EXHIBIT 99.1
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
PAGE NO.
INDEPENDENT AUDITORS' REPORT........................................ 1
COMBINED FINANCIAL STATEMENTS
Combined Balance Sheet
October 31, 2002............................................. 2
Combined Statement of Income
Year Ended October 31, 2002.................................. 3
Combined Statement of Comprehensive Income
Year Ended October 31, 2002.................................. 3
Combined Statement of Stockholders' Equity
Year Ended October 31, 2002.................................. 4
Combined Statement of Cash Flows
Year Ended October 31, 2002.................................. 5
Notes to Combined Financial Statements....................... 7
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
Quiksilver, Inc.:
We have audited the accompanying combined balance sheet of Quiksilver
Asia/Pacific, as defined in Note 1 to the combined financial statements, as of
October 31, 2002, and the related combined statements of income, comprehensive
income, stockholders' equity and cash flows the year ended October 31, 2002.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Quiksilver Asia/Pacific as of
October 31, 2002, and the results of its operations and cash flows for the year
ended October 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
Our audits also comprehended the translation of amounts into US dollars amounts
and, in our opinion, such translation has been made in conformity with the basis
stated in Note 1. Such US dollar amounts are presented solely for the
convenience of readers in the United States of America.
As discussed in Note 1 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill and intangible assets.
DELOITTE TOUCHE TOHMATSU
Date: February 28, 2002
Melbourne, Australia
1
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
COMBINED BALANCE SHEET
OCTOBER 31, 2002
2002 2002
AUD$ US$
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ................................................ 37,659,797 20,901,187
Trade accounts receivable, less allowance for doubtful accounts
of AUD $4,169,338 (US$2,313,983) - Note 2 .............................. 36,888,373 20,473,047
Other receivables ........................................................ 904,542 502,021
Inventories .............................................................. 20,102,563 11,156,922
Deferred income taxes - Note 11 .......................................... 2,078,095 1,153,343
Prepaid expenses and other current assets ................................ 5,044,795 2,799,859
----------- ----------
Total current assets ................................................. 102,678,167 56,986,379
Fixed assets, net - Note 3 .................................................... 8,847,441 4,910,330
Goodwill ...................................................................... 2,481,922 1,377,467
Deferred income taxes - Note 11 ............................................... 163,527 90,758
Investments in unconsolidated affiliates - Note 12 ............................ 670,801 372,295
Other assets - Note 13 ........................................................ 1,692,122 939,127
----------- ----------
Total assets ...................................................... 116,533,980 64,676,356
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit - Note 4 .................................................. 5,737,809 3,184,484
Accounts payable ......................................................... 16,300,148 9,046,582
Accrued liabilities - Note 6 ............................................. 3,407,028 1,890,901
Accrued dividends and distributions payable - Note 7 ..................... 34,490,469 19,142,210
Current portion of lease liabilities - Note 5 ............................ 561,404 311,579
Income taxes payable - Note 11 ........................................... 1,893,265 1,050,762
Other current liabilities ................................................ 114,155 63,355
----------- ----------
Total current liabilities ............................................ 62,504,278 34,689,873
Long Term Lease liabilities - Note 5 ..................................... 936,400 519,701
----------- ----------
Total liabilities .................................................... 63,440,678 35,209,574
----------- ----------
Commitments and contingencies - Note 8
Stockholders' Equity - Note 9
Common stock - ................................................................ 103,194 57,273
Retained earnings ............................................................. 54,178,571 30,069,106
Accumulated other comprehensive loss .......................................... (1,188,463) (659,597)
----------- ----------
Total stockholders' equity ............................................... 53,093,302 29,466,782
----------- ----------
Total liabilities and stockholders' equity ............................... 116,533,980 64,676,356
=========== ==========
SEE NOTES TO COMBINED FINANCIAL STATEMENTS
2
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
COMBINED STATEMENT OF INCOME
YEAR ENDED OCTOBER 31, 2002
2002 2002
AUD$ US$
---------------------------
Net sales .......................................................... 149,942,707 83,218,202
Cost of goods sold ................................................. 86,374,072 47,937,610
---------- ----------
Gross profit .................................................. 63,568,635 35,280,592
Operating expenses:
Selling, general and administrative expense ................... 39,547,094 21,948,637
Pension payment to retiring directors - Note 14 ............... 9,241,917 5,129,264
Royalty expense ............................................... 4,964,020 2,755,031
---------- ----------
Total operating expenses .................................. 53,753,031 29,832,932
---------- ----------
Operating income ................................................... 9,815,604 5,447,660
Interest income - net .............................................. 529,151 293,679
Foreign currency gain .............................................. 1,025,532 569,170
Other income ....................................................... 244,070 135,459
---------- ----------
Income before provision for income taxes ........................... 11,614,357 6,445,968
Provision for Income taxes - Note 11 ............................... 3,136,168 1,740,573
---------- ----------
Net income ......................................................... 8,478,189 4,705,395
========== ==========
COMBINED STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED OCTOBER 31, 2002
2002 2002
AUD$ US$
--------------------------
Net income ............................................................. 8,478,189 4,705,395
Other comprehensive income(loss):
Foreign currency translation adjustment ........................... (52,232) (28,989)
Change in net unrealised loss on derivative instruments ........... (1,271,362) (705,606)
Tax on unrealised loss of derivative instruments .................. 381,409 211,682
---------- ---------
Comprehensive income ................................................... 7,536,004 4,182,482
========== =========
SEE NOTES TO COMBINED FINANCIAL STATEMENTS
3
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED OCTOBER 31,2002
AUD$
ACCUMULATED
OTHER TOTAL
CONTRIBUTED RETAINED COMPREHENSIVE STOCKHOLDERS'
EQUITY EARNINGS INCOME (LOSS) EQUITY
-------------------------------------------------------------
Balance, November 1, 2001 ....... 103,194 83,507,309 (246,278) 83,364,225
Net income .................. -- 8,478,189 -- 8,478,189
Foreign currency translation
Adjustment ............... -- -- (52,232) (52,232)
Loss on derivatives contracts -- -- (889,953) (889,953)
Dividends paid or provided .. -- (37,806,927) -- (37,806,927)
------- ---------- ---------- ----------
Balance, October 31,2002 ........ 103,194 54,178,571 (1,188,463) 53,093,302
======= ========== ========== ==========
US$
ACCUMULATED
OTHER TOTAL
CONTRIBUTED RETAINED COMPREHENSIVE STOCKHOLDERS'
EQUITY EARNINGS INCOME (LOSS) EQUITY
------------------------------------------------------------
Balance, November 1, 2001 ....... 57,273 46,346,556 (136,684) 46,267,145
Net income .................. -- 4,705,395 -- 4,705,395
Foreign currency translation
Adjustment ............... -- -- (28,989) (28,989)
Loss on derivatives contracts -- -- (493,924) (493,924)
Dividends paid or provided .. -- (20,982,845) -- (20,982,845)
------- ---------- -------- ----------
Balance, October 31,2002 ........ 57,273 30,069,106 (659,597) 29,466,782
======= ========== ======== ==========
SEE NOTES TO COMBINED FINANCIAL STATEMENTS
4
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2002
2002 2002
AUD$ US$
----------------------------
Cash flows from operating activities:
Net income .............................................................................. 8,478,189 4,705,395
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation ........................................................................ 1,193,288 662,275
Provision for doubtful accounts ..................................................... 1,077,644 598,091
Loss on sale of fixed assets ........................................................ 1,697 942
Unrealised foreign currency gain .................................................... (889,953) (493,924)
Cash Surrender Value of Life Insurance .............................................. (294,778) (163,602)
Gain on sale of Investment .......................................................... (214,063) (118,805)
Deferred income taxes ............................................................... (304,019) (168,730)
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Trade accounts receivable ...................................................... 5,483,668 3,043,436
Other receivables .............................................................. (841,565) (467,069)
Inventories .................................................................... (4,261,222) (2,364,978)
Prepaid expenses and other current assets ...................................... 68,682 38,119
Accounts payable ............................................................... (157,685) (87,515)
Accrued liabilities ............................................................ (1,406,832) (780,792)
Income taxes payable ........................................................... (4,612,157) (2,559,749))
---------- ----------
Net cash provided by operating activities ................................... 3,320,890 1,843,094
========== ==========
Cash flows from investing activities:
Proceeds from sales of fixed assets ..................................................... -- --
Capital expenditures .................................................................... (2,920,414) (1,620,830)
Proceeds from sale of investments ....................................................... 61,695 34,241
---------- ----------
Net cash used in investing activities ........................................ (2,858,718) (1,586,589)
---------- ----------
Cash flows from financing activities:
Borrowings on lines of credit ........................................................... 21,169,823 11,749,252
Payments on lines of credit ............................................................. (23,269,694) (12,914,680)
Borrowings on long-term debt ............................................................ 761,050 422,383
Payments on long-term debt .............................................................. (598,446) (332,137)
Payments of cash dividends .............................................................. (3,316,458) (1,840,635)
---------- ----------
Net cash used in financing activities ........................................ (5,253,725) (2,915,817)
Effect of exchange rate changes on cash ...................................................... (52,232) (28,989)
---------- ----------
Net decrease in cash and cash equivalents .................................................... (4,843,785) (2,688,301)
Cash and cash equivalents, beginning of year ................................................. 42,503,582 23,589,488
---------- ----------
Cash and cash equivalents, end of year ....................................................... 37,659,797 20,901,187
========== ==========
5
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 2002
2002 2002
AUD$ US$
--------- ---------
Supplementary cash flow information:
Cash paid during the year for:
Interest............................................................. 281,931 156,472
--------- ---------
Income taxes......................................................... 8,052,346 4,469,052
========= =========
SEE NOTES TO COMBINED FINANCIAL STATEMENTS
6
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND COMBINATION
The accompanying financial statements are the combined accounts of UG
Manufacturing Co. Pty Ltd and subsidiaries, ("Quiksilver Australia") Quiksilver
Japan K.K. and subsidiary, ("Quiksilver Japan") and UMTT Pty Limited
(collectively "Quiksilver Asia/Pacific" or the "Group Companies"). The
individual entities have interrelated directors and common ownership.
The combined financial statements include the financial statements of the
individual entities and the accounts of their respective domestic and foreign
subsidiaries. UG Manufacturing Co. Pty Ltd's wholly owned subsidiaries include:
- - UG Manufacturing Co (NZ) Ltd (operating in New Zealand),
- - QS (Aust) Sourcing Ltd (operating in Hong Kong),
- - QS (World) Sourcing Ltd (operating in Hong Kong); and
- - Caribbean BRC Pty Ltd (operating in Australia).
Quiksilver Japan K.K.'s wholly owned subsidiary is QSJ Holdings Pty Ltd
(operating in Australia).
Investments in affiliates in which UG Manufacturing Co. Pty Ltd owns more than
20% of the voting securities but less than 50% of the total equity are accounted
for under the equity method of accounting. Intercompany accounts and
transactions have been eliminated.
GROUP BUSINESS
Quiksilver Asia/Pacific designs, produces and distributes clothing, accessories,
and related products for young minded people and promotes brands that represent
a casual lifestyle - driven from a boardriding heritage. Quiksilver
Asia/Pacific's primary focus is apparel for young men and young women under the
Quiksilver and Roxy labels, two brands that are licensed from a subsidiary of
Quiksilver Inc., an American company. Distribution is primarily through surf
specialty stores.
Quiksilver Asia/Pacific operates exclusively in the consumer products industry
in which the Group Companies design, produce and distribute clothing,
accessories and related products. Operating results of Quiksilver Asia/Pacific's
various product lines have been aggregated because of their common
characteristics.
BASIS OF PRESENTATION AND USE OF ESTIMATES
The Group Companies comprising Quiksilver Asia/Pacific are controlled and
managed through common ownership. Accordingly, the financial statements have
been combined and reflect the elimination of all significant intercompany
balances and transactions.
The combined financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. To
prepare these financial statements, it is necessary for management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities. These estimates also
affect the reported revenues and expenses. Actual results could be different
from these estimates.
7
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
Certificates of deposit and highly liquid short-term investments purchased with
original maturities of three months or less are considered cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market and
consist primarily of finished goods.
FIXED ASSETS
Furniture, equipment and buildings are recorded at cost and depreciated on a
straight-line basis over their estimated useful lives. The useful life of
furniture and equipment ranges from two to ten years, and for buildings, fifty
years.
Leasehold improvements are recorded at cost and amortized over their estimated
useful lives or the related lease term, whichever is shorter.
LONG-LIVED ASSETS
Quiksilver Asia/Pacific accounts for the impairment and disposition of
long-lived assets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of". In accordance with SFAS No. 121,
long-lived assets are reviewed for events or changes in circumstances which
indicate that their carrying value may not be recoverable. SFAS No. 121 will be
superseded by SFAS no. 144 as discussed below under "New Accounting
Pronouncements".
GOODWILL
Goodwill arose primarily from the acquisition of Omareef during 1999. Quiksilver
Asia/Pacific assesses the recoverability of goodwill at each balance sheet date
by determining whether the remaining useful life can be recovered through
projected undiscounted future operating cash flows. See discussion of SFAS No.
142 below under "New Accounting Pronouncements".
REVENUE RECOGNITION
Revenue from the sale of goods is recognized upon the transfer of title and risk
of ownership to the customers. Allowances for estimated returns and doubtful
accounts are provided when revenues are recorded.
8
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Quiksilver Asia/Pacific accounts for income taxes using the asset and liability
approach as promulgated by SFAS No. 109 "Accounting for Income Taxes". Deferred
income tax assets and liabilities are established for temporary differences
between the financial reporting bases and the tax bases of the Company's assets
and liabilities at tax rates expected to be in effect when such assets or
liabilities are realized or settled. Deferred income tax assets are reduced by a
valuation allowance if, in the judgment of Quiksilver Asia/Pacific's management,
it is more likely than not that such assets will not be realized.
FOREIGN CURRENCY AND DERIVATIVES
Quiksilver Australia's primary functional currency is the Australian Dollar.
Quiksilver Japan's primary functional currency is the Japanese Yen. Assets and
liabilities of their respective subsidiaries denominated in other currencies are
translated to the functional currency at the rate of exchange on the balance
sheet date. Revenue and expenses are translated using the average exchange rate
for the period.
Quiksilver Asia/Pacific has adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" at November 1, 2001. As a result, net
unrealized losses on forward exchange contracts have been recorded in the
Combined Statement of Comprehensive Income to recognize the fair value of
derivatives that are designated as foreign currency hedges. All outstanding
foreign currency exchange derivatives are recognized as either assets or
liabilities measured at fair value at balance date.
CURRENCY OF PRESENTATION
All amounts have been translated from the functional currencies into U.S Dollars
using the exchange rate at the most recent balance sheet date being US$ 1 =
AUD$0.555 and AUD$ 1 = Yen 67.99. The translation of amounts into US dollar
amounts are included solely for the convenience of readers in the United States
of America. Such translation should not be construed as a representation that
the Australian dollar amounts could be converted into US dollars at that or any
other rate.
COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders' equity except those
resulting from investments by, and distributions to, stockholders. Accordingly,
Quiksilver Asia/Pacific's Combined Statement of Comprehensive Income includes
net income and foreign currency adjustments that arise from the translation of
the financial statements of Quiksilver Japan and Quiksilver Australia into U.S.
dollars and unrealized gains and losses on certain foreign currency exchange
derivative instruments.
9
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of Quiksilver Asia/Pacific's trade accounts receivable and
accounts payable approximates their fair value due to their short-term nature.
The carrying value of the Company's lines of credit and long-term debt
approximates its fair value as these borrowings include a series of short-term
notes at fixed interest rates. The insurance policy recorded on the balance
sheet is valued at the cash amount anticipated on the surrendering of the
policy.
NEW ACCOUNTING PRONOUNCEMENTS
Effective November 1, 2001, the Group Companies account for goodwill under
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". This standard eliminates the pooling method of accounting for
business combinations initiated after June 30, 2001. In addition, SFAS No. 141
addresses the accounting for intangible assets and goodwill acquired in a
business combination. This portion of SFAS No. 141 is effective for business
combinations completed after June 30, 2001. The adoption of SFAS No. 141 did not
have a material effect on our financial position or results of operations.
Effective November 1, 2001, we adopted SFAS No. 142, "Goodwill and Intangible
Assets", which revises the accounting for purchased goodwill and intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are tested for impairment annually and also in the
event of an impairment indicator. An impairment is assessed when the
undiscounted expected future cash flows derived from an asset are less than its
carrying amount. Impairments, if any, would be recognized in operating earnings.
We completed the required transitional impairment test and the annual impairment
test and determined that no impairment loss was necessary. Any subsequent
impairment losses will be reflected in operating income. With the adoption of
SFAS No. 142 we discontinued amortization of goodwill.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which
supersedes previous guidance on financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a business to be
disposed of. SFAS No. 144 is effective for fiscal 2003. We do not expect the
adoption of SFAS No. 144 to have a significant impact on our financial position
or results of operations. However, future impairment reviews may result in
charges against earnings to write down the value of long-lived assets.
In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which requires that costs associated with
exit or disposal activities be recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. We must apply SFAS No. 146
prospectively to exit or disposal activities initiated after December 31, 2002.
If we initiate exit or disposal activities after that date, SFAS No. 146 will
affect the timing of the recognition of the related costs. We do not expect the
adoption of this standard to have a significant impact on our financial position
or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial
10
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. We are required to follow
the prescribed format and provide the additional disclosures required by SFAS
No. 148 in our financial statements for fiscal 2003 and must also provide the
disclosures in our quarterly reports containing condensed financial statements
for interim periods beginning with our quarterly period ending April 30, 2003.
NOTE 2 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts includes the following:
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
------------------------------------
Balance, beginning of year......................................... 3,907,833 2,168,848
Provision for doubtful accounts............................... 1,077,644 598,091
Deductions.................................................... (816,139) (452,956)
------------- -------------
Balance, end of year............................................... 4,169,338 2,313,983
============= =============
NOTE 3 - FIXED ASSETS
Fixed assets consist of the following:
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
------------------------------------
Furniture and equipment....................................... 7,910,685 4,390,430
Leasehold improvements........................................ 3,955,778 2,195,457
Land and buildings............................................ 2,075,631 1,151,975
----------- -----------
13,942,094 7,737,862
Accumulated depreciation and amortization..................... (5,094,652) (2,827,532)
----------- -----------
8,847,441 4,910,330
=========== ===========
11
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 4 - LINE OF CREDIT
At October 31, 2002, Quiksilver Australia had an available line of credit with a
bank that provides maximum cash borrowings of approximately AUD$17,000,000 (US$
9,435,000), including an AUD$9,600,000 (US$ 5,328,000) sublimit for the issuance
of letters of credit. Borrowings under the credit facility bear interest based
on the bank's base rate. The weighted average interest rate at October 31, 2002
was 7.75%. As of October 31, 2002, AUD$5,737,809 (US$ 3,184,484) of cash
borrowings was outstanding under the line of credit. The line of credit
agreement expires in June 2003 and provides for a reduction in the maximum cash
borrowings available under the agreement to AUD$10,500,000 (US$5,827,500) at
January 31, 2003. Quiksilver Australia believes that these lines of credit can
be renewed with substantially similar terms. The line of credit agreement
contains restrictive covenants, the most significant of which relate to
maintaining certain leverage and interest coverage ratios. At October 31, 2002,
the Company was in compliance with such covenants. The line of credit is secured
by a pledge of the assets of Quiksilver Australia and is guaranteed by
Quiksilver Japan.
Principal payments on long-term debt are all due within twelve months.
NOTE 5 - CAPITAL LEASE OBLIGATIONS
The Company has equipment under capital lease, which requires payments of
principal and interest as follows:
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
------------------------------------
2003...................................................... 734,420 407,603
2004...................................................... 573,041 318,038
2005...................................................... 356,741 197,991
2006...................................................... 166,526 92,422
--------- ---------
Total payments 1,830,728 1,016,054
Less - amount attributable to interest.......................... (332,924) (184,773)
--------- ---------
Capital lease obligation 1,497,804 831,281
Less - current portion.......................................... (561,404) (311,579)
--------- ---------
Long-term lease obligation......................................... 936,400 519,701
========= =========
The weighted average interest rate on capital lease obligations at October 31,
2001 was 10.4 %. Property and equipment includes approximately AUD$4,056,809
(US$2,251,529) of vehicles, office and computer equipment under lease as at
October 31, 2002. Accumulated amortization associated with this equipment
totaled approximately AUD$1,962,942 (US$1,089,433) as at October 31, 2002.
12
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
------------------------------------
Accrued employee compensation and benefits.................... 1,224,167 679,413
Accrued sales, goods and services and payroll taxes........... 643,284 357,023
Derivative liability.......................................... 954,016 529,479
Accrued pension liability-Note 14............................. 225,225 125,000
Other liabilities............................................. 360,336 199,986
--------- ---------
3,407,028 1,890,901
========= =========
NOTE 7 - ACCRUED DIVIDENDS AND DISTRIBUTIONS PAYABLE
Total dividends declared/paid during the year ended October 31, 2002 was
AUD$37,806,927 (US$20,982,845). Outstanding as at October 31, 2002 is the
dividend declared by Japan's Board of Directors on October 15, 2002 of
AUD$34,490,469 (US$19,142,210).
NOTE 8 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Quiksilver Asia/Pacific leases certain land and buildings under long-term
operating lease agreements. The following is a schedule of future minimum lease
payments required under such leases as of October 31, 2002:
2002 2002
AUD$ US$
--------------------------------
2003...................................................... 3,699,099 2,053,000
2004...................................................... 1,610,810 894,000
2005...................................................... 1,596,396 886,000
2006...................................................... 1,380,180 766,000
2007...................................................... 1,261,261 700,000
Thereafter................................................ 481,081 267,000
---------- ---------
10,028,827 5,566,000
========== =========
Total rent expense was AUD$5,163,449 (US$2,865,714) during the year ended
October 31, 2002.
LITIGATION
There are currently no known legal claims against the entities that comprise the
Quiksilver Asia/Pacific Group.
13
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 9 - STOCKHOLDERS' EQUITY
Stockholder's equity consists of the combined equity of Quiksilver Japan,
Quiksilver Australia, and UMTT Pty Limited. The components of stockholder equity
included in the Combined Statement of Stockholders' Equity have been translated
from the functional currencies into U.S Dollars using the exchange rate at the
most recent balance sheet date being US$ 1 = AUD$0.555 and AUD$ 1 = Yen 67.99.
Contributed equity included in the company's Combined Statement of Stockholders'
Equity consists of the value received in exchange for shares of ownership in the
various combining entities. At October 31, 2002, there were 119,431 shares of
common stock of UG Manufacturing Co Pty Ltd, 600 shares of common stock of
Quiksilver Japan, and 100 shares of common stock of UMTT Pty Limited. During the
year ended October 31, 2002, there were no equity transactions that affected
contributed equity.
During the year ended October 31, 2002, the Group Companies paid or provided for
dividends out of retained earnings. These dividends totaled AUD $37,806,927
(US$20,982,845) translated using the exchange rate at the most recent balance
sheet date.
There are no shares under option.
NOTE 10 - TRADEMARK
The Group Companies have various licensing agreements with Quiksilver Inc.
("License Agreements"). The License Agreements provide that the Group Companies
can sell product under the Quiksilver and Roxy trademarks and trade names in
territories covered by the License Agreements - primarily, Australia, New
Zealand and Japan ("Licensed Territories"). These agreements expire on various
dates ranging from one to ten years. In consideration of the rights granted
under the License Agreements, the Group Companies pay a royalty on a monthly
basis based on net sales of Quiksilver and Roxy products in the Licensed
Territories. The License Agreements also require the Group Companies to pay a
promotional fee based on net sales of Quiksilver and Roxy products and generally
restrict the companies from selling products under other brand names.
14
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 11 - INCOME TAXES
A summary of the provision for income taxes is as follows:
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
------------------------------------
Current:
Australia ........................................................ 3,973,492 2,205,288
New Zealand ...................................................... 648,315 359,815
Hong Kong ........................................................ 57,649 31,995
Japan ............................................................ (1,239,269) (687,795)
----------- ---------
3,440,187 1,909,304
=========== =========
Deferred:
Australia ........................................................ (222,929) (123,726)
New Zealand ...................................................... - -
Hong Kong ........................................................ - -
Japan ............................................................ (81,090) (45,005)
----------- ---------
(304,019) (168,731)
----------- ---------
Provision for income taxes ....................................... 3,136,168 1,740,573
=========== =========
A reconciliation of the effective income tax rate to a computed "expected"
statutory Australian income tax rate is as follows:
OCTOBER 31 2002
%
---------------
Computed "expected" statutory Australian income tax rate ........................... 30.0
Non-Deductible Expenses ............................................................ 2.1
Foreign income tax rate differential................................................ (5.9)
----
Effective income tax rate .......................................................... 26.2
====
15
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
The components of net deferred income taxes are as follows:
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
-------------------------------------
Deferred income tax assets:
Net operating loss............................................... 2,418,900 1,342,490
Other accrued expenses........................................... 985,100 546,730
Allowance for doubtful accounts.................................. 934,472 518,632
Accrual for employee liability................................... 345,117 191,540
Other comprehensive income....................................... 286,205 158,844
Inventory........................................................ 109,083 60,541
Leases........................................................... 66,531 36,925
--------- ---------
5,145,408 2,855,703
Deferred income tax liabilities:
Inventory adjustment............................................. 1,238,238 687,222
Cash surrender value life insurance.............................. 1,204,385 668,434
Prepayment....................................................... 272,722 151,361
Other............................................................ 187,400 104,007
Depreciation..................................................... 1,040 577
--------- ---------
2,903,785 1,611,600
--------- ---------
Net deferred income taxes ....................................... 2,241,623 1,244,102
========= =========
For classification purposes within the balance sheet, some tax assets and tax
liabilities have been off set within the same geographical location.
16
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 12 - INVESTMENTS IN UNCONSOLIDATED AFFILIATES
The Group Companies' investments in affiliated companies includes four
distributors and retailers that have licensing agreements with Quiksilver, Inc.
to manufacture products with the Quiksilver and Roxy labels in Thailand,
Malaysia and Indonesia. The Group Companies use the equity method of accounting
for investments in and earnings and losses of affiliates in which the Group
Companies own between 20% and 50% of the investee's voting stock and/or has the
ability to exercise significant influence over operating and financial policies
of the investee. The equity method requires periodic adjustments to the
investment account to recognize the Group Companies' proportionate share in the
investee's results, reduced by receipt of investee dividends and amortization of
goodwill. The Group Companies periodically review these investments for
impairment and provide a reserve for the diminution of value when recoverability
is in question. The Group Companies use the cost method to account for
investment in affiliates in which the Group Companies own less than 20% of the
investee's voting stock.
The Group Companies' investment in unconsolidated affiliates, net, including
loans to unconsolidated affiliates of AUD$271,238 (US$150,538), totaled
AUD$670,801 (US$372,295) at October 31, 2002. For the year ended October 31,
2002, the Group Companies' equity in earnings of unconsolidated affiliates was
not significant.
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
--------------- ---------------
Investments in unconsolidated affiliates
Depreciation ........................... 783,563 434,877
Less Provision for diminution ............. (384,000) (213,120)
-------- --------
Net Investments in unconsolidated affiliates . 399,563 221,757
Loans to unconsolidated affiliates ........... 271,238 150,538
-------- --------
Total Investments in Unconsolidated Affiliates 670,801 372,295
======== ========
NOTE 13 - OTHER ASSETS
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
--------------- ---------------
Guarantee deposits ....................... 1,392,103 772,617
Intangible pension asset - Note 14 ....... 169,369 94,000
Other assets ............................. 130,650 72,510
--------- -------
1,692,122 939,127
========= =======
17
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 14 - PENSIONS AND OTHER POST RETIREMENT BENEFITS
The Group Companies have several retirement and pension plans covering the
majority of employees, including employees in foreign countries, and certain
directors of Quiksilver Japan. Substantially all full-time employees in Japan
participate in a pension plan ("Pension Plan") that provides pension benefits
based on the number of years of service and rate of compensation at the time of
retirement or termination. In the case of involuntary termination, the employee
is entitled to greater payments than in the case of voluntary termination. The
Pension Plan was established during the year ended October 31, 2002.
The following table reconciles the funded status of the Pension Plan to the
balance on the Consolidated Statement of Financial Position. The pension
obligations are valued as of October 31, 2002. There are no plan assets
currently set aside in relation to this pension liability.
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
--------------- ---------------
Pension Obligations
Beginning balance
Benefit obligation at inception .... (194,595) (108,000)
Service cost ....................... (41,441) (23,000)
Interest cost ...................... (5,405) (3,000)
Actuarial loss (gain) ...................... (73,874) (41,000)
-------- --------
Ending balance ............................. (315,315) (175,000)
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
--------------- ---------------
Reconciliation of funded status to net amounts recognized:
Funded status - plan assets in excess of (less than) projected
benefit obligation ......................................... (315,415) (175,000)
Unrecognized prior service cost .............................. 185,585 103,000
Unrecognized net actuarial loss (gain) ....................... 73,874 41,000
-------- --------
Net amount recognized ............................................. (55,856) (31,000)
Amounts recognized in the statement of financial position
Accrued pension liability .................................... (225,225) (125,000)
Pension intangible asset ..................................... 169,369 94,000
-------- --------
Net amounts recognized ............................................ (55,856) (31,000)
======== ========
18
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
The components of net periodic pension costs and other supplemental information
were as follows:
OCTOBER 31 2002 OCTOBER 31 2002
AUD$ US$
--------------- ---------------
Components of net periodic benefit costs - pensions
Service cost for benefits earned during the period 41,441 23,000
Interest cost on projected benefit obligation .... 5,405 3,000
Amortization of prior service cost ............... 9,009 5,000
Recognition of actuarial loss (gain) ............. -- --
------ ------
Net periodic pension costs ............................ 55,856 31,000
====== ======
Assumptions used in the accounting were:
Discount rate ......................................... 2.5%
Expected return on plan assets ........................ 0%
Rate of increase in compensation levels ............... 2.5%
Substantially all full-time employees in Australia and Hong Kong participate in
government-mandated defined contribution retirement plans. During the year ended
October 31, 2002 the Group Companies incurred AUD$711,712 (US$395,000) of
expenses related to these government-mandated defined contribution plans.
All employees in Australia also participate in a long term service plan (the
"Plan") by which employees who provide certain years of service are entitled to
either a lump sum payment upon termination or extended leave. For the year ended
October 31, 2002, Quiksilver Australia incurred AUD$34,739 (US$19,280) of
expenses related to the Plan. At October 31, 2002, the Companies had an accrued
liability of AUD$396,647 (US$220,139) related to the Plan.
During the year ended October 31, 2002, AUD$9,241,917 (US$5,129,264) was paid to
certain retiring members of the Board of Directors for prior years of service as
employees and directors. The entire amount is included in the Combined Statement
of Income for the year ended October 31, 2002.
19
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
Quiksilver Asia/Pacific is exposed to gains and losses resulting from
fluctuations in foreign currency exchange rates relating to product purchases
that are denominated in currencies other than the functional currencies of the
Group Companies.
Furthermore, Quiksilver Asia/Pacific is exposed to gains and losses resulting
from the effect that fluctuations in foreign currency exchange rates have on the
reported results in the combined financial statements due to the translation of
the operating results and financial position of its international companies. As
part of its overall strategy to manage the level of exposure to the risk of
fluctuations in foreign currency exchange rates, Quiksilver Asia/Pacific uses
various foreign currency exchange contracts.
For all qualifying cash flow hedges, the changes in the fair value of the
derivatives are recorded in other comprehensive income. If Quiksilver
Asia/Pacific entered into other derivatives in the future that did not qualify
for hedge accounting but would be used by management to mitigate exposure to
currency risks, they would be marked to fair value with corresponding gains or
losses recorded in earnings. As of October 31, 2002, Quiksilver Asia/Pacific was
hedging forecasted transactions expected to occur in the following five months.
Assuming exchange rates at October 31, 2002 remain constant, approximately
AUD$900,000 (US$499,500) of losses related to hedges of these transactions are
expected to be reclassified into earnings over the next five months.
On the date Quiksilver Asia/Pacific enters into a derivative contract,
management designates the derivative as a hedge of the identified exposure.
Quiksilver Asia/Pacific 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,
Quiksilver Asia/Pacific 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. Quiksilver Asia/Pacific formally measures effectiveness of its hedging
relationships both at the hedge inception and on an ongoing basis in accordance
with its risk management policy. Quiksilver Asia/Pacific would discontinue hedge
accounting prospectively:
(i) if it is determined 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 FISCAL YEAR ENDED OCTOBER 31, 2002, QUIKSILVER ASIA/PACIFIC
RECLASSIFIED INTO EARNINGS A NET LOSS OF AUD $735,253 (US$408,066) RESULTING
FROM THE EXPIRATION, SALE, TERMINATION, OR EXERCISE OF DERIVATIVE CONTRACTS.
Quiksilver Asia/Pacific enters into forward exchange and other derivative
contracts with major banks and is exposed to credit losses in the event of
nonperformance by these banks. Quiksilver Asia/Pacific anticipates, however,
that these banks will be able to fully satisfy their obligations under the
contracts. Accordingly, Quiksilver Asia/Pacific does not obtain collateral or
other security to support the contracts.
20
QUIKSILVER ASIA/PACIFIC
(INCORPORATING UG MANUFACTURING CO. PTY LIMITED AND SUBSIDIARIES
AND QUIKSILVER JAPAN K.K. AND SUBSIDIARIES)
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 2002
A summary of derivative contracts at October 31, 2002 is as follows:
NOTIONAL FAIR
AMOUNT VALUE
-------- -----
AUD$ AUD$ MATURITY AUD$
---- -------- ----
U.S. dollars................................... 17,541,180 Nov 2002 - January 2003 (1,002,449)
New Zealand dollars............................ 1,603,505 February 2003 48,432
---------- --------
19,144,685 (954,017)
========== ========
NOTIONAL FAIR
AMOUNT VALUE
-------- -----
US$ US$ MATURITY US$
--- -------- ---
U.S. dollars................................... 9,735,355 Nov 2002 - January 2003 (556,359)
New Zealand dollars............................ 889,945 February 2003 26,880
---------- --------
10,625,300 (529,479)
========== ========
21