facility; (g) Indebtedness of QAPL to the former shareholders of QIPL for the deferred purchase price for the acquisition of the shares of QIPL by QAPL, and Indebtedness of the Borrower in respect of its guaranty of such Indebtedness of QAPL; and (h) Indebtedness of the Borrower in addition to the foregoing, provided that such Indebtedness, when combined with Indebtedness permitted by Section 6.2(c)(i), does not exceed $5,000,000 in aggregate principal amount at any time outstanding." (j) Section 6.3 of the Loan Agreement is amended by (i) in the first clause of that section, inserting ", QAPL or QIPL" immediately after "Domestic Subsidiaries," (ii) in the same clause, inserting "(including trademarks and copyrights)" immediately after the word "revenues," (iii) in subsection (i) of that section, deleting "6.2(g)" and substituting "6.2(h)" and (iv) restating subsection (c) of that section to read as follows: "(c) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Borrower, its Domestic Subsidiaries, QAPL or QIPL, as the case may be, in conformity with GAAP or accounting principles generally accepted in Australia, as applicable;." (k) Section 6.7 of the Loan Agreement is amended by (i) in subsection (d) of that section, deleting "; and" at the end of clause (i) and substituting a comma, (ii) in the same subsection, adding "and (iii) such Acquisition is not opposed by the Person to be, or whose business is to be, acquired" immediately before the semicolon at the end of the subsection, (iii) in subsection (f) of that section, deleting the period and substituting "; and" and (iv) at the end of that section, adding the following new subsection (g): "(g) acquisition of all of the shares of capital stock of QIPL by QAPL." (l) Section 8.2 of the Loan Agreement is amended by deleting the 8 Union Bank of California, N.A. October 12, 2000 Page 8 information for the Borrower and the Lender regarding where notices and other communications should be sent and substituting the following: "The Borrower: Quiksilver, Inc. 15202 Graham Street Huntington Beach, California 92649 Attention: Steven L. Brink Telecopy: (714) 889-2322 The Lender: Union Bank of California, N.A. 18300 Von Karman Avenue, Suite 310 Irvine, California 92612 Attention: Margaret Furbank Telecopy: (949) 553-7122." (m) Section 8.5(a) of the Loan Agreement is amended by inserting "and Field Exams" immediately before the comma at the end of the section. (n) The signature page of the Loan Agreement is amended by deleting the information for the Lender regarding address for notices and applicable lending offices and substituting the following: "Address for Notices (a) For Credit: 18300 Von Karman Avenue, Suite 310 Irvine, California 92612 Attention: Margaret Furbank Telephone: (949) 553-6853 Facsimile: (949) 553-7122 (b) For Operations: 1980 Saturn Street, Monterey Park, California 91755 Attention: Ruby Gonzales Telephone: (323) 720-7055 Facsimile: (323) 724-6198 9 Union Bank of California, N.A. October 12, 2000 Page 9 Applicable Lending Office 18300 Von Karman Avenue, Suite 310 Irvine, California 92612." (o) Schedule 3.19 of the Loan Agreement is amended by adding the following entities to the list of Foreign Subsidiaries: Quiksilver Australia Pty Ltd, Quiksilver International Pty Ltd, Pavilion Pty Ltd and Freestyle S.A. 2. The Borrower hereby represents and warrants for the benefit of the Lender that (a) the representations and warranties contained in the Loan Documents are correct in all material respects on and as of the date of this letter amendment, before and after giving effect to the same, as if made on and as of such date and (b) no event has occurred and is continuing, or would result from the effectiveness of this letter amendment, that constitutes a Default. 3. This letter amendment shall become effective when the Lender has received all of the following in form and substance satisfactory to the Lender and in the number of originals requested by the Lender: (a) a UCC-1 financing statement for filing in the State of Delaware; (b) payment of all fees, costs and expenses, including legal fees (if requested by the Lender), accrued and unpaid and otherwise due and payable on or before the date hereof by the Borrower in connection with the Loan Agreement or this letter amendment; (c) a certificate, dated a recent date, of the Secretary of State of the state of formation of the Borrower and each other jurisdiction where the Borrower is required to be qualified to do business under such jurisdiction's law, certifying as to the existence and good standing of, and the payment of taxes by, the Borrower in such state; (d) such other approvals, opinions, evidence and documents as the Lender may reasonably request. 4. On and after the effective date of this letter amendment, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Loan Agreement, and each reference in the other Loan Documents to "the Loan Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Loan Agreement, shall mean and be a reference to the Loan Agreement as amended by this letter amendment. The Loan Agreement, as amended by this letter amendment, is and 10 Union Bank of California, N.A. October 12, 2000 Page 10 shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. 5. This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. 6. THIS LETTER AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REFERENCE TO THE CHOICE-OF-LAW PRINCIPLES THEREOF. Very truly yours, QUIKSILVER, INC. By: _______________________________________ Name: _____________________________________ Title: ____________________________________ Agreed as of the date first written above: UNION BANK OF CALIFORNIA, N.A. By: _______________________________________ Name: _____________________________________ Title: ____________________________________ EX-10.10 4 a68848ex10-10.txt EXHIBIT 10.10 1 EXHIBIT 10.10 QUIKSILVER, INC. 2000 STOCK INCENTIVE PLAN ARTICLE ONE GENERAL PROVISIONS 1.1 PURPOSE OF THE PLAN This 2000 Stock Incentive Plan is intended to promote the interests of Quiksilver, Inc., a Delaware corporation, by providing eligible persons in the Corporation's service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in such service. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. 1.2 STRUCTURE OF THE PLAN A. The Plan shall be divided into four separate equity programs: - the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, - the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants, - the Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive option grants at designated intervals over their period of continued Board service, and - the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special stock option grant. B. The provisions of Articles One and Six shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. 1.3 ADMINISTRATION OF THE PLAN A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant Program with respect to Section 16 Insiders. Administration of the Discretionary Option Grant Program with respect to all other persons eligible to participate in that program may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer that 2 program with respect to all such persons. However, any discretionary option grants for members of the Primary Committee shall be made by a disinterested majority of the Board. B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant Program and to make such determinations under, and issue such interpretations of, the provisions of that program and any outstanding options thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant Program under its jurisdiction or any option or stock issuance thereunder. D. The Primary Committee shall have the sole and exclusive authority to determine which Section 16 Insiders and other highly compensated Employees shall be eligible for participation in the Salary Investment Option Grant Program for one or more calendar years. However, all option grants under the Salary Investment Option Grant Program shall be made in accordance with the express terms of that program, and the Primary Committee shall not exercise any discretionary functions with respect to the option grants made under that program. E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. F. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of those programs, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants made under those programs. 1.4 ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant Program are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and 2 3 (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive such grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding. D. The Plan Administrator shall have the absolute discretion to grant options in accordance with the Discretionary Option Grant Program. E. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individuals serving as non-employee Board members on the Plan Effective Date who have not previously received an option grant from the Corporation in connection with their Board service, (ii) those individuals who first become non-employee Board members after the Plan Effective Date, whether through appointment by the Board or election by the Corporation's stockholders, and (iii) those individuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Plan Effective Date. A non- employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non-employee Board member. F. All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program. 1.5 STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 3,736,209 shares. Such reserve shall consist of (i) the number of shares estimated to remain available for issuance, as of the Plan Effective Date, under the Predecessor Plans as last approved by the Corporation's stockholders, including the shares subject to outstanding options under those Predecessor Plans, (ii) plus an additional increase of approximately 500,000 shares to be approved by the Corporation's stockholders in connection with the adoption of this Plan. 3 4 B. No one person participating in the Plan may receive options and separately exercisable stock appreciation rights for more than 200,000 shares of Common Stock in the aggregate per calendar year. C. Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plans) shall be available for subsequent issuance under the Plan to the extent (i) those options expire or terminate for any reason prior to exercise in full or (ii) the options are canceled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently canceled or repurchased by the Corporation at the original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised, and not by the net number of shares of Common Stock issued to the holder of such option. Shares of Common Stock underlying one or more stock appreciation rights exercised under Section 2.4 of Article Two, Section 3.3 of Article Three, Section 4.2 of Article Four or Section 5.3 of Article Five of the Plan shall NOT be available for subsequent issuance under the Plan. D. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made by the Plan Administrator to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted stock options and separately exercisable stock appreciation rights under the Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan, and (v) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plans. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. ARTICLE Two DISCRETIONARY OPTION GRANT PROGRAM 2.1 OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the 4 5 terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. The Plan Administrator may not reset the exercise price of outstanding options and may not grant new options in exchange for the cancellation of outstanding options with a higher exercise price. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section 6.1 of Article Six and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. 5 6 (ii) Any option held by the Optionee at the time of death and exercisable in whole or in part at that time may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the Optionee's designated beneficiary or beneficiaries of that option. (iii) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post- Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be 6 7 assignable or transferable other than by will or the laws of inheritance following the Optionee's death. However, a Non-Statutory Option may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Two, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. 2.2 INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section 2.2, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section 2.2. A. ELIGIBILITY. Incentive Options may only be granted to Employees. B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. 2.3 CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. However, an outstanding option shall NOT become 7 8 exercisable on such an accelerated basis if and to the extent: (i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Corporate Transaction on any shares for which the option is not otherwise at that time exercisable and provides for subsequent payout in accordance with the same exercise/vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. B. All outstanding repurchase rights shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year and (iv) the maximum number and/or class of securities by which the share reserve is to increase automatically each calendar year. E. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effect date of such Corporate Transaction, become fully exercisable for the total number of shares of Common Stock at the time subject to those options and may be exercised for any or all of those shares as fully vested shares of Common Stock, whether or not those options are to be assumed in the Corporate Transaction. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall not be assignable in connection with such Corporate Transaction and shall accordingly terminate upon the consummation of such Corporate Transaction, and the shares subject to those terminated rights shall thereupon vest in full. F. The Plan Administrator shall have full power and authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those 8 9 options shall become fully exercisable for the total number of shares of Common Stock at the time subject to those options in the event the Optionee's Service is subsequently terminated by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1) year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may structure one or more of the Corporation's repurchase rights so that those rights shall immediately terminate with respect to any shares held by the Optionee at the time of such Involuntary Termination, and the shares subject to those terminated repurchase rights shall accordingly vest in full at that time. G. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effect date of a Change in Control, become fully exercisable for the total number of shares of Common Stock at the time subject to those options and may be exercised for any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Change in Control, and the shares subject to those terminated rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and the termination of one or more of the Corporation's outstanding repurchase rights under such program upon the subsequent termination of the Optionee's Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of such Change in Control. Each option so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1) year period measured from the effective date of Optionee's cessation of Service. H. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Nonstatutory Option under the Federal tax laws. I. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 2.4 STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: 9 10 (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock at the time subject to such option (whether or not the Optionee is otherwise vested in those shares) over (B) the aggregate exercise price payable for those shares. Such cash distribution shall be paid within five (5) days following the option surrender date. (iii) At the time such limited stock appreciation right is granted, the Plan Administrator shall pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. 10 11 ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM 3.1 OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for such calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely authorization shall automatically be granted an option under the Salary Investment Grant Program on the first trading day in January of the calendar year for which the salary reduction is to be in effect. 3.2 OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A divided by (B x 66-2/3%), where X is the number of option shares, A is the dollar amount of the reduction in the Optionee's base salary for the calendar year to be in effect pursuant to this program, and B is the Fair 11 12 Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)- year period measured from the date of the Optionee's cessation of Service. However, the option shall, immediately upon the Optionee's cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. 3.3 CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable for the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The 12 13 option shall remain so exercisable until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service, (iii) the termination of the option in connection with a Corporate Transaction or (iv) the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Salary Investment Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. The Primary Committee shall, at the time the option with such limited stock appreciation right is granted under the Salary Investment Option Grant Program, pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Primary Committee or the Board shall be required at the time of the actual option surrender and cash distribution. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. E. The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 3.4 REMAINING TERMS The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. ARTICLE FOUR AUTOMATIC OPTION GRANT PROGRAM 4.1 OPTION TERMS A. GRANT DATES. Option grants shall be made on the dates specified below: 13 14 1. Each individual who is first elected or appointed as a non-employee Board member at any time after the Plan Effective Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 15,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary. 2. On the date of each Annual Stockholders Meeting, beginning with the Annual Stockholders Meeting coinciding with the Plan Effective Date, each individual who is to continue to serve as a non-employee Board member, whether or not that individual is standing for re-election to the Board at that particular Annual Meeting, shall automatically be granted a Non- Statutory Option to purchase 5,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 5,000-share option grants any one non-employee Board member may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who have previously received stock options in connection with their Board service prior to the Plan Effective Date shall be eligible to receive one or more such annual option grants over their period of continued Board service. B. EXERCISE PRICE. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date. D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any unvested shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. The shares subject to each initial 15,000-share grant shall vest, and the Corporation's repurchase right shall lapse, in a series of three (3) successive equal annual installments upon the Optionee's completion of each year of service as a Board member over the three (3) year period measured from the option grant date. The shares subject to each annual 5,000-share option grant shall be fully vested as of the grant date. E. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this Article Five may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option 14 15 pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Five, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. F. TERMINATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or the designated beneficiary or beneficiaries of such option) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully-vested shares of Common Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 4.2 CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the option shares as fully-vested shares of Common Stock and may be exercised for all or any portion of those vested shares. Immediately 15 16 following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the option shares as fully-vested shares of Common Stock and may be exercised for all or any portion of those vested shares. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile Take-Over. C. All outstanding repurchase rights shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction or Change in Control. D. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required at the time of the actual option surrender and cash distribution. E. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. F. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 4.3 REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 16 17 ARTICLE FIVE DIRECTOR FEE OPTION GRANT PROGRAM 5.1 OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years for which the Director Fee Option Grant Program is to be in effect. For each such calendar year the program is in effect, each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board for that year to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable in cash. 5.2 OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A divided by (B x 66-2/3%), where X is the number of option shares, A is the portion of the annual retainer fee subject to the non-employee Board member's election, and B is the Fair Market Value per share of Common Stock on the option grant date. 17 18 C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) equal monthly installments upon the Optionee's completion of each month of Board service over the twelve (12)-month period measured from the grant date. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. LIMITED TRANSFERABILITY OF OPTIONS. Each option under this Article Five may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. The Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Five, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. E. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. F. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. Should the Optionee die while holding such option, then the option may be exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of that option. Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be 18 19 exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance or by the designated beneficiary or beneficiaries of such option. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)- year period measured from the date of the Optionee's cessation of Board service. 5.3 CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall terminate immediately following the Corporate Transaction, except to the extent assumed by the successor corporation (or parent thereof) in such Corporate Transaction. Any option so assumed and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable for the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the earliest to occur of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the two (2)-year period measured from the date of the Optionee's cessation of Board service, (iii) the termination of the option in connection with a Corporate Transaction or (iv) the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Director Fee Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required at the time of the actual option surrender and cash distribution. D. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 19 20 5.4 REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. ARTICLE SIX MISCELLANEOUS 6.1 FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price (less the par value of those shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise. 6.2 TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options under the Plan (other than the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Withholding Taxes to which such holders may become subject in connection with the exercise of their options. Such right may be provided to any such holder in either or both of the following formats: Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. 20 21 6.3 EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective immediately on the Plan Effective Date. However, the Salary Investment Option Grant Program and the Director Fee Option Grant Program shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant at any time on or after the Plan Effective Date, and the initial option grants under the Automatic Option Grant Program shall also be made on the Plan Effective Date to any non-employee Board members eligible for such a grant at that time. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to each of the Predecessor Plans, and no further option grants shall be made under the Predecessor Plans after the Plan Effective Date. All options outstanding under the Predecessor Plans on the Plan Effective Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plans which do not otherwise contain such provisions. D. The Plan shall terminate upon the earliest to occur of (i) March 31, 2010, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Should the Plan terminate on March 31, 2010, then all option grants and unvested stock issuances outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. 6.4 AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall (i) adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee consents to such amendment or modification or (ii) unless approved by the stockholders, permit the Plan Administrator to reset the exercise price of outstanding options or grant new options in exchange for the cancellation of outstanding options with a higher exercise price. In addition, certain other amendments may require stockholder approval pursuant to applicable laws or regulations. 21 22 B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. 6.5 USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. 6.6 REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock upon the exercise of any granted option shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. 6.7 NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. APPENDIX The following definitions shall be in effect under the Plan: A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under Article Four of the Plan. 22 23 B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean Quiksilver, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of Quiksilver, Inc. which shall by appropriate action adopt the Plan. H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option grant in effect for non-employee Board members under Article Five of the Plan. I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan. J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Articles One and Four. 23 24 K. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. L. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. O. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. P. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than twenty percent (20%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, 24 25 provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. T. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program. U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. W. PLAN shall mean the Corporation's 2000 Stock Incentive Plan, as set forth in this document. X. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant Program with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. Y. PLAN EFFECTIVE DATE shall mean March 31, 2000. 25 26 Z. PREDECESSOR PLANS shall mean the Corporation's (i) 1996 Stock Option Plan, (ii) the 1998 Nonemployee Directors' Stock Option Plan, (iii) the 1995 Nonemployee Directors' Stock Option Plan and (iv) the 1992 Nonemployee Directors' Stock Option Plan, as each of those plans is in effect immediately prior to the Plan Effective Date hereunder. AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant Program with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program solely with respect to the selection of the eligible individuals who may participate in such program. BB. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment option grant program in effect under Article Three of the Plan. CC. SECONDARY COMMITTEE shall mean a committee of one or more Board members appointed by the Board to administer the Discretionary Option Grant Program with respect to eligible persons other than Section 16 Insiders. DD. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. EE. SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant. FF. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. GG. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. HH. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. II. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). 26 27 JJ. WITHHOLDING TAXES shall mean the Federal, state and local income and employment withholding taxes to which the holder of Non-Statutory Options may become subject in connection with the exercise of those options. 27 EX-10.14 5 a68848ex10-14.txt EXHIBIT 10.14 1 EXHIBIT 10.14 [QUICKSILVER LOGO] November 1, 1998 PERSONAL AND CONFIDENTIAL Mr. Bernard Mariette Quiksilver Na Pali, S.A. Z.I. de Jalday -- B.P. 119 64501 Saint Jean de Luz CEDEX France Re: SERVICES AT QUIKSILVER Dear Bernard: This letter ("Agreement") will confirm our understanding and agreement regarding your continued services at Quiksilver, Inc. ("Quiksilver" or the "Company"), and completely supersedes and replaces any existing or previous oral or written understandings or agreements, express or implied, we have had and is separate and in addition to your employment agreement with Na Pali, S.A. The terms contained in this letter are effective on and after November 1, 1998. 1. Your primary job responsibilities are to expand and market the Quiksilver brand in ways that will enhance the value of the brand in the United States or in markets where Quiksilver's domestic division does business, and will involve, but is not limited to, marketing the brand in international tourist areas, overseeing the development of the Company website, the development of the Company's retail strategy, and development of the Company's overall corporate strategy. In your position, you will report to me or my designee. 2. Your salary will be variable and will be determined annually at the conclusion of the Company's fiscal year, and at the Company's discretion in light of the Company's performance, your performance, market conditions and other factors deemed relevant by the Company. 3. The amount and terms of stock options to be granted to you will be determined by the Board of Directors in its discretion and covered in separate agreements. 2 Bernard Mariette November 1, 1998 Page 2 4. Notwithstanding anything to the contrary in this Agreement or in your prior services relationship with the Company, express or implied, your service continues to be for an unspecified term, and either you or Quiksilver may terminate such service at will and with or without Cause at any time for any reason. This aspect of your service 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 service immediately, without notice, and without further obligation for Cause, which shall be defined as (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 law, (v) self-dealing, (vi) willful breach of duty, (vii) habitual neglect of duty, (viii) a material breach by you of your obligations under Paragraph 5 or 6 of this Agreement, or (ix) sustained unsatisfactory performance (determined by the Chairman of the Board of the Company). 5. Quiksilver 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 Quiksilver, and other particularized information concerning the products, finances, processes, material preferences, fabrics, designs, material sources, pricing information, production schedules, marketing strategies, 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 Quiksilver, including, but not limited to, those items specifically mentioned above. 6. You will be required to observed 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. 3 Bernard Mariette November 1, 1998 Page 3 7. This Agreement and any stock option agreements Quiksilver may enter into with you contain the entire integrated agreement between us regarding these issues, and no modification to this letter will be valid unless set forth in writing and signed by both you and the Chairman of the Board of the Company. 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 administered by JAMS/Endispute in Orange County, California, whose fees and costs shall be evenly divided by the parties. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The Company reserves the right, however, to seek judicial provisional remedies and equitable relief regarding any breach or threatened breach of your obligation regarding trade secrets and proprietary information. 8. This Agreement will be assignable by the Company to any successor or to any other company owned or controlled by 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. Best personal regards, Robert B. McKnight, Jr. Chief Executive Officer Enclosures Acknowledged and agreed: - ---------------------------------- BERNARD MARIETTE Date Effective: November 1, 1998 EX-21.1 6 a68848ex21-1.txt EXHIBIT 21.1 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 Na Pali, S.A. 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 Sumbawa SL Spain Haapiti, SRL Italy EX-23.1 7 a68848ex23-1.txt EXHIBIT 23.1 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 and No. 333-40328, of Quiksilver, Inc. on Form S-8 of our report, dated December 19, 2000, appearing in the Annual Report on Form 10-K of Quiksilver, Inc. for the year ended October 31, 2000. DELOITTE & TOUCHE LLP Costa Mesa, California January 24, 2001 -----END PRIVACY-ENHANCED MESSAGE-----