<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-15131
QUIKSILVER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0199426
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1740 MONROVIA AVENUE
COSTA MESA, CALIFORNIA
92627
(Address of principal executive offices)
(Zip Code)
(714) 645-1395
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of issuer's Common Stock,
par value $0.01 per share, at
September 4, 1998 was
14,448,564
<PAGE> 2
QUIKSILVER, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
July 31, 1998 and October 31, 1997............................................. 2
Condensed Consolidated Statements of Income
Three Months Ended July 31, 1998 and 1997...................................... 3
Condensed Consolidated Statements of Income
Nine Months Ended July 31, 1998 and 1997....................................... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 31, 1998 and 1997....................................... 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 7
Part II - OTHER INFORMATION
Item 5. Other Events................................................................... 11
Item 6. Exhibits and Reports on Form 8-K................................................ 11
SIGNATURE............................................................................... 12
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,055,000 $ 4,103,000
Trade accounts receivable, less allowance
for doubtful accounts of $2,874,000 (1998)
and $2,725,000 (1997)....................................... 60,752,000 54,668,000
Other receivables............................................. 2,802,000 1,773,000
Inventories - Note 2.......................................... 65,797,000 48,372,000
Prepaid expenses and other current assets..................... 3,485,000 2,841,000
------------- -------------
Total current assets..................................... 135,891,000 111,757,000
Property and equipment, less accumulated depreciation and
amortization of $13,266,000 (1998) and $10,033,000 (1997)...... 19,277,000 16,436,000
Trademark, less accumulated amortization of
$1,795,000 (1998) and $1,646,000 (1997)........................ 1,638,000 1,778,000
Goodwill, less accumulated amortization of
$4,257,000 (1998) and $3,807,000 (1997)........................ 17,609,000 18,141,000
Other assets...................................................... 8,064,000 1,538,000
------------- -------------
Total assets...................................................... $ 182,479,000 $ 149,650,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................................ $ 15,745,000 $ 18,671,000
Accounts payable............................................... 25,886,000 13,079,000
Accrued liabilities............................................ 13,752,000 10,725,000
Current portion of long term debt.............................. 2,182,000 1,474,000
Income taxes payable........................................... 2,017,000 515,000
------------- -------------
Total current liabilities................................ 59,582,000 44,464,000
Long term debt.................................................... 15,304,000 10,178,000
------------- -------------
Total liabilities........................................ 74,886,000 54,642,000
------------- -------------
Stockholders' equity
Preferred stock, $.01 par value, authorized
shares - 5,000,000; issued and outstanding
shares - none............................................... -- --
Common stock, $.01 par value, authorized
shares - 30,000,000; issued and outstanding
shares - 14,448,564 (1998) and 14,278,940 (1997)............ 144,000 71,000
Additional paid-in-capital..................................... 24,086,000 22,657,000
Retained earnings.............................................. 88,692,000 77,043,000
Treasury stock, 130,000 shares................................. (3,054,000) (3,054,000)
Cumulative foreign currency translation adjustment............. (2,275,000) (1,709,000)
------------- -------------
Total stockholders' equity............................... 107,593,000 95,008,000
------------- -------------
Total liabilities and stockholders' equity............... $ 182,479,000 $ 149,650,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
---------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales............................................................ $ 78,265,000 $ 58,541,000
Cost of goods sold................................................... 48,438,000 36,432,000
--------------- ---------------
Gross profit...................................................... 29,827,000 22,109,000
--------------- ---------------
Operating expenses:
Selling, general and administrative expense....................... 21,904,000 16,100,000
Royalty income.................................................... (365,000) (393,000)
Royalty expense................................................... 972,000 731,000
--------------- ---------------
Total operating expenses....................................... 22,511,000 16,438,000
--------------- ---------------
Operating income..................................................... 7,316,000 5,671,000
Interest expense..................................................... 672,000 526,000
Foreign currency gain................................................ (280,000) (5,000)
Other expense........................................................ 69,000 56,000
--------------- ---------------
Income before provision for income taxes............................. 6,855,000 5,094,000
Provision for income taxes........................................... 2,777,000 2,122,000
--------------- ---------------
Net income........................................................... $ 4,078,000 $ 2,972,000
=============== ===============
Basic net income per share........................................... $ 0.29 $ 0.21
=============== ===============
Diluted net income per share......................................... $ 0.28 $ 0.21
=============== ===============
Weighted average shares outstanding.................................. 14,094,000 13,828,000
=============== ===============
Diluted weighted average shares outstanding.......................... 14,716,000 14,213,000
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales............................................................ $ 211,708,000 $ 165,266,000
Cost of goods sold................................................... 127,897,000 101,388,000
--------------- ---------------
Gross profit...................................................... 83,811,000 63,878,000
--------------- ---------------
Operating expenses:
Selling, general and administrative expense....................... 60,691,000 45,567,000
Royalty income.................................................... (1,136,000) (1,103,000)
Royalty expense................................................... 2,719,000 2,051,000
--------------- ---------------
Total operating expenses....................................... 62,274,000 46,515,000
--------------- ---------------
Operating income..................................................... 21,537,000 17,363,000
Interest expense..................................................... 1,935,000 1,240,000
Foreign currency (gain) loss......................................... (315,000) 75,000
Other expense........................................................ 213,000 150,000
--------------- ---------------
Income before provision for income taxes............................. 19,704,000 15,898,000
Provision for income taxes........................................... 8,055,000 6,427,000
--------------- ---------------
Net income........................................................... $ 11,649,000 $ 9,471,000
=============== ===============
Basic net income per share........................................... $ 0.83 $ 0.68
=============== ===============
Diluted net income per share......................................... $ 0.80 $ 0.67
=============== ===============
Weighted average shares outstanding.................................. 14,050,000 13,898,000
=============== ===============
Diluted weighted average shares outstanding.......................... 14,496,000 14,126,000
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 11,649,000 $ 9,471,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization............................... 4,273,000 2,709,000
Provision for doubtful accounts............................. 1,774,000 1,104,000
Loss on sale of fixed assets................................ 35,000 148,000
Changes in operating assets and liabilities, net of effects of
acquisition (1997):
Trade accounts receivable................................ (8,299,000) (11,337,000)
Other receivables........................................ (970,000) 108,000
Inventories.............................................. (17,614,000) (11,137,000)
Prepaid expenses and other current assets................ (790,000) (180,000)
Other assets............................................. (365,000) 590,000
Accounts payable......................................... 13,713,000 2,692,000
Accrued liabilities...................................... 2,858,000 (1,263,000)
Income taxes payable..................................... 1,513,000 627,000
--------------- ---------------
Net cash provided by (used in) operating activities... 7,777,000 (6,468,000)
Cash flows from investing activities:
Proceeds from sales of fixed assets............................... 47,000 83,000
Capital expenditures.............................................. (12,825,000) (6,962,000)
Acquisition of Mervin Manufacturing, Inc.......................... (500,000) (1,750,000)
--------------- ---------------
Net cash used in investing activities................. (13,278,000) (8,629,000)
Cash flows from financing activities:
Borrowings on lines of credit..................................... 26,881,000 30,734,000
Payments on lines of credit....................................... (29,664,000) (25,126,000)
Borrowings on long-term debt...................................... 7,419,000 7,640,000
Payments on long-term debt........................................ (1,540,000) (351,000)
Proceeds from stock option exercises.............................. 1,502,000 1,277,000
--------------- ---------------
Net cash provided by financing activities.............. 4,598,000 14,174,000
Effect of exchange rate changes on cash.............................. (145,000) (207,000)
--------------- ---------------
Net decrease in cash and cash equivalents............................ (1,048,000) (1,130,000)
Cash and cash equivalents, beginning of period....................... 4,103,000) 3,429,000
--------------- ---------------
Cash and cash equivalents, end of period............................. $ 3,055,000 $ 2,299,000
=============== ===============
Supplementary cash flow information:
Cash paid during the period for:
Interest....................................................... $ 1,636,000 $ 1,071,000
=============== ===============
Income taxes................................................... $ 6,524,000 $ 5,930,000
=============== ===============
Non-cash financing activity -
Bank debt assumed in acquisition............................... $ -- $ 2,682,000
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 7
QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statement
presentation.
The Company, in its opinion, has included all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of
the results of operations for the three and nine months ended July 31,
1998 and 1997. The condensed consolidated financial statements and
notes thereto should be read in conjunction with the audited financial
statements and notes for the year ended October 31, 1997 included in
the Company's Annual Report on Form 10-K. Interim results are not
necessarily indicative of results for the full year due to seasonal and
other factors.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1998 1997
---- ----
<S> <C> <C>
Raw Materials..................................... $ 15,777,000 $ 16,754,000
Work-In-Process................................... 8,953,000 5,693,000
Finished Goods.................................... 41,067,000 25,925,000
--------------- ---------------
$ 65,797,000 $ 48,372,000
=============== ===============
</TABLE>
3. Net income per share - During the three months ended January 31, 1998,
the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share", which requires the Company to
report basic and diluted earnings per share ("EPS"). Basic EPS is based
on the weighted average number of shares outstanding during the
periods, while diluted EPS additionally includes the dilutive effect of
the Company's outstanding stock options computed using the treasury
stock method. Prior period net income per share data were restated for
consistency.
4. During the three months ended April 30, 1998, the Company's Board of
Directors approved a two-for-one split of the Company's Common Stock.
The split was effected in the form of a dividend on April 24, 1998 to
shareholders of record on April 16, 1998. All share and per-share
information has been restated to reflect the stock dividend.
5. Effective July 17, 1998, the Company's loan agreement with a U.S. bank
was amended to add a $10,000,000 term loan generally at LIBOR plus
1.35%, extend the maturity date of the revolving line of credit to May
2000, and to reduce the interest rate on line of credit borrowings
based on LIBOR to 1.25% above LIBOR.
6
<PAGE> 8
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1997
Net sales for the three months ended July 31, 1998 increased 33.7% to
$78,265,000 from $58,541,000 in the comparable period of the prior year.
Domestic net sales for the three months ended July 31, 1998 increased 30.8% to
$49,981,000 from $38,216,000 in the comparable period of the prior year, and
European net sales increased 39.2% to $28,284,000 from $20,325,000 for those
same periods. As measured in French Francs, Quiksilver Europe's functional
currency, net sales in the current year's quarter increased 41.8% compared to
the prior year. Domestic mens sales increased 14.3% to $31,560,000 from
$27,608,000 in the comparable period of the prior year, while domestic womens
sales increased 68.2% to $15,979,000 from $9,501,000. Sales of snowboards, boots
and bindings amounted to $2,442,000 for the current year's quarter compared to
$1,107,000 in the prior year (from the date of the Mervin acquisition). The
domestic mens sales increase came from the Quiksilver Young Mens, Boys and
Accessories divisions. The domestic womens sales increase came from the Roxy
division. In Europe, mens sales increased 31.1% to $25,864,000 from $19,723,000,
while womens sales increased 302.0% to $2,420,000 from $602,000.
The gross profit margin for the three months ended July 31, 1998 increased
somewhat to 38.1% from 37.8% in the comparable period of the prior year. The
domestic gross profit margin increased to 35.8% from 35.3%, and the European
gross profit margin decreased somewhat to 42.2% from 42.4% for those same
periods. The increase in the domestic gross profit margin resulted primarily
from a change in product mix. In the current year's quarter, there were more
sales of juniors sportswear product, which sells at higher average profit
margins, and less sales of private label product, which sells at lower average
profit margins.
Selling, general and administrative expense ("SG&A") for the three months ended
July 31, 1998 increased 36.0% to $21,904,000 from $16,100,000 in the comparable
period of the prior year. Domestic SG&A increased 33.1% to $12,949,000 from
$9,729,000 in the comparable period of the prior year, and European SG&A
increased 40.6% to $8,955,000 from $6,371,000 for those same periods. The
increase in domestic SG&A was primarily due to higher personnel and other costs
related to increased sales volume, along with increased distribution center
expenses. The increase in European SG&A was primarily due higher personnel and
other costs related to increased sales volume.
Net royalty expense for the three months ended July 31, 1998 increased 80.0% to
$607,000 from $338,000 in the comparable period of the prior year. This increase
was due primarily to increased royalty expense related to European sales. The
Company receives domestic royalty income from its Mexico, wetsuit, watch,
sunglass, and outlet store licensees as well as Raisins international licensees,
and Quiksilver Europe pays royalties on European sales under a trademark
agreement with Quiksilver International.
Interest expense for the three months ended July 31, 1998 increased 27.8% to
$672,000 from $526,000 in the comparable period of the prior year. This increase
was primarily due to higher long term liabilities in Europe, which resulted from
borrowings to begin the build out of two company-owned boardriders clubs in
Paris.
The effective income tax rate for the three months ended July 31, 1998, which is
based on current estimates of the annual effective income tax rate, decreased to
40.5% from 41.7% in the comparable period of the prior year. The prior year's
income tax rate was adversely affected by an increase in the French tax rate.
As a result of the above factors, net income for the three months ended July 31,
1998 increased 37.2% to $4,078,000 or $0.28 per share on a diluted basis from
$2,972,000 or $0.21 per share on a diluted basis in the comparable period of the
prior year. Basic net income per share increased to $0.29 per share for the
three months ended July 31, 1998 from $0.21 per share in the comparable period
of the prior year.
7
<PAGE> 9
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
Net sales for the nine months ended July 31, 1998 increased 28.1% to
$211,708,000 from $165,266,000 in the comparable period of the prior year.
Domestic net sales for the nine months ended July 31, 1998 increased 23.8% to
$132,192,000 from $106,815,000 in the comparable period of the prior year, and
European net sales increased 36.0% to $79,516,000 from $58,451,000 for those
same periods. As measured in French Francs, Quiksilver Europe's net sales in the
first nine months of the current year increased 45.5% compared to the prior
year. Domestic men's sales increased 11.1% to $80,525,000 from $72,454,000 in
the comparable period of the prior year, while domestic women's sales increased
38.7% to $46,123,000 from $33,254,000. Sales of snowboards, boots and bindings
amounted to $5,544,000 for the current year's nine months compared to $1,107,000
in the prior year (from the date of the Mervin acquisition). The Domestic men's
sales increase came from all divisions except Private Label. The Domestic womens
sales increase came from the Quiksilver Roxy division. In Europe, mens sales
increased 30.3% to $72,961,000 from $55,979,000, while women's sales increased
165.2% to $6,555,000 from $2,472,000.
The gross profit margin for the nine months ended July 31, 1998 increased to
39.6% from 38.7% in the comparable period of the prior year. The domestic gross
profit margin increased to 36.6% from 35.3% in the comparable period of the
prior year, and the European gross profit margin decreased slightly to 44.6%
from 44.7% for those same periods. The increase in the domestic gross profit
margin resulted primarily from a change in product mix and the impact of selling
excess raw materials during the first half of the prior year at margins that
were less than normal wholesale and from markdowns taken during the first half
of the prior year to sell Pirate Surf product, which was removed from production
plans. In the current year's nine months, there were more sales of juniors
product, which sells at higher average profit margins, and less sales of private
label product, which sells at lower average profit margins.
Selling, general and administrative expense ("SG&A") for the nine months ended
July 31, 1998 increased 33.2% to $60,691,000 from $45,567,000 in the comparable
period of the prior year. Domestic SG&A increased 30.7% to $36,223,000 from
$27,721,000 in the comparable period of the prior year, and European SG&A
increased 37.1% to $24,468,000 from $17,846,000 for those same periods. The
increase in domestic SG&A was primarily due to higher personnel and other costs
related to increased sales volume, along with increased distribution center
expenses. The increase in European SG&A was primarily due to higher personnel
and other costs related to increased sales volume.
Net royalty expense for the nine months ended July 31, 1998 increased 67.0% to
$1,583,000 from $948,000 in the comparable period of the prior year. This
increase was due primarily to increased royalty expense related to European
sales.
Interest expense for the nine months ended July 31, 1998 increased 56.0% to
$1,935,000 from $1,240,000 in the comparable period of the prior year. This
increase was primarily due to higher average outstanding balances on the
Company's domestic line of credit and increased long-term liabilities in Europe
during the third quarter of the current year. In addition to domestic borrowings
that provided working capital to fund the Company's growth, funds were borrowed
to acquire Mervin, upgrade the Company's computer systems, equip the Company's
new warehouse facility in Huntington Beach, California, and in the third quarter
of the current year, to begin the build-out of two Company owned boardriders
clubs in Paris.
The effective income tax rate for the nine months ended July 31, 1998, which is
based on current estimates of the annual effective income tax rate, increased to
40.9% from 40.4% in the comparable period of the prior year.
As a result of the above factors, net income for the nine months ended July 31,
1998 increased 23.0% to $11,649,000 or $0.80 per share from $9,471,000 or $0.67
per share in the comparable period of the prior year. Basic net income per share
increased to $0.83 per share for the nine months ended July 31, 1998 from $0.68
per share in the comparable period of the prior year.
8
<PAGE> 10
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
The Company finances its capital investments and seasonal working capital
requirements with funds generated by operations and its bank revolving lines of
credit.
Net cash provided by operating activities for the nine months ended July 31,
1998 was $7,777,000 compared to net cash used in operating activities of
$6,468,000 in the comparable period of the prior year. This $14,245,000 increase
in cash provided by operating activities was due primarily to the decrease in
cash used for inventories and trade accounts receivable, and a higher level of
net income plus noncash charges. Cash paid for inventories net of changes in
accounts payable decreased by $4,544,000 as a result of improved domestic cash
management, in contrast to the growth in inventories in preparation for the 1998
Fall and Holiday seasons. The increase in trade accounts receivable was
$3,038,000 less in the nine months ended July 31, 1998 compared to the prior
year primarily as a result of improved domestic collection efforts. Net income
plus noncash expenses increased by $4,299,000 comparing the nine months ended
July 31, 1998 to the prior year.
For the nine months ended July 31, 1998, capital expenditures increased 84.2% to
$12,825,000 from $6,962,000 in the comparable period of the prior year primarily
due to investments during the nine months ended July 31, 1998 in retail space in
Paris, the new corporate headquarters building in France, and the domestic
distribution center in Huntington Beach, California.
Effective July 17, 1998, the Company's loan agreement with a U.S. bank was
amended to add a $10,000,000 term loan generally at LIBOR plus 1.35%, extend the
maturity date of the revolving line of credit to May 2000, and to reduce the
interest rate on line of credit borrowings based on LIBOR to 1.25% above LIBOR.
During the nine months ended July 31, 1998, net cash provided by financing
activities totaled $4,598,000 compared to $14,174,000 in the comparable period
of the prior year. These decreased borrowings during the first nine months of
fiscal 1998 result from the improved cash flow from operations as described
above.
The net decrease in cash and cash equivalents for the nine months ended July 31,
1998 was $1,048,000 compared to a decrease of $1,130,000 in the comparable
period of the prior year. Cash and cash equivalents decreased to $3,055,000 at
July 31, 1998 from $4,103,000 at October 31, 1997, while working capital
increased $9,016,000 or 13.4% to $76,309,000 from $67,293,000 for that same
period. The Company believes its current lines of credit are adequate to cover
its seasonal working capital and other requirements for the foreseeable future,
and that increases in its lines of credit can be obtained as needed to fund
future growth.
Accounts receivable increased 11.1% to $60,752,000 at July 31, 1998 from
$54,668,000 at October 31, 1997. Domestic accounts receivable decreased 1.1% to
$36,491,000 at July 31, 1998 from $36,887,000 at October 31, 1997, and European
accounts receivable increased 36.4% to $24,261,000 from $17,781,000 for that
same period. Domestic accounts receivable decreased as a result of improved
collection efforts, while the increases in European accounts receivable is
generally consistent with the increase in European sales.
Consolidated inventories increased 36.0% to $65,797,000 at July 31, 1998 from
$48,372,000 at October 31, 1997. Domestic inventories increased 26.1% to
$48,878,000 from $38,758,000 at October 31, 1997, and European inventories
increased 76.0% to $16,919,000 from $9,614,000 for that same period. The
increase in inventories occurred primarily to support increased sales for the
Fall and Holiday seasons of the current year and from increased product
offerings in Europe.
Customers of the Company have experienced financial difficulties, from time to
time, including the filing of reorganization proceedings under bankruptcy laws.
The Company has not incurred significant losses outside the normal course of
business as a result of the financial difficulties of these customers.
While management believes that allowances for doubtful accounts at July 31, 1998
are adequate, the Company carefully monitors developments regarding its major
customers. Additional material financial difficulties encountered by these or
other significant customers could have an adverse impact on the Company's
financial position or results of operations.
9
<PAGE> 11
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
FOREIGN CURRENCY
Quiksilver Europe sells in various European countries and collects at future
dates in the customers' local currencies and purchases certain raw materials or
product in currencies other than French Francs. Accordingly, the Company is
exposed to transaction gains and losses that could result from changes in
foreign currency exchange rates. When considered appropriate, management
purchases financial instruments, primarily forward exchange contracts, to reduce
its exposure to these exchange rate fluctuations.
Quiksilver Europe's statements of income are translated from French Francs into
U.S. Dollars at average exchange rates in affect during the reporting period.
When the French Franc strengthens compared to the U.S. Dollar there is a
positive affect on Quiksilver Europe's results as reported in the Company's
Consolidated Financial Statements. Conversely, when the U.S. Dollar strengthens,
there is a negative affect.
Because the average exchange rate between the French Franc and the U.S. Dollar
was relatively consistent during the three months ended July 31, 1998 compared
to the three months ended July 31, 1997, there was minimal affect from exchange
rate fluctuations on the comparisons between the periods. European net sales
increased 41.8% in French Francs during the three months ended July 31, 1998
compared to the three months ended July 31, 1997. As measured and reported in
the Company's Condensed Consolidated Statements of Income, European net sales
increased 39.2%.
10
<PAGE> 12
PART II - OTHER INFORMATION
Item 5. Other Events.
The Securities and Exchange Commission (the "SEC") has recently amended its Rule
14a-4, which governs the use by the Company of discretionary voting authority
with respect to certain shareholder proposals. SEC Rule 14a-4(c)(1) provides
that, if the proponent of a shareholder proposal fails to notify the Company at
least 45 days prior to the month and day of mailing the prior year's proxy
statement, the proxies of the Company's management would be permitted to use
their discretionary authority at the Company's next annual meeting of
shareholders if the proposal were raised at the meeting without any discussion
of the matter in the proxy statement. In order to provide shareholders with
notice of the deadline for the submission of such proposals for the Company's
1999 Annual Meeting of Shareholders, the Company hereby notifies all
shareholders of the Company that after December 30, 1998 any shareholder
proposal submitted outside the process of SEC Rule 14a-8 will be considered
untimely for purposes of SEC Rules 14a-4 and 14a-5(e).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Second Amendment to the Amended and Restated Loan
Agreement dated as of July 17, 1998.
27.0 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
July 31, 1998.
11
<PAGE> 13
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUIKSILVER, INC., a Delaware
Corporation
September 14, 1998 /s/ Steven L. Brink
------------------------------------
Steven L. Brink
Chief Financial Officer, Secretary
and Treasurer (Principal Accounting
Officer)
12
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.1 Second Amendment to the Amended and Restated Loan
Agreement dated as of July 17, 1998.
27.0 Financial Data Schedule.
</TABLE>
<PAGE> 1
SECOND AMENDMENT
TO THE AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED LOAN AGREEMENT (this "Second
Amendment") dated as of July 17, 1998, is made and entered into by and between
QUIKSILVER, INC., a Delaware Corporation ("Borrower"), and UNION BANK OF
CALIFORNIA, N.A. ("Bank").
RECITALS:
A. Borrower and Bank are parties to that certain Amended and Restated Loan
Agreement dated July 1, 1997 (the "Agreement"), pursuant to which Bank agreed to
extend credit to Borrower.
B. Borrower and Bank desire to amend the Agreement subject to the terms and
conditions of this Second Amendment.
AGREEMENT:
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
(a) Section 1.1 of the Agreement is hereby amended by substituting the
date "May 3, 2000" for the date "May 3, 1999".
(b) Section 1.1.1 of the Agreement is hereby amended by substituting the
date "May 3, 2000" for the date "May 3, 1999" and the date "October 1,
2000" for the date "October 1, 1999".
(c) Section 1.1.1.2 of the Agreement is hereby deleted in its entirety.
(d) Section 1.1.1.3 is hereby added in its entirety as follows:
1.1.1.3 THE TERM LOAN B. Bank will loan to Borrower an amount not to
exceed Ten Million Dollars ($10,000,000), amortizing over ten years,
(the "Term Loan"). The Term Loan B shall be evidenced by a promissory
note (the "Note") on the standard form used by Bank for commercial
loans. The proceeds will be used to repay the existing Seven Million
Dollar ($7,000,000) Revolving Loan B maturing October 1, 1998 and
provide financing for Company's capital expenses.
-1-
<PAGE> 2
(e) Section 4.6 Quick Ratio of the Agreement is hereby amended by
substituting the amount ".95:1.00" for "1.00:1.00"
(f) Section 4.7 of the Agreement is hereby amended in its entirety as
follows:
4.7 TANGIBLE NET WORTH. Until October 31, 1998, Borrower will at all
times maintain Tangible Net Worth of not less than Fifty-One Million
Dollars ($51,000,000). Thereafter, Borrower will at all times maintain
a minimum Tangible Net Worth that increases on the first day of each
of Borrower's successive fiscal years by Ninety percent (90%) of
Borrower's net profit after taxes for the fiscal year just ended plus
One Hundred percent (100%) of any future equity additions. "Tangible
Net Worth" shall mean net worth increased by indebtedness of Borrower
subordinated to Bank and decreased by patents, licenses, trademarks,
trade names, goodwill and other similar intangible assets,
organizational expenses, and monies due from affiliates, including
officers, shareholders and directors. Net profit after tax shall have
the same meaning as set forth in GAAP.
3. EFFECTIVENESS OF THE SECOND AMENDMENT. This Second Amendment shall become
effective as of the date hereof when, and only when, Bank shall have received
all of the following, in form and substance satisfactory to Bank:
(a) The counterpart of this Second Amendment, duly executed by Borrower;
(b) The Commercial Promissory Note, duly executed by Borrower;
(c) Such other documents, instruments or agreements as Bank may reasonably
deem necessary.
4. RATIFICATION. Except as specifically amended herein above, the Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows:
(a) Each of the representations and warranties contained in the Agreement,
as may be amended hereby, is hereby reaffirmed as of the date hereof, each as if
set forth herein;
(b) The execution, delivery and performance of the Second Amendment and any
other instruments or documents in connection herewith are within Borrower's
power, have been duly authorized, are legal, valid and binding obligations of
Borrower, and are not in conflict with the terms of any charter, bylaw, or other
organization papers of Borrower or with any law, indenture, agreement or
undertaking to which Borrower is a party or by which Borrower is bound or
affected;
(c) No event has occurred and is continuing or would result from this
Second Amendment which constitutes or would constitute an Event of Default under
the Agreement.
6. GOVERNING LAW. This Second Amendment and all other instruments or documents
in connection herewith shall be governed by and construed according to the laws
of the State of California.
7. COUNTERPARTS. This Second Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
-2-
<PAGE> 3
WITNESS the due execution hereof as of the date first above written.
QUIKSILVER, INC., UNION BANK OF CALIFORNIA, N.A.
A DELAWARE CORPORATION
By: /s/ Steven L. Brink By: /s/ Rita H. Dailey
--------------------------------- ---------------------------------
Steven L. Brink Rita H. Dailey
Chief Financial Officer Vice President
-3-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUIKSILVER, INC. JULY 31, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 3,055,000
<SECURITIES> 0
<RECEIVABLES> 63,626,000
<ALLOWANCES> 2,874,000
<INVENTORY> 65,797,000
<CURRENT-ASSETS> 135,891,000
<PP&E> 32,543,000
<DEPRECIATION> 13,266,000
<TOTAL-ASSETS> 182,479,000
<CURRENT-LIABILITIES> 59,582,000
<BONDS> 15,304,000
0
0
<COMMON> 144,000
<OTHER-SE> 107,449,000
<TOTAL-LIABILITY-AND-EQUITY> 182,479,000
<SALES> 211,708,000
<TOTAL-REVENUES> 211,708,000
<CGS> 127,897,000
<TOTAL-COSTS> 127,897,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,774,000
<INTEREST-EXPENSE> 1,935,000
<INCOME-PRETAX> 19,704,000
<INCOME-TAX> 8,055,000
<INCOME-CONTINUING> 11,649,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,649,000
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.80
</TABLE>
