##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 1-14229
 QUIKSILVER, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    33-0199426(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 15202 Graham Street
Huntington Beach, California
92649
 (714) 889-2200
 Yes þ No o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No þ




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##### 



QUIKSILVER, INC.
 FORM 10-Q
INDEX
 Page No.PART I  FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited):Quiksilver, Inc. Condensed Consolidated Statements of Operations
Three Months Ended January 31, 2008 and 2007
    
    
    2Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive (Loss)
Income Three Months Ended January 31, 2008 and 2007
    
    
    2Quiksilver, Inc. Condensed Consolidated Balance Sheets
January 31, 2008 and October 31, 2007
    
    
    3Quiksilver, Inc. Condensed Consolidated Statements of Cash Flows
Three Months Ended January 31, 2008 and 2007
    
    
    4Quiksilver, Inc. Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and
Results of OperationsResults of Operations
    
    
    23Three Months Ended January 31, 2008 Compared to Three Months
Ended January 31, 2007
    
    
    24Financial Position, Capital Resources and Liquidity
    
    
    25Critical Accounting Policies
    
    
    27New Accounting Pronouncements
    
    
    29Forward-Looking Statements
    
    
    29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    31Part II  OTHER INFORMATIONItem 6. Exhibits
    
    
    32SIGNATURES
    
    
    34EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.6EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 QUIKSILVER, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended January 31,In thousands, except per share amounts
    
    2008
    
    
    2007Revenues, net
    
    $
    605,296
    
    
    $
    528,677Cost of goods sold
    
    
    329,646
    
    
    
    279,748Gross profit
    
    
    275,650
    
    
    
    248,929Selling, general and administrative expense
    
    
    279,937
    
    
    
    221,612Operating (loss) income
    
    
    (4,287
    )
    
    
    27,317Interest expense
    
    
    14,640
    
    
    
    14,756Foreign currency (gain) loss
    
    
    (735
    )
    
    
    1,897Other expense
    
    
    74
    
    
    
    33(Loss) income before (benefit) provision for income taxes
    
    
    (18,266
    )
    
    
    10,631(Benefit) provision for income taxes
    
    
    (3,608
    )
    
    
    3,822(Loss) income from continuing operations
    
    
    (14,658
    )
    
    
    6,809Loss from discontinued operations
    
    
    (7,282
    )
    
    
    (4,334
    )Net (loss) income
    
    $
    (21,940
    )
    
    $
    2,475(Loss) income per share from continuing operations
    
    $
    (0.12
    )
    
    $
    0.06Loss per share from discontinued operations
    
    $
    (0.06
    )
    
    $
    (0.04
    )Net (loss) income per share
    
    $
    (0.18
    )
    
    $
    0.02(Loss) income per share from continuing operations, assuming
dilution
    
    $
    (0.12
    )
    
    $
    0.05Loss per share from discontinued operations, assuming dilution
    
    $
    (0.06
    )
    
    $
    (0.04
    )Net (loss) income per share, assuming dilution
    
    $
    (0.18
    )
    
    $
    0.02Weighted average common shares outstanding   Note 1
    
    
    124,508
    
    
    
    123,049Weighted average common shares outstanding, assuming dilution
    
    
    124,508
    
    
    
    129,234
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 (Unaudited)
 Three months ended January 31,In thousands
    
    2008
    
    
    2007Net (loss) income
    
    $
    (21,940
    )
    
    $
    2,475Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    510
    
    
    
    8,531Net unrealized income (loss) on derivative instruments,
net of tax of ($2,074) (2008) and $539 (2007)
    
    
    4,464
    
    
    
    (1,116
    )Comprehensive (loss) income
    
    $
    (16,966
    )
    
    $
    9,890
  2




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##### Table of Contents



QUIKSILVER, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 January 31,
    
    
    October 31,In thousands, except share amounts
    
    2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    75,181
    
    
    $
    74,348Trade accounts receivable, less allowances of $38,816 (2008)
and $37,037 (2007)
    
    
    638,707
    
    
    
    760,430Other receivables
    
    
    59,534
    
    
    
    70,101Income taxes receivable
    
    
    3,853
    
    
    
    Inventories
    
    
    490,235
    
    
    
    447,282Deferred income taxes
    
    
    66,221
    
    
    
    62,197Prepaid expenses and other current assets
    
    
    40,938
    
    
    
    25,219Current assets held for sale
    
    
    1,946
    
    
    
    73,685Total current assets
    
    
    1,376,615
    
    
    
    1,513,262Fixed assets, less accumulated depreciation and amortization
of $214,721 (2008) and $196,184 (2007)
    
    
    365,317
    
    
    
    347,322Intangible assets, net
    
    
    227,300
    
    
    
    225,642Goodwill
    
    
    416,375
    
    
    
    417,283Other assets
    
    
    47,230
    
    
    
    46,263Non-current assets held for sale
    
    
    15,792
    
    
    
    91,756Total assets
    
    $
    2,448,629
    
    
    $
    2,641,528LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit
    
    $
    271,549
    
    
    $
    313,996Accounts payable
    
    
    297,646
    
    
    
    286,807Accrued liabilities
    
    
    194,719
    
    
    
    227,840Current portion of long-term debt
    
    
    35,255
    
    
    
    34,306Income taxes payable
    
    
    
    
    
    
    7,187Liabilities related to assets held for sale
    
    
    110
    
    
    
    11,269Total current liabilities
    
    
    799,279
    
    
    
    881,405Long-term debt, net of current portion
    
    
    725,098
    
    
    
    772,128Deferred income taxes and other long-term liabilities
    
    
    69,329
    
    
    
    48,466Non-current liabilities related to assets held for sale
    
    
    
    
    
    
    52,916Total liabilities
    
    
    1,593,706
    
    
    
    1,754,915Stockholders equity:Preferred stock, $.01 par value, authorized shares  5,000,000;
issued and outstanding shares  none
    
    
    3⁄4
    
    
    
    3⁄4Common stock, $.01 par value, authorized shares  185,000,000;
issued shares  129,144,134 (2008) and 128,340,538 (2007)
    
    
    1,291
    
    
    
    1,283Additional paid-in capital
    
    
    312,575
    
    
    
    306,051Treasury stock, 2,885,200 shares
    
    
    (6,778
    )
    
    
    (6,778
    )Retained earnings
    
    
    394,744
    
    
    
    437,940Accumulated other comprehensive income
    
    
    153,091
    
    
    
    148,117Total stockholders equity
    
    
    854,923
    
    
    
    886,613Total liabilities and stockholders equity
    
    $
    2,448,629
    
    
    $
    2,641,528
  3




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QUIKSILVER, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended January 31,In thousands
    
    2008
    
    
    2007Cash flows from operating activities:Net (loss) income
    
    $
    (21,940
    )
    
    $
    2,475Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Loss from discontinued operations
    
    
    7,282
    
    
    
    4,334Depreciation and amortization
    
    
    19,015
    
    
    
    15,772Stock-based compensation
    
    
    2,461
    
    
    
    4,777Provision for doubtful accounts
    
    
    1,976
    
    
    
    (445
    )Gain on disposal of fixed assets
    
    
    (148
    )
    
    
    (209
    )Foreign currency loss
    
    
    120
    
    
    
    36Minority interest and equity in earnings
    
    
    556
    
    
    
    191Changes in operating assets and liabilities,
net of the effects from business acquisitions:Trade accounts receivable
    
    
    127,920
    
    
    
    118,012Other receivables
    
    
    11,653
    
    
    
    (840
    )Inventories
    
    
    (36,922
    )
    
    
    (48,801
    )Prepaid expenses and other current assets
    
    
    (14,447
    )
    
    
    (12,506
    )Other assets
    
    
    (957
    )
    
    
    2,077Accounts payable
    
    
    6,869
    
    
    
    22,566Accrued liabilities and other long-term liabilities
    
    
    (25,018
    )
    
    
    (27,914
    )Income taxes payable
    
    
    (18,728
    )
    
    
    (6,951
    )Cash provided by operating activities of continuing operations
    
    
    59,692
    
    
    
    72,574Cash used in operating activities of discontinued operations
    
    
    (999
    )
    
    
    (8,249
    )Net cash provided by operating activities
    
    
    58,693
    
    
    
    64,325Cash flows from investing activities:Proceeds from the sale of properties and equipment
    
    
    280
    
    
    
    7,908Capital expenditures
    
    
    (35,410
    )
    
    
    (27,967
    )Business acquisitions, net of cash acquired
    
    
    (1,038
    )
    
    
    (2,524
    )Cash used in investing activities of continuing operations
    
    
    (36,168
    )
    
    
    (22,583
    )Cash provided by (used in) investing activities of discontinued
operations
    
    
    115,449
    
    
    
    (303
    )Net cash provided by (used in) investing activities
    
    
    79,281
    
    
    
    (22,886
    )Cash flows from financing activities:Borrowings on lines of credit
    
    
    14,551
    
    
    
    14,972Payments on lines of credit
    
    
    (65,349
    )
    
    
    (41,205
    )Borrowings on long-term debt
    
    
    87,523
    
    
    
    24,088Payments on long-term debt
    
    
    (141,287
    )
    
    
    (35,645
    )Stock option exercises, employee stock purchases and tax benefit
on option exercises
    
    
    2,772
    
    
    
    4,708Cash used in financing activities of continuing operations
    
    
    (101,790
    )
    
    
    (33,082
    )Cash (used in) provided by financing activities of discontinued
operations
    
    
    (35,000
    )
    
    
    2,000Net cash used in financing activities
    
    
    (136,790
    )
    
    
    (31,082
    )Effect of exchange rate changes on cash
    
    
    (351
    )
    
    
    (1,195
    )Net increase in cash and cash equivalents
    
    
    833
    
    
    
    9,162Cash and cash equivalents, beginning of period
    
    
    74,348
    
    
    
    36,834Cash and cash equivalents, end of period
    
    $
    75,181
    
    
    $
    45,996Supplementary cash flow information:Cash paid during the period for:Interest
    
    $
    12,356
    
    
    $
    9,401Income taxes
    
    $
    14,062
    
    
    $
    15,607
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QUIKSILVER, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1.
    
    Basis of PresentationThe 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.Quiksilver, Inc. (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 months ended January 31, 2008 and 2007. 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, 2007 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.In October 2007, the Company entered into an agreement to sell its golf equipment business.
This transaction was completed in December 2007. As a result of this disposition, all
financial information has been adjusted to exclude the Companys golf equipment operations.
The golf equipment business has also been classified as discontinued operations for all
periods presented.For the three months ended January 31, 2008, the potential dilutive effect of common
stock equivalents was not included in the weighted average shares for the computation of
diluted earnings per share, as the effect was antidilutive.2.
    
    New Accounting PronouncementsIn July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109 (FIN 48). This interpretation
clarifies the application of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, by defining criteria that an individual tax position must
meet for any part of the benefit of that position to be recognized in the Companys
financial statements and also provides guidance on measurement, derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and
transition. The Company adopted FIN 48 on November 1, 2007. See Note 14 for a description
of the impact of this standard on the Companys financial statements.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This standard
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. This
statement is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company expects to adopt this standard at the beginning of the
Companys fiscal year ending October 31, 2009. The adoption of this accounting
pronouncement is not expected to have a material effect on the Companys consolidated
financial position, results of operations or cash flows.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, (SFAS No. 159), which permits companies to choose to measure
certain financial instruments and other items at fair value that are not currently required
to be measured at fair value. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The Company expects to adopt this
standard at the beginning of the Companys fiscal year ending October 31, 2009. The Company
has not determined the effect that the adoption of SFAS No. 159 will have on its
consolidated financial statements.
 5




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS No.
141(R)), which requires the Company to record fair value estimates of contingent
consideration and certain other potential liabilities during the original purchase price
allocation, expense acquisition costs as incurred and does not permit certain restructuring
activities previously allowed under Emerging Issues Task Force Issue No. 95-3 to be recorded
as a component of purchase accounting. This statement is effective for financial statements
issued for fiscal years beginning on or after December 15, 2008. The Company will adopt
this standard at the beginning of the Companys fiscal year ending October 31, 2010 for all
prospective business acquisitions. The Company has not determined the effect that the
adoption of SFAS No. 141(R) will have on its consolidated financial statements but the
impact will be limited to any future acquisitions beginning in fiscal 2010 except for
certain tax treatment of existing acquisitions.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51, (SFAS No. 160), which requires
noncontrolling interests in subsidiaries to be included in the equity section of the balance
sheet. This statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company will adopt this standard at the beginning of
the Companys fiscal year ending October 31, 2010. The Company has not determined the
effect that the adoption of SFAS No. 160 will have on its consolidated financial statements.3.
    
    Stock-Based CompensationThe Company accounts for stock-based compensation under the fair value recognition
provisions of SFAS No. 123(R) Share-Based Payment. The Company uses the Black-Scholes
option-pricing model to value compensation expense. Forfeitures are estimated at the date
of grant based on historical rates and reduce the compensation expense recognized. The
expected term of options granted is derived from historical data on employee exercises. The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of
grant. Expected volatility is based on the historical volatility of the Companys stock.
For the three months ended January 31, 2008 and 2007 options were valued assuming a
risk-free interest rate of 3.0% and 4.8%, respectively, volatility of 40.7% and 43.2%,
respectively, zero dividend yield, and an expected life of 5.7 and 5.6 years, respectively.
The weighted average fair value of options granted was $3.84 and $7.35 for the three months
ended January 31, 2008 and 2007, respectively. The Company records stock compensation
expense using the graded vested method over the vesting period, which is generally three
years. As of January 31, 2008, the Company had approximately $12.0 million of unrecognized
compensation expense expected to be recognized over a weighted average period of
approximately 2.6 years. Compensation expense was included as selling, general and
administrative expense for the period. The impact on cost of goods sold was not
significant.Changes in shares under option for the three months ended January 31, 2008 are as follows:
 Weighted
    
    Weighted
    
    AggregateDollar amounts in thousands,
    
    
    
    
    
    Average
    
    Average
    
    Intrinsicexcept per share amounts
    
    Shares
    
    Price
    
    Life
    
    ValueOutstanding, October 31, 2007
    
    
    17,311,049
    
    
    $
    9.30Granted
    
    
    1,200,000
    
    
    
    9.00Exercised
    
    
    (387,704
    )
    
    
    2.48
    
    
    
    
    
    
    $
    2,494Canceled
    
    
    (13,500
    )
    
    
    14.42Outstanding, January 31, 2008
    
    
    18,109,845
    
    
    $
    9.43
    
    
    
    5.8
    
    
    $
    36,142Options exercisable, January 31, 2008
    
    
    14,167,048
    
    
    $
    8.52
    
    
    
    5.1
    
    
    $
    35,506
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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Changes in non-vested shares under option for the three months ended January 31, 2008 are as
follows:
 Weighted-Average GrantShares
    
    Date Fair ValueNon-vested, October 31, 2007
    
    
    4,915,536
    
    
    $
    6.71Granted
    
    
    1,200,000
    
    
    
    3.84Vested
    
    
    (2,169,405
    )
    
    
    6.47Canceled
    
    
    (3,334
    )
    
    
    6.96Non-vested, January 31, 2008
    
    
    3,942,797
    
    
    $
    5.97
 In March 2006, the Companys shareholders approved the 2006 Restricted Stock Plan and in
March 2007, the Companys shareholders approved an amendment to the 2000 Stock Incentive
Plan whereby restricted stock and restricted stock units can be issued from such plan.
Stock issued under these plans generally vests from three to five years and may have certain
performance based acceleration features which allow for earlier vesting.Changes in restricted stock for the three months ended January 31, 2008 are as follows:
 SharesOutstanding, October 31, 2007
    
    
    842,000Granted
    
    
    300,000Vested
    
    
    Forfeited
    
    
    Outstanding, January 31, 2008
    
    
    1,142,000
 Compensation expense is determined using the intrinsic value method and forfeitures are
estimated at the date of grant based on historical rates and reduce the compensation expense
recognized. The Company monitors the probability of meeting the restricted stock
performance criteria and will adjust the amortization period as appropriate. As of January
31, 2008, there had been no acceleration of the amortization period. As of January 31,
2008, the Company had approximately $9.7 million of unrecognized compensation expense
expected to be recognized over a weighted average period of approximately 1.7 years.
 4.
    
    InventoriesInventories consist of the following:
 January 31,
    
    
    October 31,In thousands
    
    2008
    
    
    2007Raw materials
    
    $
    32,049
    
    
    $
    29,725Work in-process
    
    
    13,446
    
    
    
    12,223Finished goods
    
    
    444,740
    
    
    
    405,334$
    490,235
    
    
    $
    447,282
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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 5.
    
    Intangible Assets and GoodwillA summary of intangible assets is as follows:
 January 31, 2008
    
    
    October 31, 2007Net
    
    
    
    
    
    
    
    
    
    
    NetGross
    
    
    Amorti-
    
    
    Book
    
    
    Gross
    
    
    Amorti-
    
    
    BookIn thousands
    
    Amount
    
    
    zation
    
    
    Value
    
    
    Amount
    
    
    zation
    
    
    ValueAmortizable trademarks
    
    $
    19,517
    
    
    $
    (7,150
    )
    
    $
    12,367
    
    
    $
    16,082
    
    
    $
    (4,329
    )
    
    $
    11,753Amortizable licenses
    
    
    11,940
    
    
    
    (6,169
    )
    
    
    5,771
    
    
    
    12,354
    
    
    
    (6,074
    )
    
    
    6,280Other amortizable intangibles
    
    
    13,877
    
    
    
    (6,634
    )
    
    
    7,243
    
    
    
    13,906
    
    
    
    (6,282
    )
    
    
    7,624Non-amortizable trademarks
    
    
    201,919
    
    
    
    3⁄4
    
    
    
    201,919
    
    
    
    199,985
    
    
    
    3⁄4
    
    
    
    199,985$
    247,253
    
    
    $
    (19,953
    )
    
    $
    227,300
    
    
    $
    242,327
    
    
    $
    (16,685
    )
    
    $
    225,642
 Certain trademarks and licenses will continue to be amortized by the Company using
estimated useful lives of 10 to 25 years with no residual values. Intangible amortization
expense for the three months ended January 31, 2008 and 2007 was $1.2 million and $1.5
million, respectively. Annual amortization expense is estimated to be approximately $4.0
million in the fiscal year ending October 31, 2008, approximately $4.1 million in the fiscal
year ending October 31, 2009 and approximately $3.7 million in the fiscal years ending
October 31, 2010 through 2012. Goodwill related to the Companys operating segments is as
follows:
 January 31,
    
    
    October 31,In thousands
    
    2008
    
    
    2007Americas
    
    $
    73,386
    
    
    $
    73,709Europe
    
    
    187,328
    
    
    
    184,292Asia/Pacific
    
    
    142,557
    
    
    
    146,178Wintersports equipment
    
    
    13,104
    
    
    
    13,104$
    416,375
    
    
    $
    417,283
 Goodwill decreased approximately $0.9 million during the three months ended January 31,
2008, primarily as a result of the effect of foreign currency exchange rates.
 6.
    
    Accumulated Other Comprehensive IncomeThe components of accumulated other comprehensive income include net income, changes in fair
value of derivative instruments qualifying as cash flow hedges, the fair value of interest
rate swaps and foreign currency translation adjustments. The components of accumulated
other comprehensive income, net of tax, are as follows:
 January 31,
    
    
    October 31,In thousands
    
    2008
    
    
    2007Foreign currency translation adjustment
    
    $
    172,433
    
    
    $
    171,923Loss on cash flow hedges and interest rate swaps
    
    
    (19,342
    )
    
    
    (23,806
    )$
    153,091
    
    
    $
    148,117
 7.
    
    Segment InformationOperating 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 in the outdoor
market of the sporting goods industry in which the Company designs, produces and distributes
clothing, wintersports equipment, footwear, accessories and related products. Effective
November 1, 2007, the Company changed its operating segments to reflect changes in its
internal reporting structure. The Company currently operates in four segments, the
Americas,
 8




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Europe, Asia/Pacific and Wintersports equipment. The Americas segment includes apparel
revenues primarily from the U.S. and Canada. The European segment includes apparel revenues
primarily from Western Europe. The Asia/Pacific segment includes apparel revenues primarily
from Australia, Japan, New Zealand and Indonesia. The Wintersports equipment segment
includes world-wide wintersports equipment revenue, which is primarily from Western Europe
and North America. All prior segment information has been adjusted to reflect our current
operating segment presentation. Costs that support all four segments, including trademark
protection, trademark maintenance and licensing functions are part of Corporate operations.
Corporate operations also includes sourcing income and gross profit earned from the
Companys licensees. The Companys largest customer accounted for approximately 4% of the
Companys net revenues.Information related to the Companys operating segments is as follows:
 Three months ended January 31,In thousands
    
    2008
    
    
    2007Revenues, net:Americas
    
    $
    232,936
    
    
    $
    197,374Europe
    
    
    205,273
    
    
    
    172,011Asia/Pacific
    
    
    61,254
    
    
    
    51,383Wintersports equipment
    
    
    104,846
    
    
    
    107,135Corporate operations
    
    
    987
    
    
    
    774$
    605,296
    
    
    $
    528,677Gross profit:Americas
    
    $
    100,655
    
    
    $
    83,868Europe
    
    
    110,347
    
    
    
    91,506Asia/Pacific
    
    
    31,541
    
    
    
    24,024Wintersports equipment
    
    
    32,771
    
    
    
    49,021Corporate operations
    
    
    336
    
    
    
    510$
    275,650
    
    
    $
    248,929Operating (loss) income:Americas
    
    $
    6,153
    
    
    $
    9,892Europe
    
    
    18,421
    
    
    
    21,426Asia/Pacific
    
    
    3,454
    
    
    
    266Wintersports equipment
    
    
    (21,376
    )
    
    
    7,690Corporate operations
    
    
    (10,939
    )
    
    
    (11,957
    )$
    (4,287
    )
    
    $
    27,317Identifiable assets:Americas
    
    $
    628,169
    
    
    $
    777,649Europe
    
    
    768,977
    
    
    
    749,210Asia/Pacific
    
    
    350,271
    
    
    
    367,935Wintersports equipment
    
    
    632,705
    
    
    
    690,985Corporate operations
    
    
    68,507
    
    
    
    55,749$
    2,448,629
    
    
    $
    2,641,528
 8.
    
    Derivative Financial InstrumentsThe Company is exposed to gains and losses resulting from fluctuations in foreign
currency exchange rates relating to certain sales, royalty income, and product purchases of
its international subsidiaries that are denominated in currencies other than their
functional currencies. The Company is also exposed to foreign currency gains and losses
resulting from domestic transactions that are not denominated in U.S. dollars, and to
fluctuations in interest rates related to its variable rate debt. Furthermore, the Company
is exposed to gains and losses resulting from the effect that fluctuations in foreign
currency exchange rates have on the reported
 9




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 results in the Companys consolidated financial statements due to the translation of the
operating results and financial position of the Companys international subsidiaries. As
part of its overall strategy to manage the level of exposure to the risk of fluctuations in
foreign currency exchange rates, the Company uses various foreign currency exchange
contracts and intercompany loans. In addition, interest rate swaps are used to manage the
Companys exposure to the risk of fluctuations in interest rates.Derivatives that do not qualify for hedge accounting but are used by management to mitigate
exposure to currency risks are marked to fair value with corresponding gains or losses
recorded in earnings. A loss of $0.3 million was recognized related to these types of
contracts during the three months ended January 31, 2008. For all qualifying cash flow
hedges, the changes in the fair value of the derivatives are recorded in other comprehensive
income. As of January 31, 2008, the Company was hedging forecasted transactions expected to
occur through December 2009. Assuming exchange rates at January 31, 2008 remain constant,
$19.3 million of losses, net of tax, related to hedges of these transactions are expected to
be reclassified into earnings over the next 23 months.On the date the Company enters into a derivative contract, management designates the
derivative as a hedge of the identified exposure. The Company formally documents all
relationships between hedging instruments and hedged items, as well as the risk-management
objective and strategy for entering into various hedge transactions. In this documentation,
the Company identifies the asset, liability, firm commitment, or forecasted transaction that
has been designated as a hedged item and indicates how the hedging instrument is expected to
hedge the risks related to the hedged item. The Company formally measures effectiveness of
its hedging relationships both at the hedge inception and on an ongoing basis in accordance
with its risk management policy. The Company would discontinue hedge accounting
prospectively (i) if management determines that the derivative is no longer effective in
offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or
is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted
transaction being hedged by the derivative will not occur, (iv) because a hedged firm
commitment no longer meets the definition of a firm commitment, or (v) if management
determines that designation of the derivative as a hedge instrument is no longer
appropriate. During the three months ended January 31, 2008, the Company reclassified into
earnings a net loss of $5.9 million resulting from the expiration, sale, termination, or
exercise of derivative contracts.The Company enters into forward exchange and other derivative contracts with major banks and
is exposed to credit losses in the event of nonperformance by these banks. The Company
anticipates, however, that these banks will be able to fully satisfy their obligations under
the contracts. Accordingly, the Company does not obtain collateral or other security to
support the contracts.A summary of derivative contracts at January 31, 2008 is as follows:
 Notional
    
    
    
    
    FairIn thousands
    
    Amount
    
    
    Maturity
    
    ValueU.S. dollar
    
    $
    398,649
    
    
    Feb 2008  Dec 2009
    
    $
    (30,448
    )Canadian dollar
    
    
    16,433
    
    
    Feb 2008  Dec 2008
    
    
    (36
    )Japanese Yen
    
    
    13,561
    
    
    Feb 2008  Dec 2008
    
    
    (131
    )Romanian New Lei
    
    
    3,273
    
    
    Feb 2008
    
    
    328Swiss Franc
    
    
    1,190
    
    
    Feb 2008
    
    
    3Interest Rate Swap Euro
    
    
    24,390
    
    
    April 2008  Sep 2009
    
    
    13$
    457,496
    
    
    
    
    $
    (30,271
    )
 10




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 9.
    
    Business AcquisitionsIn September 2007, the Company acquired the minority interest of Roger Cleveland Golf
Company, Inc. (Cleveland Golf), the Companys U.S. golf equipment operations. The Company
had previously acquired 63.63% of Cleveland Golf as part of the acquisition of Rossignol in
July 2005. The purchase price for the remaining minority interest of Cleveland Golf,
excluding transaction costs, included a cash payment of $17.5 million at closing. The
Company accounted for this transaction as a step acquisition and recorded 36.37% of fair
value adjustments related to the acquisition of the remaining portion of Cleveland Golf.
The Company also agreed to terminate all consulting arrangements with the former minority
interest holders of Cleveland Golf and recorded an expense of approximately $3.6 million in
contract termination costs. In October 2007, the Company entered into an agreement to sell
its golf equipment business (Note 13). In connection with the sale of Cleveland Golf in
December, 2007, the Company paid an additional $8.5 million to the former minority interest
holders of Cleveland Golf as required by the terms of the minority interest stock purchase
agreement.The Company paid cash of approximately $1.0 million during the three months ended January
31, 2008 which related primarily to acquisitions of certain distributors.10.
    
    Litigation, Indemnities and GuaranteesThe Company has been named in a class action lawsuit that alleges willful violation of the
federal Fair and Accurate Credit Transaction Act based upon certain of the Companys retail
stores alleged electronic printing of receipts on which appeared more than the last five
digits of customers credit or debit card number and/or the expiration date of such
customers credit or debit card. The Company is currently unable to assess the extent of
damages, if any, that could be awarded to the plaintiff class if it were to prevail. The
Company intends to vigorously defend itself against the claims asserted. No provision has
been made in the Companys financial statements for the three months ended January 31, 2008.The Company is also involved from time to time in legal claims involving trademark and
intellectual property, licensing, employee relations and other matters incidental to its
business. The Company believes the resolution of any such matter currently pending will not
have a material adverse effect on its financial condition or results of operations.During its normal course of business, the Company has made certain indemnities, commitments
and guarantees under which it may be required to make payments in relation to certain
transactions. These include (i) intellectual property indemnities to the Companys
customers and licensees in connection with the use, sale and/or license of Company products,
(ii) indemnities to various lessors in connection with facility leases for certain claims
arising from such facility or lease, (iii) indemnities to vendors and service providers
pertaining to claims based on the negligence or willful misconduct of the Company, and (iv)
indemnities involving the accuracy of representations and warranties in certain contracts.
The duration of these indemnities, commitments and guarantees varies, and in certain cases,
may be indefinite. The majority of these indemnities, commitments and guarantees do not
provide for any limitation of the maximum potential for future payments the Company could be
obligated to make. The Company has not recorded any liability for these indemnities,
commitments and guarantees in the accompanying consolidated balance sheets.11.
    
    Rossignol Integration Plan and Pre-acquisition Restructuring PlanIn connection with the acquisition of Rossignol, the Company has formulated the Rossignol
Integration Plan (the Plan). The Plan covers the global operations of Rossignol and the
Companys existing businesses, and it includes the evaluation of facility relocations,
nonstrategic business activities, redundant functions and other related items. As of
January 31, 2008 the Company had recognized approximately $62.5 million of liabilities
related to the Plan, including
 11




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 employee relocation and severance costs, moving costs, and other costs related primarily to
the consolidation of Rossignols administrative headquarters in Europe, the consolidation of
Rossignols European distribution, the consolidation and realignment of certain European
manufacturing facilities, and the relocation of the Companys wintersports equipment sales
and distribution operations in the United States. These liabilities were included in the
allocation of the purchase price for Rossignol in accordance with SFAS No. 141, Business
Combinations and EITF Issue No. 95-3, Recognition of Liabilities in Connection with a
Purchase Business Combination. As of January 31, 2008, the Company also recognized
approximately $1.4 million in inventory impairments relating to the realignment of its
European manufacturing facilities. Costs that are not associated with the acquired company
but relate to activities or employees of the Companys existing operations are not
significant and are charged to earnings. If the Company has overestimated these integration
costs, the excess will reduce goodwill in future periods. If the Company has underestimated
these integration costs, additional liabilities recognized will be recorded in earnings.
Certain land and facilities owned by the acquired company are expected to be sold during the
next 12 months in connection with the Plan, while others are anticipated to be refinanced
through sale-leaseback arrangements. Assets currently held for sale, primarily in France,
totaled approximately $15.8 million at January 31, 2008.Activity and liability balances recorded as part of the Plan are as follows:
 FacilityIn thousands
    
    Workforce
    
    
    and Other
    
    
    TotalRecorded in purchase price allocation
    
    $
    3,673
    
    
    $
    1,574
    
    
    $
    5,247Adjustment to purchase price
allocation tax
    
    
    17,463
    
    
    
    752
    
    
    
    18,215Cash payments tax
    
    
    (17
    )
    
    
    (44
    )
    
    
    (61
    )Foreign currency translation tax
    
    
    (83
    )
    
    
    (6
    )
    
    
    (89
    )Balance, October 31, 2005
    
    
    21,036
    
    
    
    2,276
    
    
    
    23,312Adjustment to purchase price
allocation tax
    
    
    33,998
    
    
    
    5,085
    
    
    
    39,083Cash payments tax
    
    
    (14,122
    )
    
    
    (2,512
    )
    
    
    (16,634
    )Foreign currency translation tax
    
    
    2,559
    
    
    
    88
    
    
    
    2,647Balance, October 31, 2006
    
    
    43,471
    
    
    
    4,937
    
    
    
    48,408Cash payments tax
    
    
    (25,589
    )
    
    
    (4,005
    )
    
    
    (29,594
    )Foreign currency translation tax
    
    
    4,213
    
    
    
    635
    
    
    
    4,848Balance, October 31, 2007
    
    
    22,095
    
    
    
    1,567
    
    
    
    23,662Cash payments
    
    
    (4,557
    )
    
    
    (134
    )
    
    
    (4,691
    )Foreign currency translation
    
    
    528
    
    
    
    39
    
    
    
    567Balance, January 31, 2008
    
    $
    18,066
    
    
    $
    1,472
    
    
    $
    19,538
 Prior to the acquisition of Rossignol, a restructuring plan was announced related to
Rossignols French manufacturing facilities (Pre-acquisition Restructuring Plan). The
costs associated with the Pre-acquisition Restructuring Plan consist of termination benefits
achieved through voluntary early retirement and voluntary termination of certain employees.Activity and liability balances recorded as part of the Pre-acquisition Restructuring Plan
are as follows:
 In thousands
    
    WorkforceBalance, October 31, 2007
    
    $
    1,182Cash payments
    
    
    (102
    )Foreign currency translation
    
    
    29Balance, January 31, 2008
    
    $
    1,109
 12




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 12.
    
    Condensed Consolidating Financial InformationThe Company has $400 million in publicly registered senior notes. Obligations under the
Companys senior notes are fully and unconditionally guaranteed by certain of its domestic
subsidiaries. The Company is required to present condensed consolidating financial
information for Quiksilver, Inc. and its domestic subsidiaries within the notes to the
consolidated financial statements in accordance with the criteria established for parent
companies in the SECs Regulation S-X, Rule 3-10(f). The following condensed consolidating
financial information presents the results of operations, financial position and cash flows
of Quiksilver Inc., its guarantor subsidiaries, its non-guarantor subsidiaries and the
eliminations necessary to arrive at the information for the Company on a consolidated basis
as of January 31, 2008 and October 31, 2007 and for the three months ended January 31, 2008
and 2007. The principal elimination entries eliminate investments in subsidiaries and
intercompany balances and transactions. Due to the seasonality of the Companys quarterly
operations, management has applied the estimated consolidated annual effective income tax
rate to both the guarantor and non-guarantor subsidiaries for interim reporting purposes.
In the Companys consolidated financial statements for the fiscal year ending October 31,
2008, management will apply the actual income tax rate to both the guarantor and
non-guarantor subsidiaries. These interim tax rates may differ from the actual annual
effective income tax rates for both the guarantor and non-guarantor subsidiaries.
 13




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 2008
 Wholly-owned
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues, net
    
    $
    (5
    )
    
    $
    224,908
    
    
    $
    391,449
    
    
    $
    (11,056
    )
    
    $
    605,296Cost of goods sold
    
    
    
    
    
    
    131,817
    
    
    
    202,071
    
    
    
    (4,242
    )
    
    
    329,646Gross profit
    
    
    (5
    )
    
    
    93,091
    
    
    
    189,378
    
    
    
    (6,814
    )
    
    
    275,650Selling, general and administrative
expense
    
    
    9,035
    
    
    
    96,688
    
    
    
    180,897
    
    
    
    (6,683
    )
    
    
    279,937Operating (loss) income
    
    
    (9,040
    )
    
    
    (3,597
    )
    
    
    8,481
    
    
    
    (131
    )
    
    
    (4,287
    )Interest expense
    
    
    10,680
    
    
    
    567
    
    
    
    3,393
    
    
    
    
    
    
    
    14,640Foreign currency loss (gain)
    
    
    196
    
    
    
    15
    
    
    
    (946
    )
    
    
    
    
    
    
    (735
    )Minority interest and other
(income) expense
    
    
    
    
    
    
    (35
    )
    
    
    109
    
    
    
    
    
    
    
    74(Loss) income before (benefit)
provision for income taxes
    
    
    (19,916
    )
    
    
    (4,144
    )
    
    
    5,925
    
    
    
    (131
    )
    
    
    (18,266
    )(Benefit) provision for income
taxes
    
    
    (3,933
    )
    
    
    (818
    )
    
    
    1,143
    
    
    
    
    
    
    
    (3,608
    )(Loss) income from continuing
operations
    
    
    (15,983
    )
    
    
    (3,326
    )
    
    
    4,782
    
    
    
    (131
    )
    
    
    (14,658
    )(Loss) income from discontinued
operations
    
    
    (250
    )
    
    
    (9,133
    )
    
    
    1,961
    
    
    
    140
    
    
    
    (7,282
    )Net (loss) income
    
    $
    (16,233
    )
    
    $
    (12,459
    )
    
    $
    6,743
    
    
    $
    9
    
    
    $
    (21,940
    )
 14




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 2007
 Wholly-owned
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues, net
    
    $
    
    
    
    $
    194,082
    
    
    $
    344,273
    
    
    $
    (9,678
    )
    
    $
    528,677Cost of goods sold
    
    
    
    
    
    
    115,902
    
    
    
    167,843
    
    
    
    (3,997
    )
    
    
    279,748Gross profit
    
    
    
    
    
    
    78,180
    
    
    
    176,430
    
    
    
    (5,681
    )
    
    
    248,929Selling, general and administrative
expense
    
    
    10,990
    
    
    
    78,440
    
    
    
    138,172
    
    
    
    (5,990
    )
    
    
    221,612Operating (loss) income
    
    
    (10,990
    )
    
    
    (260
    )
    
    
    38,258
    
    
    
    309
    
    
    
    27,317Interest expense
    
    
    10,420
    
    
    
    1,662
    
    
    
    2,674
    
    
    
    
    
    
    
    14,756Foreign currency loss (gain)
    
    
    684
    
    
    
    (297
    )
    
    
    1,510
    
    
    
    
    
    
    
    1,897Minority interest and other
expense
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    33(Loss) income before (benefit)
provision for income taxes
    
    
    (22,094
    )
    
    
    (1,625
    )
    
    
    34,041
    
    
    
    309
    
    
    
    10,631(Benefit) provision for income
taxes
    
    
    (5,205
    )
    
    
    718
    
    
    
    8,309
    
    
    
    
    
    
    
    3,822(Loss) income from continuing
operations
    
    
    (16,889
    )
    
    
    (2,343
    )
    
    
    25,732
    
    
    
    309
    
    
    
    6,809Income (loss) from discontinued
operations
    
    
    1,688
    
    
    
    (5,392
    )
    
    
    (601
    )
    
    
    (29
    )
    
    
    (4,334
    )Net (loss) income
    
    $
    (15,201
    )
    
    $
    (7,735
    )
    
    $
    25,131
    
    
    $
    280
    
    
    $
    2,475
 15




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING BALANCE SHEET
At January 31, 2008
 Wholly-owned
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    (71
    )
    
    $
    2,075
    
    
    $
    73,177
    
    
    $
    
    
    
    $
    75,181Trade accounts receivable, net
    
    
    
    
    
    
    212,125
    
    
    
    426,582
    
    
    
    
    
    
    
    638,707Other receivables
    
    
    1,434
    
    
    
    19,119
    
    
    
    38,981
    
    
    
    
    
    
    
    59,534Income taxes receivable
    
    
    
    
    
    
    4,853
    
    
    
    (1,000
    )
    
    
    
    
    
    
    3,853Inventories
    
    
    
    
    
    
    151,711
    
    
    
    340,015
    
    
    
    (1,491
    )
    
    
    490,235Deferred income taxes
    
    
    
    
    
    
    21,757
    
    
    
    44,464
    
    
    
    
    
    
    
    66,221Prepaid expenses and other
current assets
    
    
    2,275
    
    
    
    12,011
    
    
    
    26,652
    
    
    
    
    
    
    
    40,938Current assets held for sale
    
    
    
    
    
    
    1,946
    
    
    
    
    
    
    
    
    
    
    
    1,946Total current assets
    
    
    3,638
    
    
    
    425,597
    
    
    
    948,871
    
    
    
    (1,491
    )
    
    
    1,376,615Fixed assets, net
    
    
    7,000
    
    
    
    104,483
    
    
    
    253,834
    
    
    
    
    
    
    
    365,317Intangible assets, net
    
    
    2,677
    
    
    
    47,255
    
    
    
    177,368
    
    
    
    
    
    
    
    227,300Goodwill
    
    
    
    
    
    
    126,964
    
    
    
    289,411
    
    
    
    
    
    
    
    416,375Investment in subsidiaries
    
    
    505,058
    
    
    
    
    
    
    
    
    
    
    
    (505,058
    )
    
    
    Other assets
    
    
    11,032
    
    
    
    5,954
    
    
    
    30,244
    
    
    
    
    
    
    
    47,230Non-current assets held for sale
    
    
    
    
    
    
    100
    
    
    
    15,692
    
    
    
    
    
    
    
    15,792Total assets
    
    $
    529,405
    
    
    $
    710,353
    
    
    $
    1,715,420
    
    
    $
    (506,549
    )
    
    $
    2,448,629LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit
    
    $
    
    
    
    $
    
    
    
    $
    271,549
    
    
    $
    
    
    
    $
    271,549Accounts payable
    
    
    1,946
    
    
    
    81,086
    
    
    
    214,614
    
    
    
    
    
    
    
    297,646Accrued liabilities
    
    
    20,883
    
    
    
    36,792
    
    
    
    137,044
    
    
    
    
    
    
    
    194,719Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    35,255
    
    
    
    
    
    
    
    35,255Intercompany balances
    
    
    150,288
    
    
    
    (22,427
    )
    
    
    (127,861
    )
    
    
    
    
    
    
    Current liabilities of assets held for
sale
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    110Total current liabilities
    
    
    173,117
    
    
    
    95,561
    
    
    
    530,601
    
    
    
    
    
    
    
    799,279Long-term debt,
    
    
    400,000
    
    
    
    96,500
    
    
    
    228,598
    
    
    
    
    
    
    
    725,098Deferred income taxes and other
long-term liabilities
    
    
    
    
    
    
    31,768
    
    
    
    37,561
    
    
    
    
    
    
    
    69,329Non-current liabilities of assets held for
sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    573,117
    
    
    
    223,829
    
    
    
    796,760
    
    
    
    
    
    
    
    1,593,706Stockholders/invested equity
    
    
    (43,712
    )
    
    
    486,524
    
    
    
    918,660
    
    
    
    (506,549
    )
    
    
    854,923Total liabilities and
stockholders equity
    
    $
    529,405
    
    
    $
    710,353
    
    
    $
    1,715,420
    
    
    $
    (506,549
    )
    
    $
    2,448,629
 16




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING BALANCE SHEET
At October 31, 2007
 Wholly-owned
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    12
    
    
    $
    13,254
    
    
    $
    61,082
    
    
    $
    
    
    
    $
    74,348Trade accounts receivable, net
    
    
    
    
    
    
    248,392
    
    
    
    512,038
    
    
    
    
    
    
    
    760,430Other receivables
    
    
    775
    
    
    
    13,574
    
    
    
    55,752
    
    
    
    
    
    
    
    70,101Inventories
    
    
    
    
    
    
    152,700
    
    
    
    295,878
    
    
    
    (1,296
    )
    
    
    447,282Deferred income taxes
    
    
    
    
    
    
    18,143
    
    
    
    44,054
    
    
    
    
    
    
    
    62,197Prepaid expenses and other
current assets
    
    
    1,596
    
    
    
    7,729
    
    
    
    15,894
    
    
    
    
    
    
    
    25,219Current assets held for sale
    
    
    
    
    
    
    53,044
    
    
    
    21,662
    
    
    
    (1,021
    )
    
    
    73,685Total current assets
    
    
    2,383
    
    
    
    506,836
    
    
    
    1,006,360
    
    
    
    (2,317
    )
    
    
    1,513,262Fixed assets, net
    
    
    6,959
    
    
    
    100,803
    
    
    
    239,560
    
    
    
    
    
    
    
    347,322Intangible assets, net
    
    
    2,626
    
    
    
    47,282
    
    
    
    175,734
    
    
    
    
    
    
    
    225,642Goodwill
    
    
    
    
    
    
    126,437
    
    
    
    290,846
    
    
    
    
    
    
    
    417,283Investment in subsidiaries
    
    
    569,492
    
    
    
    
    
    
    
    
    
    
    
    (569,492
    )
    
    
    Other assets
    
    
    10,120
    
    
    
    5,967
    
    
    
    30,176
    
    
    
    
    
    
    
    46,263Non-current assets held for sale
    
    
    
    
    
    
    72,679
    
    
    
    19,077
    
    
    
    
    
    
    
    91,756Total assets
    
    $
    591,580
    
    
    $
    860,004
    
    
    $
    1,761,753
    
    
    $
    (571,809
    )
    
    $
    2,641,528LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit
    
    $
    
    
    
    $
    
    
    
    $
    313,996
    
    
    $
    
    
    
    $
    313,996Accounts payable
    
    
    2,086
    
    
    
    111,086
    
    
    
    173,635
    
    
    
    
    
    
    
    286,807Accrued liabilities
    
    
    20,287
    
    
    
    41,986
    
    
    
    165,567
    
    
    
    
    
    
    
    227,840Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    34,306
    
    
    
    
    
    
    
    34,306Income taxes payable
    
    
    
    
    
    
    3,331
    
    
    
    3,856
    
    
    
    
    
    
    
    7,187Intercompany balances
    
    
    178,353
    
    
    
    (6,389
    )
    
    
    (171,964
    )
    
    
    
    
    
    
    Current liabilities of assets held for
sale
    
    
    
    
    
    
    7,274
    
    
    
    3,995
    
    
    
    
    
    
    
    11,269Total current liabilities
    
    
    200,726
    
    
    
    157,288
    
    
    
    523,391
    
    
    
    
    
    
    
    881,405Long-term debt
    
    
    400,000
    
    
    
    129,700
    
    
    
    242,428
    
    
    
    
    
    
    
    772,128Deferred income taxes and other
long-term liabilities
    
    
    
    
    
    
    10,548
    
    
    
    37,918
    
    
    
    
    
    
    
    48,466Non-current liabilities of assets held for
sale
    
    
    
    
    
    
    52,812
    
    
    
    104
    
    
    
    
    
    
    
    52,916Total liabilities
    
    
    600,726
    
    
    
    350,348
    
    
    
    803,841
    
    
    
    
    
    
    
    1,754,915Stockholders/invested equity
    
    
    (9,146
    )
    
    
    509,656
    
    
    
    957,912
    
    
    
    (571,809
    )
    
    
    886,613Total liabilities and
stockholders equity
    
    $
    591,580
    
    
    $
    860,004
    
    
    $
    1,761,753
    
    
    $
    (571,809
    )
    
    $
    2,641,528
 17




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended January 31, 2008
 Non-Quiksilver,
    
    
    Guarantor
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activities:Net (loss) income
    
    $
    (16,233
    )
    
    $
    (12,459
    )
    
    $
    6,752
    
    
    $
    (21,940
    )Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Loss (income) from discontinued operations
    
    
    250
    
    
    
    9,133
    
    
    
    (2,101
    )
    
    
    7,282Depreciation and amortization
    
    
    194
    
    
    
    6,451
    
    
    
    12,370
    
    
    
    19,015Provision for doubtful accounts
    
    
    
    
    
    
    925
    
    
    
    1,051
    
    
    
    1,976Stock-based compensation
    
    
    2,461
    
    
    
    
    
    
    
    
    
    
    
    2,461Other adjustments to reconcile net income
    
    
    178
    
    
    
    (184
    )
    
    
    540
    
    
    
    534Changes in operating assets and liabilities:Trade accounts receivable
    
    
    
    
    
    
    35,341
    
    
    
    92,579
    
    
    
    127,920Inventories
    
    
    
    
    
    
    998
    
    
    
    (37,920
    )
    
    
    (36,922
    )Other operating assets and liabilities
    
    
    3,079
    
    
    
    (54,096
    )
    
    
    10,383
    
    
    
    (40,634
    )Cash (used in) provided by operating activities of
continuing operations
    
    
    (10,071
    )
    
    
    (13,891
    )
    
    
    83,654
    
    
    
    59,692Cash provided by (used in) operating activities of
discontinued operations
    
    
    26
    
    
    
    (95
    )
    
    
    (930
    )
    
    
    (999
    )Net cash (used in) provided by operating activities
    
    
    (10,045
    )
    
    
    (13,986
    )
    
    
    82,724
    
    
    
    58,693Cash flows from investing activities:Proceeds from the sale of properties and equipment
    
    
    
    
    
    
    
    
    
    
    280
    
    
    
    280Capital expenditures
    
    
    (285
    )
    
    
    (11,678
    )
    
    
    (23,447
    )
    
    
    (35,410
    )Business acquisitions, net of cash acquired
    
    
    
    
    
    
    422
    
    
    
    (1,460
    )
    
    
    (1,038
    )Cash used in investing activities of continuing
operations
    
    
    (285
    )
    
    
    (11,256
    )
    
    
    (24,627
    )
    
    
    (36,168
    )Cash provided by investing activities of discontinued
operations
    
    
    
    
    
    
    95,526
    
    
    
    19,923
    
    
    
    115,449Net cash (used in) provided by investing activities
    
    
    (285
    )
    
    
    84,270
    
    
    
    (4,704
    )
    
    
    79,281Cash flows from financing activities:Borrowings on lines of credit
    
    
    
    
    
    
    
    
    
    
    14,551
    
    
    
    14,551Payments on lines of credit
    
    
    
    
    
    
    
    
    
    
    (65,349
    )
    
    
    (65,349
    )Borrowings on long-term debt
    
    
    
    
    
    
    86,500
    
    
    
    1,023
    
    
    
    87,523Payments on long-term debt
    
    
    
    
    
    
    (119,700
    )
    
    
    (21,587
    )
    
    
    (141,287
    )Stock option exercises, employee stock purchases and tax
benefit on option exercises
    
    
    2,772
    
    
    
    
    
    
    
    
    
    
    
    2,772Intercompany
    
    
    7,475
    
    
    
    (13,263
    )
    
    
    5,788
    
    
    
    Cash provided by (used in) financing activities
continuing operations
    
    
    10,247
    
    
    
    (46,463
    )
    
    
    (65,574
    )
    
    
    (101,790
    )Cash used in financing activities of
discontinued operations
    
    
    
    
    
    
    (35,000
    )
    
    
    
    
    
    
    (35,000
    )Net cash provided by (used in) financing activities
    
    
    10,247
    
    
    
    (81,463
    )
    
    
    (65,574
    )
    
    
    (136,790
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (351
    )
    
    
    (351
    )Net (decrease) increase in cash and cash equivalents
    
    
    (83
    )
    
    
    (11,179
    )
    
    
    12,095
    
    
    
    833Cash and cash equivalents, beginning of period
    
    
    12
    
    
    
    13,254
    
    
    
    61,082
    
    
    
    74,348Cash and cash equivalents, end of period
    
    $
    (71
    )
    
    $
    2,075
    
    
    $
    73,177
    
    
    $
    75,181
 18




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended January 31, 2007
 Non-Quiksilver,
    
    
    Guarantor
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activities:Net (loss) income
    
    $
    (15,201
    )
    
    $
    (7,735
    )
    
    $
    25,411
    
    
    $
    2,475Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:Income (loss) from discontinued operations
    
    
    (1,688
    )
    
    
    5,392
    
    
    
    630
    
    
    
    4,334Depreciation and amortization
    
    
    54
    
    
    
    4,611
    
    
    
    11,107
    
    
    
    15,772Provision for doubtful accounts
    
    
    
    
    
    
    813
    
    
    
    (1,258
    )
    
    
    (445
    )Stock-based compensation
    
    
    4,777
    
    
    
    
    
    
    
    
    
    
    
    4,777Other adjustments to reconcile net income
    
    
    10
    
    
    
    (137
    )
    
    
    145
    
    
    
    18Changes in operating assets and liabilities:Trade accounts receivable
    
    
    
    
    
    
    26,311
    
    
    
    91,701
    
    
    
    118,012Inventories
    
    
    
    
    
    
    (15,226
    )
    
    
    (33,575
    )
    
    
    (48,801
    )Other operating assets and liabilities
    
    
    4,083
    
    
    
    (14,953
    )
    
    
    (12,698
    )
    
    
    (23,568
    )Cash (used in) provided by operating activities of
continuing operations
    
    
    (7,965
    )
    
    
    (924
    )
    
    
    81,463
    
    
    
    72,574Cash provided by (used in) operating activities of
discontinued operations
    
    
    1,691
    
    
    
    (8,232
    )
    
    
    (1,708
    )
    
    
    (8,249
    )Net cash (used in) provided by operating activities
    
    
    (6,274
    )
    
    
    (9,156
    )
    
    
    79,755
    
    
    
    64,325Cash flows from investing activities:Proceeds from the sale of properties and equipment
    
    
    
    
    
    
    4,463
    
    
    
    3,445
    
    
    
    7,908Capital expenditures
    
    
    (409
    )
    
    
    (9,877
    )
    
    
    (17,681
    )
    
    
    (27,967
    )Business acquisitions, net of cash acquired
    
    
    (264
    )
    
    
    
    
    
    
    (2,260
    )
    
    
    (2,524
    )Cash used in investing activities of continuing
operations
    
    
    (673
    )
    
    
    (5,414
    )
    
    
    (16,496
    )
    
    
    (22,583
    )Cash used in investing activities of discontinued
operations
    
    
    
    
    
    
    (271
    )
    
    
    (32
    )
    
    
    (303
    )Net cash used in investing activities
    
    
    (673
    )
    
    
    (5,685
    )
    
    
    (16,528
    )
    
    
    (22,886
    )Cash flows from financing activities:Borrowings on lines of credit
    
    
    
    
    
    
    
    
    
    
    14,972
    
    
    
    14,972Payments on lines of credit
    
    
    
    
    
    
    (153
    )
    
    
    (41,052
    )
    
    
    (41,205
    )Borrowings on long-term debt
    
    
    
    
    
    
    22,750
    
    
    
    1,338
    
    
    
    24,088Payments on long-term debt
    
    
    
    
    
    
    (19,107
    )
    
    
    (16,538
    )
    
    
    (35,645
    )Stock option exercises, employee stock purchase and tax
benefit on option exercises
    
    
    4,708
    
    
    
    
    
    
    
    
    
    
    
    4,708Intercompany
    
    
    1,919
    
    
    
    11,986
    
    
    
    (13,905
    )
    
    
    Cash provided by (used in) financing activities
continuing operations
    
    
    6,627
    
    
    
    15,476
    
    
    
    (55,185
    )
    
    
    (33,082
    )Cash (used in) provided by financing activities of
discontinued operations
    
    
    
    
    
    
    (1,351
    )
    
    
    3,351
    
    
    
    2,000Net cash provided by (used in) financing activities
    
    
    6,627
    
    
    
    14,125
    
    
    
    (51,834
    )
    
    
    (31,082
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    (388
    )
    
    
    (807
    )
    
    
    (1,195
    )Net (decrease) increase in cash and cash equivalents
    
    
    (320
    )
    
    
    (1,104
    )
    
    
    10,586
    
    
    
    9,162Cash and cash equivalents, beginning of period
    
    
    8
    
    
    
    3,392
    
    
    
    33,434
    
    
    
    36,834Cash and cash equivalents, end of period
    
    $
    (312
    )
    
    $
    2,288
    
    
    $
    44,020
    
    
    $
    45,996
 19




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 13.
    
    Discontinued OperationsIn October 2007, the Company entered into an agreement to sell its golf equipment
business which includes Roger Cleveland Golf Company, Inc. and certain other related
international subsidiaries for approximately $132.5 million. Majority ownership in this
business was originally acquired in fiscal 2005 as part of the Rossignol acquisition. In
September 2007, the Company acquired the remaining 36.37% minority interest in Roger
Cleveland Golf Company, Inc. (Note 9). The golf equipment business assets are classified as
held for sale and the operations of the golf equipment business are classified as
discontinued operations for all periods presented. The Company closed this transaction
during December 2007. The Company used the net proceeds from this sale to repay
indebtedness.The operating results of discontinued operations included in the accompanying consolidated
statements of operations were as follows:
 Three Months EndedJanuary 31,In thousands
    
    2008
    
    
    2007Revenues, net
    
    $
    7,937
    
    
    $
    23,847Loss before income taxes
    
    
    (5,319
    )
    
    
    (7,305
    )Provision (benefit) for income taxes
    
    
    1,963
    
    
    
    (2,971
    )Loss from discontinued operations
    
    $
    (7,282
    )
    
    $
    (4,334
    )
 The remaining assets and liabilities of our discontinued golf equipment business at
January 31, 2008 related to our Fidra golf brand business which will cease in fiscal 2008.
The components of assets and liabilities of discontinued operations are as follows:
 January 31,
    
    
    October 31,In thousands
    
    2008
    
    
    2007Current assets:Receivables, net
    
    $
    45
    
    
    $
    40,309Inventories
    
    
    462
    
    
    
    26,415Other current assets
    
    
    1,439
    
    
    
    6,961$
    1,946
    
    
    $
    73,685Non-current assets:Fixed assets, net
    
    $
    
    
    
    $
    3,619Goodwill and intangible assets, net
    
    
    
    
    
    
    72,540Other assets
    
    
    100
    
    
    
    301$
    100
    
    
    $
    76,460Current liabilities:Accounts payable
    
    $
    103
    
    
    $
    6,614Other current liabilities
    
    
    7
    
    
    
    4,655$
    110
    
    
    $
    11,269Non-current liabilities:Long-term debt
    
    $
    
    
    
    $
    35,000Other non-current liabilities
    
    
    
    
    
    
    17,916$
    
    
    
    $
    52,916
 20




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 14.
    
    Income TaxesOn November 1, 2007, the Company adopted FIN 48. The evaluation of a tax position in
accordance with FIN 48 is a two-step process. The Company first is required to determine
whether an uncertain tax position may be recognized when it is more likely than not that a
tax position will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. A tax position that
meets the more-likely-than-not threshold is then measured to determine the amount of benefit
to recognize in the financial statements. If a tax position does not meet the
more-likely-than-not threshold, no benefit can be recognized.As a result of the adoption of FIN 48, the Company recognized a $21.3 million reduction in
retained earnings as of November 1, 2007. This adjustment consisted of an increase in the
Companys liability for unrecognized tax benefits of $30.4 million partially offset by an
increase to the Companys deferred tax assets of $2.0 million and an increase in the
Companys taxes receivable of $7.1 million. The total balance of unrecognized tax benefits,
including interest and penalties, was $37.4 million as of November 1, 2007. The total
amount of unrecognized tax benefits that, if recognized, would have had an impact on the
effective tax rate was $28.3 million as of November 1, 2007.The Company includes interest and penalties related to unrecognized tax benefits in its
provision for income taxes in the accompanying condensed consolidated statements of
operations. Accrued interest and penalties are included in income taxes payable in the
condensed consolidated balance sheets. As of November 1, 2007, the Company had accrued $7.8
million in interest and penalties related to uncertain tax positions.The Companys significant jurisdictions, including the United States, France, Australia and
Canada, are subject to normal and regular examination for various years beginning in fiscal
year 2000. The Company completed a tax audit in the United States for fiscal years ending
2004 and 2005 and is currently under examination in France, Australia and Canada.The Company has evaluated its tax positions for which it is reasonably possible that the
total amounts of unrecognized tax benefits will significantly increase or decrease within 12
months. During the next 12 months, it is reasonably possible that the Companys liability
for uncertain tax positions may decrease by a significant amount as a result of the
resolution or payment of uncertain tax positions relating to intercompany transactions
between foreign affiliates and certain foreign withholding tax exposures. The liability
would decrease as a result of filing amended returns and paying the liabilities, resolving
the uncertainties in connection with a current tax examination, or the lapse of a statute of
limitation for such examination. The range of the decrease in the FIN 48 tax liability
which is reasonably possible in the next 12 months is not expected to exceed $14.5 million.Conclusion of the above matters could result in settlements for different amounts than the
Company has accrued as uncertain tax benefits. If a position for which the Company
concluded it was more likely than not that the tax position would be sustained is
subsequently not upheld, the Company would need to accrue and ultimately pay an additional
amount. Conversely, the Company could settle positions with the tax authorities for amounts
lower than those which have been accrued or extinguish a position through payment.
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Quiksilver Quiksilver Quiksilver Roxy Boardriders Clubs Quiksilver Roxy Quiksilver Roxy Rossignol Dynastar Lange Look Kerma
    22




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Results of Operations
  Three Months Ended January 31,2008
    
    
    2007Statement of Income dataRevenues, net
    
    
    100.0
    %
    
    
    100.0
    %Gross profit
    
    
    45.5
    
    
    
    47.1Selling, general and administrative expense
    
    
    46.2
    
    
    
    41.9Operating (loss) income
    
    
    (0.7
    )
    
    
    5.2Interest expense
    
    
    2.4
    
    
    
    2.8Foreign currency, minority interest and other
(income) expense
    
    
    (0.1
    )
    
    
    0.4(Loss) income before (benefit) provision for
income taxes
    
    
    (3.0
    )%
    
    
    2.0
    %Other dataAdjusted EBITDA(1)
    
    
    3.1
    %
    
    
    8.7
    %
 
 (1)
    
    Adjusted EBITDA is defined as (loss) income from continuing operations
before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization,
(iv) non-cash stock-based compensation expense and (v) asset impairments. Adjusted EBITDA
is not defined under generally accepted accounting principles (GAAP), and it may not be
comparable to similarly titled measures reported by other companies. We use Adjusted
EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted
EBITDA helps us to compare our performance on a consistent basis by removing from our
operating results the impact of our capital structure, the effect of operating in
different tax jurisdictions, the impact of our asset base, which can differ depending on
the book value of assets, the accounting methods used to compute depreciation and
amortization, the existence or timing of asset impairments and the effect of non-cash
stock-based compensation expense. We believe EBITDA is useful to investors as it is a
widely used measure of performance and the adjustments we make to EBITDA provide further
clarity on our profitability. We remove the effect of non-cash stock-based compensation
from our earnings which can vary based on share price, share price volatility and expected
life of the equity instruments we grant. In addition, this stock-based compensation
expense does not result in cash payments by us. We remove the effect of asset impairments
from Adjusted EBITDA for the same reason that we remove depreciation and amortization as it is
part of the impact of our asset base. Adjusted EBITDA has limitations as a profitability
measure in that it does not include the interest expense on our debts, our provisions for
income taxes, the effect of our expenditures for capital assets and certain intangible
assets, the effect of non-cash compensation expense and the effect of asset impairments.
Following is a reconciliation of income from continuing operations to Adjusted EBITDA: Three Months Ended January 31,2008
    
    
    2007(Loss) income from continuing operations
    
    $
    (14,658
    )
    
    $
    6,809(Benefit) provision for income taxes
    
    
    (3,608
    )
    
    
    3,822Interest expense
    
    
    14,640
    
    
    
    14,756Depreciation and amortization
    
    
    19,015
    
    
    
    15,772Non-cash stock-based compensation expense
    
    
    3,429
    
    
    
    4,777Adjusted EBITDA
    
    $
    18,818
    
    
    $
    45,936
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##### Table of Contents



Three Months Ended January 31, 2008 Compared to Three Months Ended January 31, 2007
  Quiksilver Roxy DC, Rossignol, Hawk Raisins Leilani Radio Fiji Rossignol Dynastar Look Lange Roxy Kerma Lib Technologies Gnu Bent Metal
 DC Roxy DC Roxy Rossignol Roxy
  Three Months Ended January 31,2008
    
    
    2007Wintersports
    
    
    
    
    
    
    
    
    
    
    WintersportsIn thousands
    
    Apparel
    
    
    equipment
    
    
    Total
    
    
    Apparel
    
    
    equipment
    
    
    TotalAmericas
    
    $
    232,936
    
    
    $
    26,723
    
    
    $
    259,659
    
    
    $
    197,374
    
    
    $
    24,836
    
    
    $
    222,210Europe
    
    
    205,273
    
    
    
    74,689
    
    
    
    279,962
    
    
    
    172,011
    
    
    
    78,812
    
    
    
    250,823Asia/Pacific
    
    
    61,254
    
    
    
    3,434
    
    
    
    64,688
    
    
    
    51,383
    
    
    
    3,487
    
    
    
    54,870Corporate operations
    
    
    
    
    
    
    
    
    
    
    987
    
    
    
    
    
    
    
    
    
    
    
    774$
    499,463
    
    
    $
    104,846
    
    
    $
    605,296
    
    
    $
    420,768
    
    
    $
    107,135
    
    
    $
    528,677
 
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Financial Position, Capital Resources and Liquidity
  25




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Cash Flows
    
 Trade Accounts Receivable and Inventories
   26




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Commitments
     
 Critical Accounting Policies
  Revenue Recognition
  Accounts Receivable
  27




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##### Table of Contents



Inventories
  
    
    weakening economic conditions;
    
    terrorist acts or threats;
    
    unanticipated changes in consumer preferences;
    
    reduced customer confidence in the retail market; and
    
    unseasonable weather.
  Long-Lived Assets
  Goodwill
  Stock-Based Compensation Expense
   28




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Income Taxes
   Foreign Currency Translation
   
 New Accounting Pronouncements
  
 Forward-Looking Statements
  29




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
    
    our ability to achieve the financial results that we anticipate, or have experienced in the
past;
    
    the impact of our substantial leverage on our ability to generate cash flows or obtain
financing to fund our anticipated growth strategies and the cost of such financing;
    
    our plans to expand internationally;
    
    our intention to introduce new products and enter into new joint ventures;
    
    our plans to open new retail stores;
    
    payments due on contractual commitments;
    
    future expenditures for capital projects;
    
    our ability to continue to maintain our brand image and reputation;
    
    our ability to remain compliant with our debt covenants;
    
    integration of acquired businesses and future acquisitions;
    
    our ability to realize the expected benefits from certain asset dispositions;
    
    general economic and business conditions;
    
    foreign exchange rate fluctuations; and
    
    changes in political, social and economic conditions and local regulations, particularly in
Europe and Asia.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Foreign Currency
     30




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Item 4. Controls and Procedures
    31




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PART II  OTHER INFORMATION
 
 Item 6. Exhibits
 Exhibits2.1
    
    Stock Purchase Agreement between the Company and the Sellers of DC Shoes, Inc. dated
March 8, 2004 (incorporated by reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K filed on May 18, 2004).2.2
    
    First Amendment to the Stock Purchase Agreement between the Company and the Sellers of
DC Shoes, Inc. dated May 3, 2004 (incorporated by reference to Exhibit 2.2 of the
Companys Current Report on Form 8-K filed on May 18, 2004).2.3
    
    Stock Purchase Agreement between the Roger Cleveland Golf Company, Inc., Rossignol Ski
Company, Incorporated, the Company and SRI Sports Limited dated October 30, 2007
(incorporated by reference to Exhibit 2.3 of the Companys Annual Report on Form 10-K
for the year ended October 31, 2007).2.4
    
    Amendment No. 1 to the Stock Purchase Agreement between the Roger Cleveland Golf
Company, Inc., Rossignol Ski Company, Incorporated, the Company and SRI Sports Limited
dated December 7, 2007(incorporated by reference to Exhibit 2.4 of the Companys
Annual Report on Form 10-K for the year ended October 31, 2007).3.1
    
    Restated Certificate of Incorporation of Quiksilver, Inc., as amended (incorporated by
reference to Exhibit 3.1 of the Companys Annual Report on Form 10-K for the year
ended October 31, 2004).3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc.
(incorporated by reference to Exhibit 10.1 of the Companys Quarterly Report on
Form 10-Q for the quarter ended April 30, 2005).3.3
    
    Amended and Restated Bylaws of Quiksilver, Inc. (incorporated by reference to
Exhibit 3.1 of the Companys Current Report on Form 8-K filed on December 7, 2007).4.1
    
    Indenture for the 6 7/8% Senior Notes due 2015 dated July 22, 2005, among Quiksilver,
Inc., the subsidiary guarantors set forth therein and Wilmington Trust Company, as
trustee, including the form of Global Note attached thereto (incorporated by reference
to Exhibit 4.1 of the Companys Current Report on Form 8-K filed July 25, 2005).10.1
    
    Separation and Transition Agreement between Bernard Mariette and Quiksilver, Inc.
dated February 11, 2008 (incorporated by reference to Exhibit 10.1 of the Companys
Form 8-K filed on February 13, 2008). (1)10.2
    
    Fifth Amendment to Amended and Restated Credit Agreement dated December 5, 2007
(incorporated by reference to Exhibit 10.9 of the Companys Annual Report on Form 10-K
for the year ended October 31, 2007).10.3
    
    Sixth Amendment to Amended and Restated Credit Agreement dated February 14, 2008.10.4
    
    Award grant under Quiksilver, Inc. Long-Term Incentive Plan dated January 29, 2008. (1)10.5
    
    Amendments to executive officer base salaries effective as of November 1, 2007
(incorporated by reference to Exhibit 10.35 of the Companys Annual Report on Form
10-K for the year ended October 31, 2007). (1)10.6
    
    Amendments to executive officer base salaries effective as of February 1, 2008. (1)
 32




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Exhibits31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications  Principal Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications  Principal Financial Officer32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
of The Sarbanes-Oxley Act of 2003  Chief Executive Officer32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
of The Sarbanes-Oxley Act of 2003  Chief Financial Officer
 
 (1)
    
    Management contract or compensatory plan. 33




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QUIKSILVER, INC., a Delaware corporationMarch 11, 2008
    
    /s/ Brad L. HolmanBrad L. HolmanVice President of Accounting and FinancialReporting(Principal Accounting Officer and AuthorizedSignatory)
 34