##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2007
 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
(State or other jurisdiction of 
incorporation or organization)
    
    33-0199426
(I.R.S. Employer
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
 ). 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 July 31, 2007 and 2006
    
    
    2Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive
Income/Loss Three Months Ended July 31, 2007 and 2006
    
    
    2Quiksilver, Inc. Condensed Consolidated Statements of Operations
Nine Months Ended July 31, 2007 and 2006
    
    
    3Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Income
Nine Months Ended July 31, 2007 and 2006
    
    
    3Quiksilver, Inc. Condensed Consolidated Balance Sheets
July 31, 2007 and October 31, 2006
    
    
    4Quiksilver, Inc. Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 31, 2007 and 2006
    
    
    5Quiksilver, Inc. Notes to Condensed Consolidated Financial Statements
    
    
    6Roger Cleveland Golf Company, Inc. Condensed Statements of Operations and
Comprehensive Income/Loss Three Months Ended July 31, 2007 and 2006
    
    
    26Roger Cleveland Golf Company, Inc. Condensed Statements of Operations and
Comprehensive Income/Loss Nine Months Ended July 31, 2007 and 2006
    
    
    27Roger Cleveland Golf Company, Inc. Condensed Balance Sheets
July 31, 2007 and October 31, 2006
    
    
    28Roger Cleveland Golf Company, Inc. Condensed Statements of Cash Flows
Nine Months Ended July 31, 2007 and 2006
    
    
    29Roger Cleveland Golf Company, Inc. Notes to Condensed Financial Statements
    
    
    30Item 2. Managements Discussion and Analysis of Financial Condition and
Results of OperationsResults of Operations
    
    
    34Three Months Ended July 31, 2007 Compared to Three Months Ended
July 31, 2006
    
    
    34Nine Months Ended July 31, 2007 Compared to Nine Months Ended
July 31, 2006
    
    
    36Financial Position, Capital Resources and Liquidity
    
    
    37Critical Accounting Policies
    
    
    39New Accounting Pronouncements
    
    
    41Forward-Looking Statements
    
    
    41Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4. Controls and Procedures
    
    
    42Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    43Item 6. Exhibits
    
    
    44SIGNATURES
    
    
    45EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 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 July 31,In thousands, except per share amounts
    
    2007
    
    
    2006Revenues, net
    
    $
    612,756
    
    
    $
    525,854Cost of goods sold
    
    
    331,540
    
    
    
    277,079Gross profit
    
    
    281,216
    
    
    
    248,775Selling, general and administrative expense
    
    
    275,407
    
    
    
    228,843Operating income
    
    
    5,809
    
    
    
    19,932Interest expense
    
    
    15,332
    
    
    
    11,877Foreign currency loss
    
    
    65
    
    
    
    377Minority interest and other (income) expense
    
    
    (18
    )
    
    
    484(Loss) income before (benefit) provision for income taxes
    
    
    (9,570
    )
    
    
    7,194(Benefit) provision for income taxes
    
    
    (1,703
    )
    
    
    1,858Net (loss) income
    
    $
    (7,867
    )
    
    $
    5,336Net (loss) income per share
    
    $
    (0.06
    )
    
    $
    0.04Net (loss) income per share, assuming dilution
    
    $
    (0.06
    )
    
    $
    0.04Weighted average common shares outstanding
    
    
    124,013
    
    
    
    122,341Weighted average common shares outstanding, assuming dilution
    
    
    124,013
    
    
    
    127,737
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS
(Unaudited)
 Three months ended July 31,In thousands
    
    2007
    
    
    2006Net (loss) income
    
    $
    (7,867
    )
    
    $
    5,336Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    5,541
    
    
    
    5,798Net unrealized gain (loss) on derivative instruments,
net of tax of $1,277 (2007) and $(785) (2006)
    
    
    2,308
    
    
    
    (1,427
    )Comprehensive (loss) income
    
    $
    (18
    )
    
    $
    9,707
  2




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##### Table of Contents



QUIKSILVER, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Nine months ended July 31,In thousands, except per share amounts
    
    2007
    
    
    2006Revenues, net
    
    $
    1,769,079
    
    
    $
    1,583,924Cost of goods sold
    
    
    958,649
    
    
    
    852,098Gross profit
    
    
    810,430
    
    
    
    731,826Selling, general and administrative expense
    
    
    776,708
    
    
    
    655,986Operating income
    
    
    33,722
    
    
    
    75,840Interest expense
    
    
    45,675
    
    
    
    36,417Foreign currency loss (gain)
    
    
    3,481
    
    
    
    (616
    )Minority interest and other (income) expense
    
    
    (2,166
    )
    
    
    895(Loss) income before (benefit) provision for income taxes
    
    
    (13,268
    )
    
    
    39,144(Benefit) provision for income taxes
    
    
    (3,076
    )
    
    
    11,476Net (loss) income
    
    $
    (10,192
    )
    
    $
    27,668Net (loss) income per share
    
    $
    (0.08
    )
    
    $
    0.23Net (loss) income per share, assuming dilution
    
    $
    (0.08
    )
    
    $
    0.22Weighted average common shares outstanding
    
    
    123,579
    
    
    
    121,928Weighted average common shares outstanding, assuming dilution
    
    
    123,579
    
    
    
    127,564
 
 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 Nine months ended July 31,In thousands
    
    2007
    
    
    2006Net (loss) income
    
    $
    (10,192
    )
    
    $
    27,668Other comprehensive income (loss):Foreign currency translation adjustment
    
    
    62,365
    
    
    
    32,127Net unrealized loss on derivative instruments,
net of tax of $(4,233) (2007) and $(3,040) (2006)
    
    
    (8,983
    )
    
    
    (5,996
    )Comprehensive income
    
    $
    43,190
    
    
    $
    53,799
  3




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##### Table of Contents



QUIKSILVER, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 July 31,
    
    
    October 31,In thousands, except share amounts
    
    2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    76,007
    
    
    $
    36,834Trade accounts receivable, less allowance for doubtful accounts
of $42,236 (2007) and $32,480 (2006)
    
    
    610,973
    
    
    
    721,562Other receivables
    
    
    52,357
    
    
    
    35,324Income tax receivable
    
    
    11,018
    
    
    
    Inventories
    
    
    545,515
    
    
    
    425,864Deferred income taxes
    
    
    94,941
    
    
    
    84,672Prepaid expenses and other current assets
    
    
    31,482
    
    
    
    28,926Total current assets
    
    
    1,422,293
    
    
    
    1,333,182Fixed assets, less accumulated depreciation and amortization of
$208,139 (2007) and $176,647 (2006)
    
    
    319,887
    
    
    
    282,334Intangible assets, net
    
    
    252,300
    
    
    
    248,206Goodwill
    
    
    545,196
    
    
    
    515,710Other assets
    
    
    49,104
    
    
    
    45,954Assets held for sale
    
    
    18,264
    
    
    
    21,842Total assets
    
    $
    2,607,044
    
    
    $
    2,447,228LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit
    
    $
    327,477
    
    
    $
    315,891Accounts payable
    
    
    305,067
    
    
    
    220,177Accrued liabilities
    
    
    176,045
    
    
    
    201,087Current portion of long-term debt
    
    
    20,272
    
    
    
    24,621Income taxes payable
    
    
    
    
    
    
    2,810Total current liabilities
    
    
    828,861
    
    
    
    764,586Long-term debt, net of current portion
    
    
    716,901
    
    
    
    689,690Deferred income taxes and other long-term liabilities
    
    
    101,368
    
    
    
    100,632Total liabilities
    
    
    1,647,130
    
    
    
    1,554,908Minority interest
    
    
    9,982
    
    
    
    11,193Stockholders equity:Preferred
stock, $.01 par value, authorized shares  5,000,000;
issued and outstanding shares  none
    
    
    
    
    
    
    Common
stock, $.01 par value, authorized shares  185,000,000;
issued shares  128,041,504 (2007) and 126,401,836 (2006)
    
    
    1,280
    
    
    
    1,264Additional paid-in capital
    
    
    300,087
    
    
    
    274,488Treasury stock, 2,885,200 shares
    
    
    (6,778
    )
    
    
    (6,778
    )Retained earnings
    
    
    548,867
    
    
    
    559,059Accumulated other comprehensive income
    
    
    106,476
    
    
    
    53,094Total stockholders equity
    
    
    949,932
    
    
    
    881,127Total liabilities and stockholders equity
    
    $
    2,607,044
    
    
    $
    2,447,228
  4




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##### Table of Contents



QUIKSILVER, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Nine months ended July 31,In thousands
    
    2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (10,192
    )
    
    $
    27,668Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation and amortization
    
    
    52,785
    
    
    
    47,581Stock-based compensation and tax benefit on option exercises
    
    
    11,276
    
    
    
    16,056Loss on sale of fixed assets
    
    
    412
    
    
    
    1,316Foreign currency loss (gain)
    
    
    994
    
    
    
    (229
    )Asset impairments
    
    
    8,163
    
    
    
    Minority interest and equity in earnings
    
    
    (2,107
    )
    
    
    1,427Changes in operating assets and liabilities:Trade accounts receivable
    
    
    139,660
    
    
    
    124,947Other receivables
    
    
    (15,994
    )
    
    
    (4,665
    )Inventories
    
    
    (96,919
    )
    
    
    (113,325
    )Prepaid expenses and other current assets
    
    
    (1,681
    )
    
    
    (3,967
    )Other assets
    
    
    (1,521
    )
    
    
    (8,677
    )Accounts payable
    
    
    77,819
    
    
    
    22,559Accrued liabilities
    
    
    (26,595
    )
    
    
    (29,884
    )Income taxes payable
    
    
    (12,862
    )
    
    
    (27,063
    )Net cash provided by operating activities
    
    
    123,238
    
    
    
    53,744Cash flows from investing activities:Proceeds from the sale of properties and equipment
    
    
    11,673
    
    
    
    2,420Capital expenditures
    
    
    (78,806
    )
    
    
    (61,321
    )Business acquisitions, net of cash acquired
    
    
    (34,310
    )
    
    
    (34,848
    )Net cash used in investing activities
    
    
    (101,443
    )
    
    
    (93,749
    )Cash flows from financing activities:Borrowings on lines of credit
    
    
    118,734
    
    
    
    245,672Payments on lines of credit
    
    
    (120,318
    )
    
    
    (200,920
    )Borrowings on long-term debt
    
    
    121,959
    
    
    
    129,705Payments on long-term debt
    
    
    (111,878
    )
    
    
    (130,107
    )Stock option exercises, employee stock purchases and tax benefit
on option exercises
    
    
    12,415
    
    
    
    6,491Net cash provided by financing activities
    
    
    20,912
    
    
    
    50,841Effect of exchange rate changes on cash
    
    
    (3,534
    )
    
    
    (2,092
    )Net increase in cash and cash equivalents
    
    
    39,173
    
    
    
    8,744Cash and cash equivalents, beginning of period
    
    
    36,834
    
    
    
    75,598Cash and cash equivalents, end of period
    
    $
    76,007
    
    
    $
    84,342Supplementary cash flow information:Cash paid during the period for:Interest
    
    $
    40,696
    
    
    $
    31,201Income taxes
    
    $
    8,265
    
    
    $
    40,763
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##### Table of Contents



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 financial
statements for the three and nine month periods ended July 31, 2007 and 2006. 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, 2006 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.For the three and nine months ended July 31, 2007, 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 May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, (SFAS
No. 154) which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 applies to all
voluntary changes in accounting principles and requires retrospective application (a term
defined by the statement) to prior periods financial statements, unless it is impracticable
to determine the effect of a change. It also applies to changes required by an accounting
pronouncement that does not include specific transition provisions. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company adopted this standard during the nine months ended
July 31, 2007. The adoption of this standard did not have a material impact on the
Companys financial condition, results of operations or cash flows.In 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 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. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company expects to adopt FIN 48 on November 1, 2007. The Company is
currently assessing the impact the adoption of FIN 48 will have on its financial position
and results of operations.In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides
interpretive guidance on the SECs views regarding the process of quantifying materiality of
financial statement misstatements. The Company adopted this standard during the nine months
ended July 31, 2007. The adoption of this accounting pronouncement did not have a material
effect on the Companys consolidated financial position, results of operations or cash
flows.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.
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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 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. 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.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 nine months ended July 31, 2007 and 2006, options were valued assuming a risk-free
interest rate of 4.8% and 4.5%, respectively, volatility of 43.1% and 44.9%, respectively,
zero dividend yield, and an expected life of 5.6 and 5.2 years, respectively. The weighted
average fair value of options granted was $7.16 and $6.32 for the nine months ended July 31,
2007 and 2006, respectively. The Company records stock compensation expense using the
graded vested method over the vesting period, which is generally three years. As of July
31, 2007, the Company had approximately $13.3 million of unrecognized compensation expense
expected to be recognized over a weighted average period of approximately 2.2 years.
Compensation expense was included as selling, general and administrative expense for the
period.Changes in shares under option for the nine months ended July 31, 2007 are as follows:
 Weighted
    
    Weighted
    
    AggregateDollar amounts in thousands,
    
    
    
    
    
    Average
    
    Average
    
    Intrinsicexcept per share amounts
    
    Shares
    
    Price
    
    Life
    
    ValueOutstanding, October 31, 2006
    
    
    18,135,699
    
    
    $
    8.61Granted
    
    
    1,242,051
    
    
    
    15.20Exercised
    
    
    (1,552,481
    )
    
    
    6.05
    
    
    
    
    
    
    $
    13,127Canceled
    
    
    (198,852
    )
    
    
    13.04Outstanding, July 31, 2007
    
    
    17,626,417
    
    
    $
    9.25
    
    
    
    5.9
    
    
    $
    73,820Options exercisable, July 31, 2007
    
    
    12,667,614
    
    
    $
    7.50
    
    
    
    5.0
    
    
    $
    71,406
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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Changes in non-vested shares under option for the nine months ended July 31, 2007 are as
follows:
 Weighted-Average GrantShares
    
    Date Fair ValueNon-vested, October 31, 2006
    
    
    6,958,526
    
    
    $
    6.29Granted
    
    
    1,242,051
    
    
    
    7.16Vested
    
    
    (3,217,691
    )
    
    
    5.92Canceled
    
    
    (24,083
    )
    
    
    6.89Non-vested, July 31, 2007
    
    
    4,958,803
    
    
    $
    6.72
 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 shares and restricted share 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 in the future.Changes in restricted stock for the nine months ended July 31, 2007 are as follows:
 SharesOutstanding, October 31, 2006
    
    
    800,000Granted
    
    
    40,000Vested
    
    
    Forfeited
    
    
    (45,000
    )Outstanding, July 31, 2007
    
    
    795,000
 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 July 31,
2007, there had been no acceleration of the amortization period. During the nine months
ended July 31, 2007, the Company recognized approximately $0.5 million in related
compensation expense. As of July 31, 2007, the Company had approximately $8.0 million of
unrecognized compensation expense expected to be recognized over a weighted average period
of approximately 2.2 years.4.
    
    InventoriesInventories consist of the following:
 July 31,
    
    
    October 31,In thousands
    
    2007
    
    
    2006Raw materials
    
    $
    83,229
    
    
    $
    40,951Work in-process
    
    
    14,953
    
    
    
    12,991Finished goods
    
    
    447,333
    
    
    
    371,922$
    545,515
    
    
    $
    425,864
 8




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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:
 July 31, 2007
    
    
    October 31, 2006Net
    
    
    
    
    
    
    
    
    
    
    NetGross
    
    
    Amorti-
    
    
    Book
    
    
    Gross
    
    
    Amorti-
    
    
    BookIn thousands
    
    Amount
    
    
    zation
    
    
    Value
    
    
    Amount
    
    
    zation
    
    
    ValueAmortizable trademarks
    
    $
    10,766
    
    
    $
    (4,023
    )
    
    $
    6,743
    
    
    $
    7,965
    
    
    $
    (2,659
    )
    
    $
    5,306Amortizable licenses
    
    
    11,436
    
    
    
    (5,337
    )
    
    
    6,099
    
    
    
    10,332
    
    
    
    (4,047
    )
    
    
    6,285Other amortizable intangibles
    
    
    27,088
    
    
    
    (8,133
    )
    
    
    18,955
    
    
    
    27,379
    
    
    
    (5,484
    )
    
    
    21,895Non-amortizable trademarks
    
    
    220,503
    
    
    
    
    
    
    
    220,503
    
    
    
    214,720
    
    
    
    
    
    
    
    214,720$
    269,793
    
    
    $
    (17,493
    )
    
    $
    252,300
    
    
    $
    260,396
    
    
    $
    (12,190
    )
    
    $
    248,206
 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 nine months ended July 31, 2007 and 2006 was $4.6 million and $3.7 million,
respectively. Annual amortization expense is estimated to be approximately $5.7 million in
the fiscal year ending October 31, 2007, approximately $4.2 million in the fiscal years
ending October 31, 2008 through 2010 and $3.5 million in the fiscal year ending October 31,
2011.In connection with the planned acquisition of the minority interest in Roger Cleveland Golf
Company, Inc., the Companys U.S. golf equipment operations (see note 9), the Company
remeasured the carrying value of related intangible assets. As a result, the Company
recorded asset impairments of approximately $8.2 million which included a goodwill
impairment of approximately $5.4 million, trademark impairments of approximately $2.4
million and patent impairments of approximately $0.4 million. These impairment charges are
included in selling, general and administrative expense. In accordance with the Companys
existing accounting policy, it will conduct its annual goodwill impairment test during the
three months ending October 31, 2007.Goodwill related to the Companys operating segments is as follows:
 July 31,
    
    
    October 31,In thousands
    
    2007
    
    
    2006Americas
    
    $
    127,045
    
    
    $
    132,674Europe
    
    
    277,826
    
    
    
    255,558Asia/Pacific
    
    
    140,325
    
    
    
    127,478$
    545,196
    
    
    $
    515,710
 Goodwill increased approximately $29.5 million during the nine months ended July 31, 2007.
Of this amount, approximately $8.9 million related to acquisitions of certain distributors
and retail store locations, and $26.0 million related to the effect of changes in foreign
currency exchange rates. This increase was offset by a $5.4 million decrease in goodwill
related to the Cleveland Golf goodwill impairment.6.
    
    Accumulated Other Comprehensive IncomeThe components of accumulated other comprehensive income include 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 income taxes, are as follows:
 July 31,
    
    
    October 31,In thousands
    
    2007
    
    
    2006Foreign currency translation adjustment
    
    $
    117,406
    
    
    $
    55,041Loss on cash flow hedges and interest rate swaps
    
    
    (10,930
    )
    
    
    (1,947
    )$
    106,476
    
    
    $
    53,094
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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 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 and golf equipment, footwear, accessories and related products. The
Company operates in three segments, the Americas, Europe and Asia/Pacific. Costs that
support all three operating 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 for
the nine months ended July 31, 2007.
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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Information related to the Companys operating segments is as follows:
 Three Months Ended July 31,In thousands
    
    2007
    
    
    2006Revenues, net:Americas
    
    $
    335,013
    
    
    $
    277,413Europe
    
    
    212,696
    
    
    
    190,998Asia/Pacific
    
    
    63,860
    
    
    
    56,309Corporate operations
    
    
    1,187
    
    
    
    1,134$
    612,756
    
    
    $
    525,854Gross profit:Americas
    
    $
    138,795
    
    
    $
    119,075Europe
    
    
    111,266
    
    
    
    101,401Asia/Pacific
    
    
    30,059
    
    
    
    27,697Corporate operations
    
    
    1,096
    
    
    
    602$
    281,216
    
    
    $
    248,775Operating income:Americas
    
    $
    30,251
    
    
    $
    32,888Europe
    
    
    (10,733
    )
    
    
    (4,444
    )Asia/Pacific
    
    
    4,662
    
    
    
    3,999Corporate operations
    
    
    (18,371
    )
    
    
    (12,511
    )$
    5,809
    
    
    $
    19,932
 Nine Months Ended July 31,In thousands
    
    2007
    
    
    2006Revenues, net:Americas
    
    $
    855,380
    
    
    $
    748,173Europe
    
    
    735,522
    
    
    
    669,299Asia/Pacific
    
    
    175,012
    
    
    
    162,898Corporate operations
    
    
    3,165
    
    
    
    3,554$
    1,769,079
    
    
    $
    1,583,924Gross profit:Americas
    
    $
    346,817
    
    
    $
    310,023Europe
    
    
    379,631
    
    
    
    344,621Asia/Pacific
    
    
    81,328
    
    
    
    75,554Corporate operations
    
    
    2,654
    
    
    
    1,628$
    810,430
    
    
    $
    731,826Operating income:Americas
    
    $
    40,200
    
    
    $
    58,508Europe
    
    
    37,090
    
    
    
    51,159Asia/Pacific
    
    
    1,640
    
    
    
    4,678Corporate operations
    
    
    (45,208
    )
    
    
    (38,505
    )$
    33,722
    
    
    $
    75,840Identifiable assets:Americas
    
    $
    909,268
    
    
    $
    824,703Europe
    
    
    1,281,178
    
    
    
    1,120,009Asia Pacific
    
    
    351,927
    
    
    
    319,806Corporate operations
    
    
    64,671
    
    
    
    53,438$
    2,607,044
    
    
    $
    2,317,956
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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 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 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 and interest rate risks are marked to fair value with corresponding
gains or losses recorded in earnings. A loss of $0.6 million was recognized related to
these types of derivatives during the nine months ended July 31, 2007. For all qualifying
cash flow hedges, the changes in the fair value of the derivatives are recorded in other
comprehensive income. As of July 31, 2007, the Company was hedging forecasted transactions
expected to occur through October 2009. Assuming exchange rates at July 31, 2007 remain
constant, $10.9 million of losses, net of tax, related to hedges of these transactions are
expected to be reclassified into earnings over the next 27 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 nine months ended July 31, 2007, the Company reclassified into
earnings a net loss of $4.7 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.
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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 A summary of derivative contracts at July 31, 2007 is as follows:
 NotionalIn thousands
    
    Amount
    
    

    Maturity
    
    Fair ValueUnited States dollar
    
    $
    468,732
    
    
    Aug 2007  Oct 2009
    
    $
    (19,692
    )British pound
    
    
    16,191
    
    
    Aug 2007  Oct 2007
    
    
    275Canadian dollar
    
    
    8,439
    
    
    Aug 2007  Jan 2008
    
    
    137Interest rate swap
    
    
    22,531
    
    
    Apr 2008  Sep 2009
    
    
    (14
    )$
    515,893
    
    
    
    
    
    
    $
    (19,294
    )
 9.
    
    Business AcquisitionsIn June 2007, the Company entered into a stock purchase agreement to acquire 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 31, 2005 and plans to acquire the remaining 36.37%
of Cleveland Golf during the three months ending October 31, 2007. The purchase price for
the remaining minority interest of Cleveland Golf, excluding transaction costs, will include
a cash payment of $17.5 million at closing. The Company will account for this transaction
as a step acquisition and will record 36.37% of any 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 $5.0 million in contract termination costs.
These contract termination costs are expected to be paid upon closing of the minority
interest acquisition during the three months ending October 31, 2007.Effective July 31, 2005, the Company acquired Skis Rossignol SA (Rossignol), a
wintersports and golf equipment manufacturer. Rossignol offers a full range of wintersports
equipment under the Rossignol, Dynastar, Lange, Look and Kerma brands, and also sells golf
products under the Cleveland Golf and Never Compromise brands. The Company has included the
operations of Rossignol in its results since August 1, 2005. The purchase price, excluding
transaction costs, included cash of approximately $208.3 million, approximately 2.2 million
restricted shares of the Companys common stock, valued at $28.9 million, a deferred
purchase price obligation of approximately $32.5 million, a liability of approximately $16.9
million for the mandatory purchase of approximately 0.7 million outstanding public shares of
Rossignol representing less than 5% of the share capital of Rossignol, and a liability of
approximately $2.0 million for the estimated fair value of 0.1 million fully vested
Rossignol stock options. Transaction costs totaled approximately $16.0 million. The
valuation of the common stock issued in connection with the acquisition was based on its
quoted market price for the five days before and after the announcement date, discounted to
reflect the estimated effect of its trading restrictions. The deferred purchase price
obligation is expected to be paid in 2010 and will accrue interest equal to the 3-month euro
interbank offered rate (Euribor) plus 2.35% (currently 6.6%). The mandatory purchase of
the remaining Rossignol shares was required under French law as the Company had obtained
over 95% of the outstanding shares of Rossignol through a combination of share purchases,
including a public tender offer. The purchase of these shares was completed in the quarter
ended October 31, 2005 and the Company now owns 100% of the shares in Rossignol. Upon the
future exercise of the Rossignol stock options, the Company will purchase the newly issued shares from the Rossignol stock option holders, retaining 100% ownership in Rossignol.
These Rossignol stock options are treated as variable for accounting purposes and subsequent
changes in the value of these stock options are recorded as compensation expense in the
Companys consolidated statement of income. The Company acquired a majority interest in
Cleveland Golf when it acquired Rossignol, but certain former owners of Cleveland Golf
retained a minority interest of 36.37%. The Company and the minority owners entered into a
put/call arrangement whereby the minority owners of Cleveland Golf can require the Company
to buy all of their
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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 interest in Cleveland
Golf after 4.5 years and the Company can buy their interest at its option after 7 years,
each at a purchase price generally determined by reference to a multiple of Cleveland Golfs
annual profits and the Companys price-earnings ratio. As a result of the minority interest
and put/call arrangement, the Company accounted for Cleveland Golf as a step acquisition.
In a step acquisition, where less than 100% of an entity is acquired, only a portion of the
fair value adjustments are recorded in the acquiring companys balance sheet equal to the
percentage ownership in the acquired company. Based on this step acquisition accounting,
the Company has recorded 63.63% of the fair value adjustments for Cleveland Golf in its
balance sheet. In June 2007, the put/call arrangement was replaced by the stock purchase
agreement discussed above. This transaction is expected to close during the three months
ending October 31, 2007. Goodwill arises from synergies the Company believes can be
achieved integrating Rossignols brands, products and operations with the Companys, and is
not expected to be deductible for income tax purposes. Amortizing intangibles consist of
customer relationships, patents and athlete contracts with estimated useful lives of twenty,
seven and two years, respectively. The acquired trademarks are non-amortizing as they have
been determined to have indefinite lives.The following table summarizes the fair value of the assets acquired and the liabilities
assumed at the date of the Rossignol acquisition in accordance with the purchase method of
accounting:
 July 31,In thousands
    
    2005Cash acquired
    
    $
    64,396Accounts receivable
    
    
    96,763Inventory
    
    
    232,525Other current assets
    
    
    21,548Fixed assets
    
    
    109,438Deferred income taxes
    
    
    3,572Other assets
    
    
    3,296Amortizing intangible assets
    
    
    20,400Trademarks
    
    
    94,700Goodwill
    
    
    292,168Total assets acquired
    
    
    938,806Other liabilities
    
    
    218,300Long term debt and lines of credit
    
    
    365,126Deferred income taxes
    
    
    40,657Minority interest
    
    
    10,109Net assets acquired
    
    $
    304,614
 In connection with the acquisition of Rossignol, the Company has formulated the Rossignol
Integration Plan (the Plan). As of July 31, 2007, the Company has recognized
approximately $65.3 million of liabilities related to the Plan. See Note 11 for further
description of the Plan.Effective August 1, 2005, the Company acquired 11 retail stores in Australia from Surfection
Pty Ltd, Manly Boardriders Pty Ltd. and Sydney Boardriders Pty Ltd. (Surfection). The
operations of Surfection have been included in the Companys results since August 1, 2005.
The initial purchase price, excluding transaction costs, included cash of approximately
$21.4 million. Transaction costs totaled approximately $1.1 million. The sellers are
entitled to additional payments ranging from zero to approximately $17.1 million if certain
sales and margin targets are achieved through September 30, 2008. The amount of goodwill
initially recorded for the transaction would increase if such contingent payments are made.
Goodwill arises from synergies the Company believes can be achieved through Surfections
retail expertise and store presence in key locations in Australia, and is not expected to be
deductible for income tax purposes. Amortizing intangibles consist of non-compete
agreements with estimated useful lives of five years.
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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 The following table summarizes the fair value of the assets acquired and liabilities assumed
at the date of the Surfection acquisition in accordance with the purchase method of
accounting:
 August 1,In thousands
    
    2005Inventory and other current assets
    
    $
    3,239Fixed assets
    
    
    4,839Amortizing intangible assets
    
    
    450Goodwill
    
    
    21,393Total assets acquired
    
    
    29,921Other liabilities
    
    
    7,419Net assets acquired
    
    $
    22,502
 The Company paid cash of approximately $34.3 million for business acquisitions during the
nine months ended July 31, 2007, of which $20.2 million relates to a payment to the former
owners of DC Shoes, Inc. related to the achievement of certain sales and earnings targets,
and the remaining $14.1 million relates primarily to acquisitions of certain other
distributors and retail store locations.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 nine months ended July 31, 2007.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 July
31, 2007 the Company has recognized approximately $65.3 million of liabilities related to
the Plan, including
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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 Emerging Issues Task Force (EITF) Issue No. 95-3, Recognition of
Liabilities in Connection with a Purchase Business Combination. As of July 31, 2007, the
Company has 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. 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, total
approximately $18.3 million at July 31, 2007. 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.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
    
    
    17,463
    
    
    
    752
    
    
    
    18,215Cash
payments
    
    
    (17
    )
    
    
    (44
    )
    
    
    (61
    )Foreign currency translation
    
    
    (83
    )
    
    
    (6
    )
    
    
    (89
    )Balance, October 31, 2005
    
    
    21,036
    
    
    
    2,276
    
    
    
    23,312Adjustment to purchase price
allocation
    
    
    36,733
    
    
    
    5,130
    
    
    
    41,863Cash payments
    
    
    (14,974
    )
    
    
    (2,555
    )
    
    
    (17,529
    )Foreign currency translation
    
    
    2,689
    
    
    
    90
    
    
    
    2,779Balance, October 31, 2006
    
    
    45,484
    
    
    
    4,941
    
    
    
    50,425Cash payments
    
    
    (13,541
    )
    
    
    (2,597
    )
    
    
    (16,138
    )Foreign currency translation
    
    
    2,889
    
    
    
    533
    
    
    
    3,422Balance, July 31, 2007
    
    $
    34,832
    
    
    $
    2,877
    
    
    $
    37,709
 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, 2006
    
    $
    1,587Cash payments
    
    
    (453
    )Foreign currency translation
    
    
    100Balance, July 31, 2007
    
    $
    1,234
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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 July 31, 2007 and October 31, 2006 and for the nine months ended July 31, 2007 and
2006. 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,
2007, 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.
 17




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QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended July 31, 2007
 Wholly-owned
    
    
    
    
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    Cleveland
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Golf
    
    
    Subsidiaries
    
    
    Elimination
    
    
    ConsolidatedRevenues, net
    
    $
    38
    
    
    $
    671,202
    
    
    $
    109,529
    
    
    $
    1,040,448
    
    
    $
    (52,138
    )
    
    $
    1,769,079Cost of goods sold
    
    
    
    
    
    
    401,575
    
    
    
    71,158
    
    
    
    516,742
    
    
    
    (30,826
    )
    
    
    958,649Gross profit
    
    
    38
    
    
    
    269,627
    
    
    
    38,371
    
    
    
    523,706
    
    
    
    (21,312
    )
    
    
    810,430Selling, general and administrative
expense
    
    
    43,701
    
    
    
    242,804
    
    
    
    45,535
    
    
    
    465,174
    
    
    
    (20,506
    )
    
    
    776,708Operating (loss) income
    
    
    (43,663
    )
    
    
    26,823
    
    
    
    (7,164
    )
    
    
    58,532
    
    
    
    (806
    )
    
    
    33,722Interest expense
    
    
    32,062
    
    
    
    4,319
    
    
    
    2,503
    
    
    
    6,791
    
    
    
    
    
    
    
    45,675Foreign currency loss
    
    
    1,047
    
    
    
    108
    
    
    
    
    
    
    
    2,326
    
    
    
    
    
    
    
    3,481Minority interest and other expense
    
    
    (2,204
    )
    
    
    (2
    )
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    (2,166
    )(Loss) income before (benefit) provision
for income taxes
    
    
    (74,568
    )
    
    
    22,398
    
    
    
    (9,667
    )
    
    
    49,375
    
    
    
    (806
    )
    
    
    (13,268
    )(Benefit) provision for income taxes
    
    
    (17,285
    )
    
    
    5,192
    
    
    
    (2,241
    )
    
    
    11,258
    
    
    
    
    
    
    
    (3,076
    )Net (loss) income
    
    $
    (57,283
    )
    
    $
    17,206
    
    
    $
    (7,426
    )
    
    $
    38,117
    
    
    $
    (806
    )
    
    $
    (10,192
    )
 18




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF INCOME
Nine Months Ended July 31, 2006
 Wholly-owned
    
    
    
    
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    Cleveland
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Golf
    
    
    Subsidiaries
    
    
    Elimination
    
    
    ConsolidatedRevenues, net
    
    $
    418
    
    
    $
    608,367
    
    
    $
    108,980
    
    
    $
    914,147
    
    
    $
    (47,988
    )
    
    $
    1,583,924Cost of goods sold
    
    
    
    
    
    
    367,138
    
    
    
    59,106
    
    
    
    456,320
    
    
    
    (30,466
    )
    
    
    852,098Gross profit
    
    
    418
    
    
    
    241,229
    
    
    
    49,874
    
    
    
    457,827
    
    
    
    (17,522
    )
    
    
    731,826Selling, general and administrative
expense
    
    
    36,270
    
    
    
    199,510
    
    
    
    44,320
    
    
    
    393,036
    
    
    
    (17,150
    )
    
    
    655,986Operating (loss) income
    
    
    (35,852
    )
    
    
    41,719
    
    
    
    5,554
    
    
    
    64,791
    
    
    
    (372
    )
    
    
    75,840Interest expense
    
    
    28,300
    
    
    
    2,317
    
    
    
    2,473
    
    
    
    3,327
    
    
    
    
    
    
    
    36,417Foreign currency (gain) loss
    
    
    (674
    )
    
    
    (64
    )
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    (616
    )Minority interest and other expense
    
    
    694
    
    
    
    
    
    
    
    
    
    
    
    201
    
    
    
    
    
    
    
    895(Loss) income before (benefit) provision for
income taxes
    
    
    (64,172
    )
    
    
    39,466
    
    
    
    3,081
    
    
    
    61,141
    
    
    
    (372
    )
    
    
    39,144(Benefit) provision for income taxes
    
    
    (18,813
    )
    
    
    11,570
    
    
    
    903
    
    
    
    17,816
    
    
    
    
    
    
    
    11,476Net (loss) income
    
    $
    (45,359
    )
    
    $
    27,896
    
    
    $
    2,178
    
    
    $
    43,325
    
    
    $
    (372
    )
    
    $
    27,668
 19




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING BALANCE SHEET
At July 31, 2007
 Wholly-owned
    
    
    
    
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    Cleveland
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Golf
    
    
    Subsidiaries
    
    
    Elimination
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    (1,034
    )
    
    $
    6,441
    
    
    $
    1,644
    
    
    $
    68,956
    
    
    $
    
    
    
    $
    76,007Trade accounts receivable, net
    
    
    
    
    
    
    203,528
    
    
    
    36,702
    
    
    
    370,743
    
    
    
    
    
    
    
    610,973Other receivables
    
    
    878
    
    
    
    21,019
    
    
    
    819
    
    
    
    29,641
    
    
    
    
    
    
    
    52,357Income tax receivable
    
    
    
    
    
    
    23,479
    
    
    
    3,543
    
    
    
    (16,004
    )
    
    
    
    
    
    
    11,018Inventories
    
    
    
    
    
    
    164,099
    
    
    
    24,987
    
    
    
    358,872
    
    
    
    (2,443
    )
    
    
    545,515Deferred income taxes
    
    
    
    
    
    
    20,435
    
    
    
    2,349
    
    
    
    72,157
    
    
    
    
    
    
    
    94,941Prepaid expenses and other current
assets
    
    
    1,889
    
    
    
    8,864
    
    
    
    1,268
    
    
    
    19,461
    
    
    
    
    
    
    
    31,482Total current assets
    
    
    1,733
    
    
    
    447,865
    
    
    
    71,312
    
    
    
    903,826
    
    
    
    (2,443
    )
    
    
    1,422,293Fixed assets, net
    
    
    6,818
    
    
    
    91,612
    
    
    
    3,249
    
    
    
    218,208
    
    
    
    
    
    
    
    319,887Intangible assets, net
    
    
    2,588
    
    
    
    80,294
    
    
    
    1,481
    
    
    
    167,937
    
    
    
    
    
    
    
    252,300Goodwill
    
    
    
    
    
    
    157,932
    
    
    
    2,472
    
    
    
    384,792
    
    
    
    
    
    
    
    545,196Investment in subsidiaries
    
    
    561,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (561,992
    )
    
    
    Other assets
    
    
    10,509
    
    
    
    17,693
    
    
    
    301
    
    
    
    20,601
    
    
    
    
    
    
    
    49,104Assets held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,264
    
    
    
    
    
    
    
    18,264Total assets
    
    $
    583,640
    
    
    $
    795,396
    
    
    $
    78,815
    
    
    $
    1,713,628
    
    
    $
    (564,435
    )
    
    $
    2,607,044LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    327,477
    
    
    $
    
    
    
    $
    327,477Accounts payable
    
    
    1,004
    
    
    
    122,940
    
    
    
    9,678
    
    
    
    171,445
    
    
    
    
    
    
    
    305,067Accrued liabilities
    
    
    29,254
    
    
    
    18,395
    
    
    
    5,407
    
    
    
    122,989
    
    
    
    
    
    
    
    176,045Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,272
    
    
    
    
    
    
    
    20,272Intercompany balances
    
    
    131,426
    
    
    
    38,173
    
    
    
    37,772
    
    
    
    (207,371
    )
    
    
    
    
    
    
    Total current liabilities
    
    
    161,684
    
    
    
    179,508
    
    
    
    52,857
    
    
    
    434,812
    
    
    
    
    
    
    
    828,861Long-term debt, net of current portion
    
    
    400,000
    
    
    
    153,950
    
    
    
    
    
    
    
    162,951
    
    
    
    
    
    
    
    716,901Deferred income taxes and other
long-term liabilities
    
    
    
    
    
    
    28,650
    
    
    
    (353
    )
    
    
    73,071
    
    
    
    
    
    
    
    101,368Total liabilities
    
    
    561,684
    
    
    
    362,108
    
    
    
    52,504
    
    
    
    670,834
    
    
    
    
    
    
    
    1,647,130Minority interest
    
    
    
    
    
    
    9,982
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,982Stockholders/invested equity
    
    
    21,956
    
    
    
    423,306
    
    
    
    26,311
    
    
    
    1,042,794
    
    
    
    (564,435
    )
    
    
    949,932Total liabilities and stockholders
equity
    
    $
    583,640
    
    
    $
    795,396
    
    
    $
    78,815
    
    
    $
    1,713,628
    
    
    $
    (564,435
    )
    
    $
    2,607,044
 20




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING BALANCE SHEET
At October 31, 2006
 Wholly-owned
    
    
    
    
    
    
    Non-Quiksilver,
    
    
    Guarantor
    
    
    Cleveland
    
    
    GuarantorIn thousands
    
    Inc.
    
    
    Subsidiaries
    
    
    Golf
    
    
    Subsidiaries
    
    
    Elimination
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    8
    
    
    $
    1,537
    
    
    $
    1,855
    
    
    $
    33,434
    
    
    $
    
    
    
    $
    36,834Trade accounts receivable, net
    
    
    
    
    
    
    205,853
    
    
    
    36,987
    
    
    
    478,722
    
    
    
    
    
    
    
    721,562Other receivables
    
    
    1,190
    
    
    
    12,593
    
    
    
    708
    
    
    
    20,833
    
    
    
    
    
    
    
    35,324Inventories
    
    
    
    
    
    
    144,740
    
    
    
    27,122
    
    
    
    255,636
    
    
    
    (1,634
    )
    
    
    425,864Deferred income taxes
    
    
    
    
    
    
    14,459
    
    
    
    2,349
    
    
    
    67,864
    
    
    
    
    
    
    
    84,672Prepaid expenses and other current
assets
    
    
    1,703
    
    
    
    9,968
    
    
    
    1,953
    
    
    
    15,302
    
    
    
    
    
    
    
    28,926Total current assets
    
    
    2,901
    
    
    
    389,150
    
    
    
    70,974
    
    
    
    871,791
    
    
    
    (1,634
    )
    
    
    1,333,182Fixed assets, net
    
    
    6,343
    
    
    
    83,495
    
    
    
    3,801
    
    
    
    188,695
    
    
    
    
    
    
    
    282,334Intangible assets, net
    
    
    2,452
    
    
    
    79,197
    
    
    
    3,150
    
    
    
    163,407
    
    
    
    
    
    
    
    248,206Goodwill
    
    
    
    
    
    
    163,910
    
    
    
    2,472
    
    
    
    349,328
    
    
    
    
    
    
    
    515,710Investment in subsidiaries
    
    
    561,992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (561,992
    )
    
    
    Other assets
    
    
    10,909
    
    
    
    4,730
    
    
    
    274
    
    
    
    30,041
    
    
    
    
    
    
    
    45,954Assets held for sale
    
    
    
    
    
    
    3,500
    
    
    
    
    
    
    
    18,342
    
    
    
    
    
    
    
    21,842Total assets
    
    $
    584,597
    
    
    $
    723,982
    
    
    $
    80,671
    
    
    $
    1,621,604
    
    
    $
    (563,626
    )
    
    $
    2,447,228LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit
    
    $
    
    
    
    $
    209
    
    
    $
    
    
    
    $
    315,682
    
    
    $
    
    
    
    $
    315,891Accounts payable
    
    
    2,303
    
    
    
    89,181
    
    
    
    3,525
    
    
    
    125,168
    
    
    
    
    
    
    
    220,177Accrued liabilities
    
    
    13,535
    
    
    
    43,691
    
    
    
    6,085
    
    
    
    137,805
    
    
    
    (29
    )
    
    
    201,087Current portion of long-term debt
    
    
    
    
    
    
    4,305
    
    
    
    
    
    
    
    20,316
    
    
    
    
    
    
    
    24,621Income taxes payable
    
    
    
    
    
    
    14,277
    
    
    
    1,343
    
    
    
    (12,810
    )
    
    
    
    
    
    
    2,810Intercompany balances
    
    
    72,386
    
    
    
    17,351
    
    
    
    37,766
    
    
    
    (127,503
    )
    
    
    
    
    
    
    Total current liabilities
    
    
    88,224
    
    
    
    169,014
    
    
    
    48,719
    
    
    
    458,658
    
    
    
    (29
    )
    
    
    764,586Long-term debt, net of current portion
    
    
    433,701
    
    
    
    122,150
    
    
    
    
    
    
    
    133,839
    
    
    
    
    
    
    
    689,690Deferred income taxes and other
long-term liabilities
    
    
    
    
    
    
    25,773
    
    
    
    (353
    )
    
    
    75,212
    
    
    
    
    
    
    
    100,632Total liabilities
    
    
    521,925
    
    
    
    316,937
    
    
    
    48,366
    
    
    
    667,709
    
    
    
    (29
    )
    
    
    1,554,908Minority interest
    
    
    
    
    
    
    11,193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,193Stockholders/invested equity
    
    
    62,672
    
    
    
    395,852
    
    
    
    32,305
    
    
    
    953,895
    
    
    
    (563,597
    )
    
    
    881,127Total liabilities and stockholders
equity
    
    $
    584,597
    
    
    $
    723,982
    
    
    $
    80,671
    
    
    $
    1,621,604
    
    
    $
    (563,626
    )
    
    $
    2,447,228
 21




---



##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
 Nine Months Ended July 31, 2007
 Non-Guarantor
    
    
    Cleveland
    
    
    GuarantorIn thousands
    
    Quiksilver, Inc.
    
    
    Subsidiaries
    
    
    Golf
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activities:Net (loss) income
    
    $
    (57,283
    )
    
    $
    17,206
    
    
    $
    (7,426
    )
    
    $
    37,311
    
    
    $
    (10,192
    )Adjustments to reconcile net (loss) income to
net cash provided by operating activities:Depreciation and amortization
    
    
    447
    
    
    
    14,618
    
    
    
    1,411
    
    
    
    36,309
    
    
    
    52,785Stock-based compensation
    
    
    11,276
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,276Loss on disposal of fixed assets
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    396
    
    
    
    412Foreign currency loss
    
    
    431
    
    
    
    
    
    
    
    
    
    
    
    563
    
    
    
    994Asset impairment
    
    
    
    
    
    
    6,707
    
    
    
    1,456
    
    
    
    
    
    
    
    8,163Minority interest and equity in earnings
    
    
    
    
    
    
    (2,459
    )
    
    
    
    
    
    
    352
    
    
    
    (2,107
    )Changes in operating assets and liabilities:Trade accounts receivable
    
    
    
    
    
    
    2,325
    
    
    
    285
    
    
    
    137,050
    
    
    
    139,660Other receivables
    
    
    220
    
    
    
    (9,403
    )
    
    
    (110
    )
    
    
    (6,701
    )
    
    
    (15,994
    )Inventories
    
    
    
    
    
    
    (19,011
    )
    
    
    2,135
    
    
    
    (80,043
    )
    
    
    (96,919
    )Prepaid expenses and other
current assets
    
    
    (186
    )
    
    
    1,134
    
    
    
    684
    
    
    
    (3,313
    )
    
    
    (1,681
    )Other assets
    
    
    400
    
    
    
    216
    
    
    
    (30
    )
    
    
    (2,107
    )
    
    
    (1,521
    )Accounts payable
    
    
    (1,298
    )
    
    
    33,569
    
    
    
    6,153
    
    
    
    39,395
    
    
    
    77,819Accrued liabilities
    
    
    16,265
    
    
    
    (173
    )
    
    
    (678
    )
    
    
    (42,009
    )
    
    
    (26,595
    )Income taxes payable
    
    
    
    
    
    
    (39,788
    )
    
    
    (4,886
    )
    
    
    31,812
    
    
    
    (12,862
    )Net cash (used in) provided by
operating activities
    
    
    (29,728
    )
    
    
    4,957
    
    
    
    (1,006
    )
    
    
    149,015
    
    
    
    123,238Cash flows from investing activities:Proceeds from the sale of properties and
equipment
    
    
    
    
    
    
    4,463
    
    
    
    
    
    
    
    7,210
    
    
    
    11,673Capital expenditures
    
    
    (1,058
    )
    
    
    (27,132
    )
    
    
    (643
    )
    
    
    (49,973
    )
    
    
    (78,806
    )Business acquisitions, net of cash
acquired
    
    
    (752
    )
    
    
    (20,206
    )
    
    
    
    
    
    
    (13,352
    )
    
    
    (34,310
    )Net cash used in investing
activities
    
    
    (1,810
    )
    
    
    (42,875
    )
    
    
    (643
    )
    
    
    (56,115
    )
    
    
    (101,443
    )Cash flows from financing activities:Borrowings on lines of credit
    
    
    
    
    
    
    
    
    
    
    4,000
    
    
    
    114,734
    
    
    
    118,734Payments on lines of credit
    
    
    
    
    
    
    (209
    )
    
    
    (4,000
    )
    
    
    (116,109
    )
    
    
    (120,318
    )Borrowings on long-term debt
    
    
    
    
    
    
    112,950
    
    
    
    
    
    
    
    9,009
    
    
    
    121,959Payments on long-term debt
    
    
    
    
    
    
    (85,005
    )
    
    
    
    
    
    
    (26,873
    )
    
    
    (111,878
    )Stock option exercises, employee stock
purchases and tax benefit on option
exercises
    
    
    12,415
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,415Intercompany
    
    
    18,081
    
    
    
    15,086
    
    
    
    1,438
    
    
    
    (34,605
    )
    
    
    Net cash provided by (used in)
financing activities
    
    
    30,496
    
    
    
    42,822
    
    
    
    1,438
    
    
    
    (53,844
    )
    
    
    20,912Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,534
    )
    
    
    (3,534
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (1,042
    )
    
    
    4,904
    
    
    
    (211
    )
    
    
    35,522
    
    
    
    39,173Cash and cash equivalents, beginning of
period
    
    
    8
    
    
    
    1,537
    
    
    
    1,855
    
    
    
    33,434
    
    
    
    36,834Cash and cash equivalents, end of period
    
    $
    (1,034
    )
    
    $
    6,441
    
    
    $
    1,644
    
    
    $
    68,956
    
    
    $
    76,007
 22




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 2006
 Non-Guarantor
    
    
    Cleveland
    
    
    GuarantorIn thousands
    
    Quiksilver, Inc.
    
    
    Subsidiaries
    
    
    Golf
    
    
    Subsidiaries
    
    
    ConsolidatedCash flows from operating activities:Net (loss) income
    
    $
    (45,359
    )
    
    $
    27,896
    
    
    $
    2,178
    
    
    $
    42,953
    
    
    $
    27,668Adjustments to reconcile net (loss) income to net
cash provided by operating activities:Depreciation and amortization
    
    
    434
    
    
    
    14,519
    
    
    
    1,522
    
    
    
    31,106
    
    
    
    47,581Stock-based compensation
    
    
    16,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,056Loss on sale of fixed assets
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    1,291
    
    
    
    1,316Foreign currency (gain) loss
    
    
    (33
    )
    
    
    14
    
    
    
    
    
    
    
    (210
    )
    
    
    (229
    )Minority interest and equity in earnings
    
    
    695
    
    
    
    
    
    
    
    
    
    
    
    732
    
    
    
    1,427Changes in operating assets and liabilities:Trade accounts receivable
    
    
    
    
    
    
    22,084
    
    
    
    (96
    )
    
    
    102,959
    
    
    
    124,947Other receivables
    
    
    143
    
    
    
    499
    
    
    
    (1,044
    )
    
    
    (4,263
    )
    
    
    (4,665
    )Inventories
    
    
    
    
    
    
    (34,052
    )
    
    
    (6,774
    )
    
    
    (72,499
    )
    
    
    (113,325
    )Prepaid expenses and other
current assets
    
    
    1,108
    
    
    
    (1,694
    )
    
    
    1,244
    
    
    
    (4,625
    )
    
    
    (3,967
    )Other assets
    
    
    329
    
    
    
    116
    
    
    
    (299
    )
    
    
    (8,823
    )
    
    
    (8,677
    )Accounts payable
    
    
    153
    
    
    
    12,080
    
    
    
    (1,087
    )
    
    
    11,413
    
    
    
    22,559Accrued liabilities
    
    
    1,925
    
    
    
    (3,957
    )
    
    
    (1,813
    )
    
    
    (26,039
    )
    
    
    (29,884
    )Income taxes payable
    
    
    
    
    
    
    (1,276
    )
    
    
    1,714
    
    
    
    (27,501
    )
    
    
    (27,063
    )Net cash (used in) provided by
operating activities
    
    
    (24,549
    )
    
    
    36,254
    
    
    
    (4,455
    )
    
    
    46,494
    
    
    
    53,744Cash flows from investing activities:Proceeds from the sale of properties and
equipment
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    2,408
    
    
    
    2,420Capital expenditures
    
    
    (2,257
    )
    
    
    (24,066
    )
    
    
    (1,278
    )
    
    
    (33,720
    )
    
    
    (61,321
    )Business acquisitions, net of cash
acquired
    
    
    (2,998
    )
    
    
    (5,000
    )
    
    
    
    
    
    
    (26,850
    )
    
    
    (34,848
    )Net cash used in investing
activities
    
    
    (5,255
    )
    
    
    (29,054
    )
    
    
    (1,278
    )
    
    
    (58,162
    )
    
    
    (93,749
    )Cash flows from financing activities:Borrowings on lines of credit
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    245,500
    
    
    
    245,672Payments on lines of credit
    
    
    
    
    
    
    (9,948
    )
    
    
    (5,000
    )
    
    
    (185,972
    )
    
    
    (200,920
    )Borrowings on long-term debt
    
    
    (1,266
    )
    
    
    68,450
    
    
    
    4,000
    
    
    
    58,521
    
    
    
    129,705Payments on long-term debt
    
    
    
    
    
    
    (29,189
    )
    
    
    (4,327
    )
    
    
    (96,591
    )
    
    
    (130,107
    )Proceeds from stock option exercises
    
    
    6,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,491Intercompany
    
    
    22,858
    
    
    
    (52,979
    )
    
    
    13,857
    
    
    
    16,264
    
    
    
    Net cash provided by (used in)
financing activities
    
    
    28,083
    
    
    
    (23,494
    )
    
    
    8,530
    
    
    
    37,722
    
    
    
    50,841Effect of exchange rate changes on cash
    
    
    86
    
    
    
    (867
    )
    
    
    
    
    
    
    (1,311
    )
    
    
    (2,092
    )Net (decrease) increase in cash and cash
equivalents
    
    
    (1,635
    )
    
    
    (17,161
    )
    
    
    2,797
    
    
    
    24,743
    
    
    
    8,744Cash and cash equivalents, beginning of
period
    
    
    1,177
    
    
    
    20,816
    
    
    
    986
    
    
    
    52,619
    
    
    
    75,598Cash and cash equivalents, end of period
    
    $
    (458
    )
    
    $
    3,655
    
    
    $
    3,783
    
    
    $
    77,362
    
    
    $
    84,342
 23




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##### Table of Contents



QUIKSILVER, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 13.
    
    Long-term debtDuring the three months ended July 31, 2007, the Company was out of compliance with certain
profitability covenants on a 50.0 million euro term loan of a Rossignol subsidiary in Europe.
As of July 31, 2007, this debt was approximately $68.3 million (50.0 million euros). The
Company obtained a waiver from the bank for the three months ended July 31, 2007 and
additionally amended the existing agreement to remove these financial covenants through October
2008. Accordingly, the Company continues to classify this debt as long term as of July 31,
2007.
 24




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
  Roger Cleveland Golf Company, Inc. Condensed Statement of Operations and
Comprehensive Income/Loss (Unaudited) Three Months Ended July 31, 2007
and 2006
    
    
    26Roger Cleveland Golf Company, Inc. Condensed Statement of Operations and
Comprehensive Income/Loss (Unaudited) Nine Months Ended July 31, 2007
and 2006
    
    
    27Roger Cleveland Golf Company, Inc. Condensed Balance Sheets (Unaudited)
July 31, 2007 and October 31, 2006
    
    
    28Roger Cleveland Golf Company, Inc. Condensed Statements of Cash Flows
(Unaudited) Nine Months Ended July 31, 2007 and 2006
    
    
    29Roger Cleveland Golf Company, Inc. Notes to Condensed Financial
Statements (Unaudited)
    
    
    30
 25




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/LOSS
 (Unaudited)
 Three Months Ended July 31,In thousands
    
    2007
    
    
    2006Revenues, net
    
    $
    47,193
    
    
    $
    38,625Cost of goods sold
    
    
    29,753
    
    
    
    21,006Gross profit
    
    
    17,440
    
    
    
    17,619Selling, general, and administrative expense
    
    
    16,922
    
    
    
    14,319Operating income
    
    
    518
    
    
    
    3,300Interest expense
    
    
    950
    
    
    
    865Other income
    
    
    
    
    
    
    (152
    )(Loss) income before (benefit) provision for income taxes
    
    
    (432
    )
    
    
    2,587(Benefit) provision for income taxes
    
    
    (164
    )
    
    
    983Net (loss) income and comprehensive (loss) income
    
    $
    (268
    )
    
    $
    1,604
  26




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/LOSS
 (Unaudited)
 Nine Months Ended July 31,In thousands
    
    2007
    
    
    2006Revenues, net
    
    $
    109,529
    
    
    $
    108,980Cost of goods sold
    
    
    71,158
    
    
    
    59,106Gross profit
    
    
    38,371
    
    
    
    49,874Selling, general, and administrative expense
    
    
    45,535
    
    
    
    44,675Operating (loss) income
    
    
    (7,164
    )
    
    
    5,199Interest expense
    
    
    2,503
    
    
    
    2,473Other income
    
    
    
    
    
    
    (355
    )(Loss) income before (benefit) provision for income taxes
    
    
    (9,667
    )
    
    
    3,081(Benefit) provision for income taxes
    
    
    (3,673
    )
    
    
    1,171Net (loss) income
    
    
    (5,994
    )
    
    
    1,910Loss on derivative investments, net of tax
    
    
    
    
    
    
    (42
    )Comprehensive (loss) income
    
    $
    (5,994
    )
    
    $
    1,868
  27




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
 
 CONDENSED BALANCE SHEETS
 (Unaudited)
 July 31,
    
    
    October 31,In thousands (except share amounts)
    
    2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,644
    
    
    $
    1,855Accounts receivable, less allowance for bad debts of $757
(2007) and $1,000 (2006)
    
    
    36,702
    
    
    
    36,987Income taxes receivable
    
    
    3,543
    
    
    
    Inventories
    
    
    24,987
    
    
    
    27,122Deferred income taxes
    
    
    2,349
    
    
    
    2,349Prepaid expenses and other current assets
    
    
    2,087
    
    
    
    2,661Due from affiliates
    
    
    8,282
    
    
    
    8,591Total current assets
    
    
    79,594
    
    
    
    79,565Equipment and leasehold improvements less accumulated
depreciation and amortization of $7,062 and $6,036
    
    
    3,249
    
    
    
    3,801Other intangible assets, net
    
    
    1,481
    
    
    
    3,150Goodwill
    
    
    2,472
    
    
    
    2,472Deferred income taxes
    
    
    353
    
    
    
    353Other assets
    
    
    301
    
    
    
    274Total assets
    
    $
    87,450
    
    
    $
    89,615LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit
    
    $
    
    
    
    $
    Accounts payable
    
    
    9,678
    
    
    
    3,525Accrued payroll and benefits
    
    
    2,142
    
    
    
    2,677Other accrued expenses
    
    
    3,265
    
    
    
    3,408Due to affiliates
    
    
    2,054
    
    
    
    1,357Income taxes payable
    
    
    
    
    
    
    1,343Total current liabilities
    
    
    17,139
    
    
    
    12,310Due to affiliates
    
    
    44,000
    
    
    
    45,000Total liabilities
    
    
    61,139
    
    
    
    57,310Stockholders equity:Common stock no par value  500,000 shares authorized; 290,224
shares issued and outstanding
    
    
    22,000
    
    
    
    22,000Retained earnings
    
    
    4,311
    
    
    
    10,305Total stockholders equity
    
    
    26,311
    
    
    
    32,305Total liabilities and stockholders equity
    
    $
    87,450
    
    
    $
    89,615
  28




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Nine Months Ended July 31,In thousands
    
    2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (5,994
    )
    
    $
    1,910Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    1,411
    
    
    
    1,522Asset impairment
    
    
    1,456
    
    
    
    Changes in assets and liabilities:Accounts receivable, net
    
    
    285
    
    
    
    (96
    )Inventories
    
    
    2,135
    
    
    
    (6,774
    )Prepaid expenses and other current assets
    
    
    574
    
    
    
    200Other assets
    
    
    (30
    )
    
    
    (299
    )Accounts payable
    
    
    6,153
    
    
    
    (1,087
    )Due from affiliates, net
    
    
    1,006
    
    
    
    (1,143
    )Accrued expenses
    
    
    (678
    )
    
    
    (1,813
    )Income taxes payable
    
    
    (4,886
    )
    
    
    1,982Net cash provided by (used in) operating activities
    
    
    1,432
    
    
    
    (5,598
    )Cash flows from investing activities:Purchase of equipment and leasehold improvements
    
    
    (643
    )
    
    
    (1,278
    )Net cash used in investing activities
    
    
    (643
    )
    
    
    (1,278
    )Cash flows from financing activities:Borrowings on lines of credit
    
    
    4,000
    
    
    
    4,000Payments on lines of credit
    
    
    (4,000
    )
    
    
    (5,000
    )Proceeds from affiliate loans, net of repayments
    
    
    (1,000
    )
    
    
    15,000Payments of long-term debt
    
    
    
    
    
    
    (4,327
    )Net cash (used in) provided by financing activities
    
    
    (1,000
    )
    
    
    9,673Net (decrease) increase in cash
    
    
    (211
    )
    
    
    2,797Cash, beginning of period
    
    
    1,855
    
    
    
    986Cash, end of period
    
    $
    1,644
    
    
    $
    3,783Supplemental disclosures of cash flow information:Cash paid (received) during the period for:Interest
    
    $
    2,910
    
    
    $
    2,522Income taxes
    
    $
    1,213
    
    
    $
    (838
    )
  
 29




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 1.
    
    Basis of PresentationThe accompanying unaudited condensed 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.Roger Cleveland Golf Company, Inc. (the Company) manufactures, markets, and distributes
golf clubs and related accessories. The Company is owned 64.63% by certain subsidiaries of
Quiksilver, Inc. (the Parent) and 36.37% by a group of individuals. The Parent acquired
its majority interest in the Company on July 31, 2005, and as a result, the financial
statements do not include financial statements for any periods prior to July 31, 2005. The
Parents new basis is not reflected in the accompanying financial statements as these
financial statements have been prepared on the carryover basis of accounting.The Parent has $400 million in publicly registered senior notes. In July 2006, the Company
became a guarantor subsidiary of these senior notes, fully and unconditionally guaranteeing
the senior note indebtedness of the Parent. Accordingly, the accompanying financial
statements are being included in the Parents Form 10-Q in accordance with the SECs
Regulation S-X, Rule 3-10. The inclusion of the Companys financial statements in the
Parents filings is expected to cease due to the Parents acquisition of the remaining
minority interest in the Company. This acquisition is expected to close during the three
months ending October 31, 2007 (see note 3).2.
    
    New Accounting PronouncementsIn May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, (SFAS
No. 154) which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 applies to all
voluntary changes in accounting principles and requires retrospective application (a term
defined by the statement) to prior periods financial statements, unless it is impracticable
to determine the effect of a change. It also applies to changes required by an accounting
pronouncement that does not include specific transition provisions. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company adopted this standard during the nine months ended
July 31, 2007. The adoption of this standard did not have a material impact on the
Companys financial condition, results of operations or cash flows.In 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 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. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company expects to adopt FIN 48 on November 1, 2007. The Company is
currently assessing the impact the adoption of FIN 48 will have on its financial position
and results of operations.In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting
Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides
interpretive guidance on the SECs views regarding the process of quantifying materiality of
financial statement misstatements. The Company adopted this standard during the nine months
ended
July 31, 2007. The adoption of this accounting pronouncement did not have a material effect
on the Companys consolidated financial position, results of operations or cash flows.
 30




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 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. 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.3.
    
    Intangible AssetsThe Companys intangible assets consist of the following:
 July 31, 2007
    
    
    October 31, 2006Gross
    
    
    Amorti-
    
    
    
    
    
    
    
    
    
    
    Amorti-In thousands
    
    Amount
    
    
    zation
    
    
    Net
    
    
    Amount
    
    
    zation
    
    
    NetTradenames and trademarks
    
    $
    800
    
    
    $
    
    
    
    $
    800
    
    
    $
    3,100
    
    
    $
    (689
    )
    
    $
    2,411Patents
    
    
    1,813
    
    
    
    (1,546
    )
    
    
    267
    
    
    
    1,643
    
    
    
    (1,371
    )
    
    
    272Customer relationships
    
    
    700
    
    
    
    (286
    )
    
    
    414
    
    
    
    700
    
    
    
    (233
    )
    
    
    467$
    3,313
    
    
    $
    (1,832
    )
    
    $
    1,481
    
    
    $
    5,443
    
    
    $
    (2,293
    )
    
    $
    3,150
 In June 2007, the Parent entered into a stock purchase agreement to acquire the 36.37%
minority interest in the Company. The transaction is expected to close during the three
months ending October 31, 2007. As a result of this planned transaction, the Company
remeasured the carrying values of related intangible assets. As a result, the Company
recorded an impairment charge of approximately $1.5 million during the three months ended
July 31, 2007.Amortization expense of intangible assets for the nine months ended July 31, 2007 and 2006
was approximately $0.4 million and $0.5 million, respectively. Annual amortization expense
for the fiscal year ending October 31, 2007 is estimated to be $0.5 million. Annual
amortization expense for fiscal years ending October 31, 2008 through 2011 is estimated to
be $0.1 million.4.
    
    InventoriesInventories consist of the following:
 July 31,
    
    
    October 31,In thousands
    
    2007
    
    
    2006Raw materials
    
    $
    14,071
    
    
    $
    12,287Work in process
    
    
    190
    
    
    
    41Finished goods
    
    
    10,726
    
    
    
    14,794$
    24,987
    
    
    $
    27,122
 31




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##### Table of Contents



ROGER CLEVELAND GOLF COMPANY, INC.
 NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 5.
    
    Related Party TransactionsAmounts due to affiliates consist of the following:
 July 31,
    
    
    October 31,In thousands
    
    2007
    
    
    2006Affiliated debt due to Quiksilver Americas, Inc.
    
    $
    44,000
    
    
    $
    45,000Amounts due to Parent and other Parent subsidiaries
    
    
    2,054
    
    
    
    1,357Amounts due from Parent and other Parent subsidiaries
    
    
    (8,282
    )
    
    
    (8,591
    )$
    37,772
    
    
    $
    37,766
 Interest expense on borrowings from Quiksilver Americas, Inc. was approximately $2.4 million
for the nine months ended July 31, 2007 and 2006. The weighted average interest rate on
these borrowings was 6.8% at July 31, 2007. This interest rate corresponds to the rate at
which Quiksilver Americas, Inc. borrowed these funds, on the Companys behalf, under the
shared credit facility. Sales to Quiksilver, Inc. subsidiaries amounted to $18.8 million
and $11.4 million for the nine months ended July 31, 2007 and 2006, respectively.6.
    
    Indemnities, Guarantees and LitigationDuring 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, sales, and/or license of Company
products; (ii) indemnities to vendors and service providers pertaining to claims based on
the negligence or willful misconduct of the Company; (iii) indemnities involving the
accuracy of representations and warranties in certain contracts; (iv) indemnities to
directors and officers of the Company to the maximum extent permitted under the laws of the
State of California; and (v) certain real estate leases under which the Company may be
required to indemnify property owners for environmental and other liabilities, and other
claims arising from the Companys use of the applicable premises. In addition, the Company
has made a contractual commitment to an employee providing for severance payments upon the
occurrence of certain prescribed events. 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. Historically, the
Company has not been obligated to make significant payments for these obligations, and no
liabilities have been recorded for these indemnities, commitments, and guarantees in the
accompanying balance sheets.
 32




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##### Table of Contents



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 Cleveland Golf Never Compromise
 Quiksilver
    33




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Statement of Income dataRevenues, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Gross profit
    
    
    45.9
    
    
    
    47.3
    
    
    
    45.8
    
    
    
    46.2Selling, general and administrative expense
    
    
    44.9
    
    
    
    43.5
    
    
    
    43.9
    
    
    
    41.4Operating income
    
    
    1.0
    
    
    
    3.8
    
    
    
    1.9
    
    
    
    4.8Interest expense
    
    
    2.5
    
    
    
    2.3
    
    
    
    2.6
    
    
    
    2.3Foreign currency and other expense
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0(Loss) income before (benefit) provision for
income taxes
    
    
    (1.6
    )
    
    
    1.4
    
    
    
    (0.7
    )
    
    
    2.5(Benefit) provision for income taxes
    
    
    (0.3
    )
    
    
    0.4
    
    
    
    (0.1
    )
    
    
    0.8Net (loss) income
    
    
    (1.3
    )%
    
    
    1.0
    %
    
    
    (0.6
    )%
    
    
    1.7
    %Other dataEBITDA (1)
    
    
    6.0
    %
    
    
    7.6
    %
    
    
    6.0
    %
    
    
    8.8
    %
 
 (1)
    
    EBITDA is defined as net income before (i) interest expense, (ii)
income tax expense, (iii) depreciation and amortization, (iv) non-cash stock-based
compensation expense and (v) asset impairments. 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 EBITDA, along with other GAAP measures, as a
measure of profitability because 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 and the accounting methods
used to compute depreciation and amortization, and the effect of non-cash stock-based
compensation expense. We believe it is useful to investors for the same reasons. 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 net income to
EBITDA: Three Months Ended
    
    
    Nine Months EndedJuly 31,
    
    
    July 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net (loss) income
    
    $
    (7,867
    )
    
    $
    5,336
    
    
    $
    (10,192
    )
    
    $
    27,668(Benefit) provision for income taxes
    
    
    (1,703
    )
    
    
    1,858
    
    
    
    (3,076
    )
    
    
    11,476Interest expense
    
    
    15,332
    
    
    
    11,877
    
    
    
    45,675
    
    
    
    36,417Depreciation and amortization
    
    
    18,669
    
    
    
    16,229
    
    
    
    52,785
    
    
    
    47,581Non-cash stock compensation expense
    
    
    4,052
    
    
    
    4,732
    
    
    
    13,199
    
    
    
    16,056Non-cash asset impairments
    
    
    8,163
    
    
    
    
    
    
    
    8,163
    
    
    
    EBITDA
    
    $
    36,646
    
    
    $
    40,032
    
    
    $
    106,554
    
    
    $
    139,198
 Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006
  Quiksilver Roxy DC Hawk Gotcha Raisins Leilani Radio Fiji Rossignol Rossignol Dynastar Look Lange Kerma Lib Technologies Gnu Bent Metal Cleveland Golf Never Compromise Fidra
 34




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##### Table of Contents



DC, Quiksilver Roxy DCs Quiksilver and Roxy
 Three Months Ended July 31,2007
    
    
    2006Equip-
    
    
    
    
    
    
    
    
    
    
    Equip-Apparel
    
    
    ment
    
    
    
    
    
    
    Apparel
    
    
    mentIn thousands
    
    Brands
    
    
    Brands
    
    
    Total
    
    
    Brands
    
    
    Brands
    
    
    TotalAmericas
    
    $
    279,829
    
    
    $
    55,184
    
    
    $
    335,013
    
    
    $
    233,112
    
    
    $
    44,301
    
    
    $
    277,413Europe
    
    
    185,012
    
    
    
    27,684
    
    
    
    212,696
    
    
    
    160,698
    
    
    
    30,300
    
    
    
    190,998Asia/Pacific
    
    
    59,936
    
    
    
    3,924
    
    
    
    63,860
    
    
    
    52,577
    
    
    
    3,732
    
    
    
    56,309Corporate operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,187
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    1,134$
    524,777
    
    
    $
    86,792
    
    
    $
    612,756
    
    
    $
    446,387
    
    
    $
    78,333
    
    
    $
    525,854
    35




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##### Table of Contents



Nine Months Ended July 31, 2007 Compared to Nine Months Ended July 31, 2006
  Quiksilver, Roxy DC Quiksilver Roxy DCs
 Nine Months Ended July 31,2007
    
    
    2006Equip-
    
    
    
    
    
    
    
    
    
    
    Equip-Apparel
    
    
    ment
    
    
    
    
    
    
    Apparel
    
    
    mentIn thousands
    
    Brands
    
    
    Brands
    
    
    Total
    
    
    Brands
    
    
    Brands
    
    
    TotalAmericas
    
    $
    712,466
    
    
    $
    142,914
    
    
    $
    855,380
    
    
    $
    602,024
    
    
    $
    146,149
    
    
    $
    748,173Europe
    
    
    577,923
    
    
    
    157,599
    
    
    
    735,522
    
    
    
    479,478
    
    
    
    189,821
    
    
    
    669,299Asia/Pacific
    
    
    162,140
    
    
    
    12,872
    
    
    
    175,012
    
    
    
    142,642
    
    
    
    20,256
    
    
    
    162,898Corporate operations
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,165
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3,554$
    1,452,529
    
    
    $
    313,385
    
    
    $
    1,769,079
    
    
    $
    1,224,144
    
    
    $
    356,226
    
    
    $
    1,583,924
 36




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##### Table of Contents



Financial Position, Capital Resources and Liquidity
  37




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##### Table of Contents



Cash Flows
    Commitments
   38




---



##### Table of Contents



Trade Accounts Receivable and Inventories
   
 Critical Accounting Policies
  Revenue Recognition
  Accounts Receivable
  39




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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
  Income Taxes
  Stock-Based Compensation Expense
  40




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##### Table of Contents



Foreign Currency Translation
   
 New Accounting Pronouncements
  
 Forward-Looking Statements
   41




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency
     
 Item 4. Controls and Procedures
     42




---



##### Table of Contents



Item 1. Legal Proceedings
 Burnis L. Simon, Jr. v. Quicksilver, Inc.
(sic)
 43




---



##### Table of Contents



Item 6. Exhibits
 Exhibits2.1
    
    
    English Translation of the Acquisition Agreement, dated April 12,
2005, between the Company and Mr. Laurent Boix-Vives, Ms. Jeannine
Boix-Vives, Ms. Christine Simon, Ms. Sylvie Bernard and SDI Société
de Services et Développement (incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K filed on April 18,
2005).2.2
    
    
    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).2.3
    
    
    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).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 3.2 of the Companys Annual Report on Form 10-K
for the year ended October 31, 2003).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
    
    
    Restricted Stock Agreement by and between Quiksilver, Inc. and
Douglas Ammerman dated June 7, 2007. (1)10.2
    
    
    Stock Purchase Agreement dated June 20, 2007 by and between
Quiksilver, Inc., Rossignol Ski Company, Inc., Laurent Boix-Vives,
Jeannine Boix-Vives, Christine Simon, Sylvie Bernard and Services
Expansion International.31.1
    
    
    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 44




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##### Table of Contents



QUIKSILVER, INC., a Delaware corporationSeptember 10, 2007
    /s/ Brad L. HolmanBrad L. HolmanVice President of Accounting and Financial Reporting
(Principal Accounting Officer and Authorized Signatory) 45




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##### Table of Contents



Exhibits2.1
    
    
    English Translation of the Acquisition Agreement, dated April 12,
2005, between the Company and Mr. Laurent Boix-Vives, Ms. Jeannine
Boix-Vives, Ms. Christine Simon, Ms. Sylvie Bernard and SDI Société
de Services et Développement (incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K filed on April 18,
2005).2.2
    
    
    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).2.3
    
    
    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).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 3.2 of the Companys Annual Report on Form 10-K
for the year ended October 31, 2003).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
    
    
    Restricted Stock Agreement by and between Quiksilver, Inc. and
Douglas Ammerman dated June 7, 2007. (1)10.2
    
    
    Stock Purchase Agreement dated June 20, 2007 by and between
Quiksilver, Inc., Rossignol Ski Company, Inc., Laurent Boix-Vives,
Jeannine Boix-Vives, Christine Simon, Sylvie Bernard and Services
Expansion International.31.1
    
    
    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