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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended October 31, 2003

OR

Commission file number 0-15131

QUIKSILVER, INC.

(714) 889-2200
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]  No  [  ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ü]

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes  [X]  No  [  ]

     The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was approximately $895 million as of April 30, 2003, the last business day of Registrant’s most recently completed second fiscal quarter.

     As of January 20, 2004, there were 55,681,695 shares of the Registrant’s Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held March 26, 2004 are incorporated by reference into Part III of this Form 10-K.

Table of Contents

TABLE OF CONTENTS

Table of Contents

PART I

Item 1. BUSINESS

Unless the context indicates otherwise, when we refer to “Quiksilver”, “we”, “us”, “our”, or the “Company” in this Form 10-K, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. Quiksilver, Inc. was incorporated in 1976 and was reincorporated in Delaware in 1986. Our fiscal year ends on October 31, and references to fiscal 2003, fiscal 2002 or fiscal 2001 refer to the years ended October 31, 2003, 2002 or 2001, respectively. Unless otherwise indicated, the information in this Form 10-K gives effect to a two-for-one stock split of our common stock effected on May 9, 2003 in the form of a stock dividend.

Introduction

We are a globally integrated company that designs, produces and distributes branded clothing, accessories and related products for young-minded people. Our brands represent a casual lifestyle—driven from our authentic boardriding heritage. Our primary focus is apparel for young men and young women under the Quiksilver, Roxy, Raisins, Radio Fiji and Gotcha (Europe) labels. We also manufacture apparel for boys (Quiksilver Boys and Hawk Clothing), girls (Roxy Girl, Teenie Wahine and Raisins Girls), men (Quiksilveredition and Fidra, our golf line) and women (Leilani swimwear), as well as snowboards, snowboard boots and bindings under the Lib Technologies, Gnu and Bent Metal labels.

We generate revenues primarily in the United States, Europe and, since our acquisition of Ug Manufacturing Co. Pty Ltd. (Australia) and Quiksilver Japan KK, the Asia/Pacific markets. Our products are sold primarily in surf shops, specialty stores, and our proprietary retail concept Boardriders Club stores where we can best carry our authentic brand message to the consumer.

We believe our 35-year history of continuing commitment to board sports and our development of innovative products that relate to and reflect this fast growing global lifestyle give our company and our brands a credibility and authenticity that is truly unique in our industry. Our boardriding lifestyle generates products and images that are recognized around the world as symbols of fun, freedom and individual expression. As the leader of the boardriding outdoor active lifestyle, we are now poised to carry our products and brand message to a diversity of markets worldwide.

Recent Developments

Since acquiring Quiksilver International Pty Ltd., an Australian company (“Quiksilver International”), in July 2000, we have owned all international rights to use the Quiksilver and Roxy trademarks. Before then, we owned these intellectual property rights in the United States and Mexico only, and operated under license agreements with Quiksilver International to use the trademarks in other countries and territories.

In December 2002, we took the next step in consolidating global control of the Quiksilver and Roxy brands by acquiring Ug Manufacturing Co. Pty Ltd., and Quiksilver Japan KK, our licensees (through Quiksilver International) in Australia, Japan, New Zealand and other Southeast Asian territories. By acquiring this group of companies, which we refer to as Quiksilver Asia/Pacific, we have created a global operating platform consisting of our Americas, European and Asia/Pacific operations.

In addition, in September 2002, we acquired Beach Street, Inc., the owner and operator of 26 Quiksilver outlet stores in the U.S. The operations of these outlet stores have now been integrated into our existing retail stores division.

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Segment Information

We operate exclusively in the consumer products industry segment. For fiscal 2003, we had three geographic segments, the Americas, Europe and Asia/Pacific. The Americas segment includes revenues from the U.S., Canada and other exports from the U.S. The European segment includes revenues primarily from Western Europe. The Asia/Pacific segment includes revenues primarily from Australia, New Zealand and Japan. Royalties earned from various licensees in other international territories are categorized in corporate operations. For information regarding the revenues, operating profits and identifiable assets attributable to our geographic segments, see Note 15 of our financial statements.

Products and Brands

Our first product was the famous Quiksilver boardshort developed by two Australian surfers who founded Quiksilver Australia in the late 1960’s. The Quiksilver boardshort, identified by its distinctive mountain and wave logo, became known in the core surfing world as a technically innovative and stylish product. The reputation and popularity of the Quiksilver boardshort grew, having been brought to the beaches of California and Southwest France in the 1970’s by the founders of our company and Quiksilver Europe. Since the first boardshort, our product lines have been greatly expanded, but our brands continue to represent innovation and quality. In the 1990’s we called on the Quiksilver heritage to reach out to the girls market by creating the Roxy brand for juniors, which has become our fastest growing brand. In addition to Quiksilver and Roxy, we have developed a stable of other brands to address a wide variety of consumers and markets. We believe this multibrand strategy will allow us to continue to grow across a diverse range of products and distribution with broad appeal across gender, age groups and geographies.

Quiksilver

Our Quiksilver product line now includes shirts, walkshorts, t-shirts, fleece, pants, jackets, snowboard-wear, footwear, hats, backpacks, wetsuits, watches, eyewear and other accessories. Quiksilver has also expanded demographically and currently includes young men, boys and toddlers. Quiksilveredition is our brand targeted at men. In fiscal 2003, the Quiksilver line of products represented approximately 58% of our revenues.

Roxy

Our Roxy brand for young women is a surf-inspired collection that we introduced in fiscal 1991. The Roxy line is branded with a heart logo composed of back-to-back images of the Quiksilver mountain and wave logo and includes a full range of sportswear, swimwear, footwear, backpacks, fragrance, beauty care, bedroom furnishings and other accessories for young women. Through fiscal 1997, Roxy included juniors sizes only, but was then expanded as Teenie Wahine and Roxy Girl into the girls categories. In fiscal 2003, the Roxy product line accounted for approximately 32% of our revenues.

Other Brands

In fiscal 2003, our other brands represented approximately 10% of our revenues.

•		Raisins, Radio Fiji, Leilani - Raisins and Radio Fiji are swimwear labels in the juniors category while Leilani is a contemporary swimwear label. We also produce private label swimwear.
•		Hawk - Tony Hawk, the world-famous skateboarder, is the inspiration for our Hawk Clothing brand which we added to our portfolio in fiscal 2000. Our target audience for the Hawk product line is boys who recognize Tony from his broad media and video game exposure.
•		Gotcha - We have added Gotcha to our European labels to give us product to address European street fashion for young men.
•		Fidra - We entered the golf apparel business in fiscal 2000 with a new brand, Fidra, conceived and developed by golf industry pioneer, John Ashworth, and endorsed by world famous golfer, Ernie Els.

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•

Lib Tech, Gnu, Bent Metal - We address the core snowboard market through our Lib Technologies and Gnu brands of snowboards and accessories and Bent Metal snowboard bindings.

Product Categories

The following table shows the approximate percentage of revenues attributable to each of our major product categories during the last three fiscal years:

Although our products are generally available throughout the year, demand for different categories of product changes in the different seasons of the year. Sales of shorts, short-sleeve shirts, t-shirts and swimwear are higher during the spring and summer seasons, and sales of pants, long-sleeve shirts, fleece, jackets, sweaters, snowboardwear and snowboards are higher during the fall and holiday seasons.

We believe that the U.S. retail prices for our apparel products range from approximately $18 for a t-shirt and $45 for a typical short to a range of $130 to $330 for a snowboard jacket. For European products, retail prices range from approximately $32 for a t-shirt and about $54 for a typical short to $200 for a basic snowboard jacket. Asia/Pacific t-shirts sell for approximately $30, while shorts sell for approximately $56, and a basic snowboard jacket sells for approximately $165.

Product Design

Our products are designed for young-minded people who live a casual lifestyle. Innovative design, active fabrics and quality of workmanship are emphasized. Our design and merchandising teams create seasonal product ranges for each of our brands. These design groups constantly monitor local and global fashion trends. We believe our most valuable input comes from our own managers, employees, sponsored athletes and independent sales representatives who are actively involved in surfing, snowboarding, skateboarding and other sports in our core market. This connection with our core market continues to be the inspiration for our product and is key to our reputation for distinct and authentic design.

Our design centers in California, Europe, Australia and Japan develop and share designs and merchandising themes and concepts that are globally consistent while reflecting local adaptations for differences in geography, culture and taste.

Our longtime informal global process of sharing and cross-pollinating Quiksilver and Roxy designs, art, fabrics, samples and patterns has now been formalized by our purchase of Quiksilver International and the integration of Quiksilver Asia/Pacific into our operations.

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Promotion and Advertising

Our three-decade commitment to core marketing at the grass-roots level in the sport of surfing and other youth boardriding activities is the foundation of the promotion and advertising of our brands and products.

An important marketing vehicle for us is our sponsorship of high profile athletes in outdoor, individual sports, including surfing, snowboarding, skateboarding, windsurfing and golf. Many of these athletes such as Kelly Slater, Lisa Anderson, Tom Carroll, Tony Hawk, Robbie Naish, Danny Kass and Ernie Els have achieved world champion status in their respective sports and are featured in our promotional content. We also operate a promotional fund that is used to sponsor our international team of leading athletes, produce promotional movies and videos featuring athletes wearing and/or using Quiksilver and Roxy products, and organize surfing contests and other events that have international significance.

Our core marketing is based on our sponsorship and support of surf, snowboard and skateboard contests in markets where we distribute product. These events reinforce our reputation as an authentic, core brand among surfers and non-surfers alike. For example, the Quiksilver in Memory of Eddie Aikau Big Wave Invitational is held at Waimea Bay in Hawaii, the Quiksilver Pro Fiji is held near the islands of Tavarua and Namotu, and the Roxy Pro is held in Hawaii and other international locations. We also produce many events in Europe, including the Grommets Trophy surfing event, the Slopestyle Pro snowboarding event and the Bowlriders skateboarding event. The Quiksilver Airshow, which features aerial surf maneuvers, is held in New Zealand, Japan, Indonesia and Australia. Along with other international contests, we also sponsor many regional and local events such as surf camps and skate park tours.

We sponsor the Quiksilver Crossing, a continuing voyage of the Indies Trader, a surf exploration vessel whose mission is to explore new surfing regions around the world and document the state of the environment under a team of marine biologists. The Quiksilver Crossing, now in its fifth year, began its voyage in the South Pacific, continued on through the Suez Canal to Europe in 2002, visited the Caribbean in 2003, and will reach the U.S. in 2004.

As we have gained an international reputation for the authenticity and compelling content of our boardriding lifestyle, we have entered into co-branding arrangements to promote our brands. For example, Peugeot and Toyota have produced cars branded with Quiksilver and Roxy, while Boost Mobile has produced a Roxy mobile phone, and Sony has produced a waterproof digital camera branded with Quiksilver.

Our Quiksilver Entertainment division is also producing programming to transmit our boardriding lifestyle through television, movies, events, music and publishing. For example, we developed 54321, a daily action sports news magazine for Fox Sports Net, and produced the Surf Girls series on MTV about competitive girls’ surfing.

Customers and Sales

Our distribution strategy is premised on our longstanding belief that the integrity and success of our brands is dependent on responsible growth and careful selection of the retail accounts where our products are merchandised and sold.

Our policy is to sell to retailers who provide an outstanding in-store experience for their customers and who merchandise our products in a manner consistent with the image of our brands and the quality of our products. Our customer base has for many years reflected our goal of diversification of distribution to include surf shops, specialty stores, national specialty chains and select department stores.

The foundation of our business is distribution of product through surf shops, Boardriders Clubs and specialty stores where in-store shops, fixturing and point-of-sale materials carry our brand message. (We refer to our in-store shops as “Quiksvilles”.) This core distribution channel serves as a base of legitimacy and long-term loyalty to us and our brands. Most of these stores stand alone or are part of small chains.

We also sell to independent specialty or active lifestyle stores and specialty chains not specifically characterized as surf shops or Quiksvilles. This category includes chains such as Pacific Sunwear,

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Nordstrom, Zumiez, Chicks Sporting Goods and the Buckle, as well as many independent active lifestyle stores, snowboard shops and sports shops. We also sell to a limited number of department stores, including Macy’s, Robinsons-May, Dillards, The Bon Marche and Burdines in the U.S.; Le Printemps and Galeries Lafayette in France; Corte Ingles in Spain and Lillywhites in Great Britain.

Many of our brands are sold through the same retail accounts, however, distribution can be different depending on the brand and demographic group. Our Quiksilver products are sold in the Americas to customers that have approximately 7,700 store locations combined. Likewise, Roxy products are sold in the Americas to customers with approximately 7,300 store locations. Most of these Roxy locations also carry Quiksilver product. Our swimwear brands (Raisins, Leilani and Radio Fiji) are found in 10,300 stores, including many small, specialty swim locations, while our wintersports hardgoods products are found in approximately 700 stores, including primarily snowboard shops in the U.S. and Canada. Fidra is carried in approximately 800 green grass stores primarily in the U.S. Our products are found in approximately 6,500 store locations in Europe, and in approximately 2,200 store locations in Quiksilver Asia/Pacific, in both cases primarily Quiksilver and Roxy.

Our European segment accounted for approximately 40% of our consolidated revenues during fiscal 2003, which is the same as in fiscal 2002. Our Asia/Pacific segment accounted for approximately 10% of our consolidated revenues in fiscal 2003. Other fiscal 2003 foreign sales are in the Americas (Canada, Central and South America) and were approximately 5% of consolidated revenues.

The following table summarizes the approximate percentages of our fiscal 2003 revenues by distribution channel:

Our revenues are spread over a large wholesale customer base. During fiscal 2003, approximately 19% of our consolidated revenues were from our ten largest customers. No single customer accounted for more than 5% of our consolidated revenues during fiscal 2003.

Our products are sold by approximately 300 independent sales representatives in the Americas, Europe and Asia/Pacific. In addition, we use approximately 75 local distributors in Europe. Our sales representatives are generally compensated on a commission basis. We employ retail merchandise coordinators who travel between specified retail locations of our wholesale customers to further improve the presentation of our product and build our image at the retail level.

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Our sales are globally diversified. The following table summarizes the approximate percentages of our fiscal 2003 revenues by geographic region (excluding licensees):

We generally sell our products to customers on a net-30 to net-60 day basis in the Americas, and in Europe and Asia/Pacific on a net-30 to net-90 day basis depending on the country and whether we sell directly to retailers in the country or to a distributor. We generally do not reimburse our customers for marketing expenses, participate in markdown programs with our customers, or offer goods on consignment.

For additional information regarding our revenues, operating profits and identifiable assets attributable to our geographic segments, see Note 15 of our financial statements.

Retail Concepts

Quiksilver concept stores (Boardriders Clubs) are a crucial part of our global retail strategy. These stores are stocked primarily with Quiksilver and Roxy product, and their proprietary design demonstrates the Company’s history, authenticity and commitment to surfing and other boardriding sports. We also have Roxy stores, which are dedicated to the juniors customer, Quiksilver Youth stores, Hawk Clothing stores, and Gotcha and multibrand stores in Europe.

We own 138 stores in selected markets that provide enhanced brand-building opportunities, but the majority of our full-price stores are owned by independent retailers. In territories where we operated our wholesale businesses during fiscal 2003, we had 149 stores with independent retailers under license. We do not receive royalty income from these stores. Rather, we provide the independent retailer with our retail expertise and store design concepts in exchange for the independent retailer agreeing to maintain our brands at a minimum of 80% of the store’s inventory. Certain minimum purchase obligations are also required. Furthermore, in our licensed territories, such as Turkey and South Africa, our licensees operate 94 Boardriders Clubs. We receive royalty income from sales in these stores based on wholesale volume. We also distribute our products through outlet stores generally located in outlet malls in geographically diverse, non-urban locations. The total number of stores open at October 31, 2003 was 381.

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The unit count of both company-owned and licensed stores at October 31, 2003, excluding stores in licensed territories, is summarized in the following table:

Seasonality

Our sales fluctuate from quarter to quarter primarily due to seasonal consumer demand patterns for different categories of our products, and due to the effect that the Christmas season has on the buying patterns of our customers.

Production and Raw Materials

Our apparel and accessories are generally sourced separately for the Americas, Europe and Asia/Pacific operations. When cost-effective, categories are sourced together. Approximately 88% of our apparel and accessories are purchased or imported as finished goods from suppliers principally in Hong Kong, China and the Far East, but also in Mexico, India, North Africa, Portugal and other foreign countries. After being imported, many of these products require embellishment such as screenprinting, dying, washing or embroidery. In the Americas, we also produce goods that are manufactured by independent contractors from raw materials we provide. Approximately 65% of this manufacturing is done in the U.S. with the balance in Mexico. We manufacture our snowboards and skateboards in company-owned factories in the U.S.

All products are manufactured based upon design specifications provided by us, whether they are purchased or imported as finished goods or produced from raw materials provided by us.

The majority of finished goods as well as raw materials must be committed to and purchased prior to the receipt of customer orders. If we overestimate the demand for a particular product, excess production can be distributed in our outlet stores or through secondary distribution channels. If we overestimate a particular raw material, it can be used in garments for subsequent seasons or in garments for distribution through our outlet stores or secondary distribution channels.

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During fiscal 2003, no single contractor of finished goods accounted for more than 4% of our consolidated production. No single raw material supplier of fabric and trims accounted for more than 13% of our expenditures for raw materials during fiscal 2003. We believe that numerous qualified contractors and finished goods and raw materials suppliers are available to provide additional capacity on an as-needed basis and that we enjoy favorable on-going relationships with these contractors and suppliers.

Although we continue to explore new sourcing opportunities for finished goods and raw materials, we believe we have established solid working relationships over many years with vendors who are financially stable and reputable, and who understand our product quality and delivery standards. As part of our efforts to reduce costs and enhance our sourcing efficiency, we have shifted increasingly to foreign suppliers. We research, test and add, as needed, alternate and/or back-up suppliers. However, in the event of any unanticipated substantial disruption of our relationship with, or performance by, key existing suppliers and/or contractors, there could be a short-term adverse effect on our operations.

Imports and Import Restrictions

We have for some time imported finished goods and raw materials for our domestic operations under multilateral and bilateral trade agreements between the U.S. and a number of foreign countries, including Hong Kong, India, China and Japan. These agreements impose quotas on the amount and type of textile and apparel products that can be imported into the U.S. from the affected countries. We do not anticipate that these restrictions will materially or adversely affect our operations since we would be able to meet our needs domestically or from countries not affected by the restrictions on an annual basis.

In Europe we operate in the European Union (“EU”), within which there are few trade barriers. We sell to six other countries outside of France belonging to a trade union, which has some restrictions on imports of textile products and their sources. We also operate under constraints imposed on imports of finished goods and raw materials from outside the EU, including quotas and duty charges. We do not anticipate that these restrictions will materially or adversely impact our operations since we have always operated under such constraints, and the trend in Europe is continuing toward unification.

We retain independent buying agents, primarily in China, Hong Kong, India and other foreign countries to assist us in selecting and overseeing independent third party manufacturing and sourcing of finished goods, fabrics, and blanks and other products. These agents also monitor quota and other trade regulations and perform some quality control functions. We also have approximately 50 employees in Hong Kong that are involved in sourcing and quality control functions to assist in monitoring and coordinating our overseas production.

By having employees in regions where we source our products, we enhance our ability to monitor factories to ensure their compliance with our standards of manufacturing practices. Our policies require every factory to comply with a code of conduct relating to factory working conditions and the treatment of workers involved in the manufacture of products.

Trademarks and Licensing Agreements

Trademarks

We own the “Quiksilver”, “Roxy” and famous mountain and wave and heart logos in virtually every country in the world. Other trademarks we own include “Raisins”, “Radio Fiji”, “Leilani”, “Quiksilveredition”, “Hawk”, “Fidra”, “Lib Tech”, “Gnu” and “Bent Metal”.

We apply for and register our trademarks throughout the world mainly for use on apparel and related accessories and for retail services. We believe our trademarks and our other intellectual property are crucial to the successful marketing and sale of our products, and we attempt to vigorously prosecute and defend our rights throughout the world. Because of the success of our trademarks, we are required to maintain global anti-counterfeiting programs to protect our brands.

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Licensing Agreements

Since acquiring Quiksilver International in July 2000, we have owned the international rights to use the Quiksilver and Roxy trademarks in substantially all apparel and related accessory product classifications. With the acquisition of the Asia/Pacific licensees (see “Recent Developments”) we now directly operate all of the global Quiksilver and Roxy businesses with the exception of remaining licensees in Turkey, South Korea, South Africa and Brazil, among others.

We have a license agreement with Gotcha International, LP, which provides that we can sell products primarily in Western Europe under the Gotcha trademark. We have entered into licensing agreements in certain foreign territories with respect to several other of our non-Quiksilver and Roxy brands where we believe operating efficiencies and brand protection may best be achieved through licensees. In fiscal 2003, we terminated our domestic licensing agreement for Quiksilver and Roxy watches (see Item 3. Legal Proceedings) and added watches to our technical accessory line.

Competition

Competition is strong in the global beachwear, snowboardwear, skate apparel, casual sportswear and snowboard markets in which we operate, and each territory can have different competitors. Our direct competitors in the United States differ depending on distribution channel. Our principal competitors in our core channel of surf shops, Boardriders Clubs and Quiksvilles in the United States include Billabong, Hurley, O’Neill and Volcom. Our competitors in the department store and specialty store channels in the United States include Tommy Hilfiger, Abercrombie and Fitch, Nautica and Calvin Klein. In Europe, our principal competitors in the core channel include O’Neill, Billabong, Rip Curl, Oxbow and Chimsee. In Australia our primary competitors are Billabong and Rip Curl. In broader European distribution, and in Asia/Pacific, our competitors also include brands such as Nike, Adidas and Levis. Our principal competitors both in the United States and Europe in the snowboardwear and snowboard market are Burton, K2 and a host of smaller manufacturers. Some of our competitors may be significantly larger and have substantially greater resources than us.

We compete primarily on the basis of successful brand management and product design and quality born out of our ability to:

•		maintain our reputation for authenticity in the core boardriding lifestyle demographic,
•		continue to develop and respond to global fashion and lifestyle trends in our core markets,
•		create innovative, high quality and stylish product at appropriate price points, and
•		convey our boardriding lifestyle message to young-minded consumers worldwide (see “Risk Factors – Relating to Apparel Industry”).

Future Season Orders

We generally receive wholesale orders for apparel products approximately two to four months prior to the time the products are delivered to stores. All such orders are subject to cancellation for late delivery. We generally sell our products on a season-by-season basis. Our product ranges are separated into four delivery seasons, Spring, Summer, Fall and Holiday, with the exception of our men’s divisions in the Americas which combined the Spring and Summer seasons to achieve three delivery seasons. At the end of November 2003, our Spring 2004 orders totaled $319.4 million and were up 6% over the previous year’s level of $302.4 million without adjusting for changes in foreign exchange rates. Out of that combined increase, orders in the Americas were up 3%, European orders were up 9% in euros, and Asia/Pacific orders were up 6% in Australian dollars. Our forward orders depend upon a number of factors and can fluctuate based on the timing of trade shows, sales meetings and market weeks. The timing of shipments also fluctuates from year to year and varies based on the production of goods. As a consequence, a comparison of forward orders from season to season is not necessarily meaningful and may not be indicative of eventual shipments.

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Employees

At October 31, 2003, we had approximately 3,400 employees, consisting of approximately 2,000 in the United States, approximately 950 in Europe, approximately 450 in Asia/Pacific. None of our domestic employees are represented by a union, and less than five of our foreign employees are represented by a union. We have never experienced a work stoppage and consider our working relationships with our employees to be good.

Environmental Matters

Compliance with environmental laws and regulations did not have a significant impact on our capital expenditures, earnings or competitive position during the last three fiscal years.

Available Information

Our website is http://www.quiksilver.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. This website address is intended to be an inactive textual reference only, and none of the information contained on our website is part of this report or is incorporated in this report by reference.

Forward-Looking Statements

Various statements in this Form 10-K or incorporated by reference into this Form 10-K, in future filings by us with the SEC, in our press releases and in oral statements made by or with the approval of authorized personnel constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations and are indicated by words or phrases such as “anticipate”, “estimate”, “expect”, “project”, “we believe”, “currently envisions” and similar words or phrases and involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Some of the factors that could affect our financial performance or cause actual results to differ from our estimates in, or underlying, such forward-looking statements are set forth under the heading of “Risk Factors”. Forward-looking statements include statements regarding, among other items:

•		our anticipated growth strategies,
•		our plans to expand internationally,
•		our intention to introduce new products and enter into new joint ventures,
•		our plans to open new retail stores,
•		future renewals of our credit facilities,
•		anticipated effective tax rates in future periods,
•		future expenditures for capital projects, and
•		our ability to continue to maintain our brand image and reputation.

These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of the facts described in “Risk Factors” including, among others, changes in the competitive marketplace, including the introduction of new products or pricing changes by our competitors, changes in the economy, and other events leading to a reduction in discretionary consumer spending. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks and uncertainties, we cannot assure you that the forward-looking information contained in this Form 10-K will, in fact, transpire.

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Risk Factors

Competition

The apparel industry is highly competitive. We compete with numerous domestic and foreign designers, brands and manufacturers of apparel, accessories and other products, some of which are significantly larger and have greater resources than us. We believe that our ability to compete effectively depends upon our continued ability to maintain our reputation for authencity in our core boardriding market, our flexibility in responding to market demand and our ability to manage our brands and offer fashion conscious consumers a wide variety of high quality apparel at competitive prices. See “Business – Competition.”

Changes in Fashion Trends

We believe that our success depends in substantial part on our ability to anticipate, gauge and respond to changing consumer demand and fashion trends in a timely manner. We attempt to minimize the risk of changing fashion trends and product acceptance by closely monitoring retail sales trends. However, if fashion trends shift away from our products, or if we otherwise misjudge the market for our product lines, we may be faced with a significant amount of unsold finished goods inventory or other conditions which could have a material adverse effect on us.

Uncertainties in Apparel Retailing

The apparel industry historically has been subject to substantial cyclical variations, and a recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits could have a material adverse effect on our results of operations. While various retailers, including some of our customers, experienced financial difficulties in the past three years which increased the risk of extending credit to such retailers, our bad debt experience has been limited.

Our Business is Subject to Seasonal Trends

Historically, our operating results have been subject to seasonal trends when measured on a quarterly basis. Our first fiscal quarter is traditionally weaker compared with our other fiscal quarters. This trend is dependent on numerous factors, including the markets in which we operate, holiday seasons, consumer demand, climate, economic conditions and numerous other factors beyond our control. There can be no assurance that our historic operating patterns will continue in future periods as we cannot influence or forecast many of these factors.

Sourcing

We are dependent upon third parties for the manufacture of substantially all of our products. The inability of a manufacturer to ship orders of our products in a timely manner, including as a result of local financial market disruption which could impair the ability of such suppliers to finance their operations, or to meet quality standards, could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on our financial condition and results of operations. We have no long-term formal arrangements with any of our suppliers of raw materials, and to date we have experienced only limited difficulty in satisfying our raw materials requirements. Although we believe we could replace such suppliers without a material adverse effect on us, there can be no assurance that such suppliers could be replaced in a timely manner, and the loss of such suppliers could have a material adverse effect on our short-term operating results.

Impact of Potential Future Acquisitions

From time to time, we have pursued, and may continue to pursue, acquisitions. For example, during fiscal 2003, we completed the acquisition of the licensees of our trademarks in Australia, Japan, New Zealand and several other countries and territories in Southeast Asia using available lines of credit and common stock. If one or more acquisitions results in us becoming substantially more leveraged on a consolidated basis, our flexibility in responding to adverse changes in economic, business or market conditions may be adversely affected.

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Risks Relating to International Operations

We conduct a significant portion of our business outside of the United States and, particularly in light of our recent acquisitions, we anticipate that revenue from foreign operations will account for an increasingly larger portion of our future revenue. Our international operations are directly related to and dependent on the volume of international trade and local market conditions. Our international operations and international commerce are influenced by many factors, including:

•		changes in economic and political conditions and in governmental policies,
•		changes in international and domestic customs regulations,
•		wars, civil unrest, acts of terrorism and other conflicts,
•		natural disasters,
•		changes in tariffs, trade restrictions, trade agreements and taxation,
•		difficulties in managing or overseeing foreign operations,
•		limitations on the repatriation of funds because of foreign exchange controls,
•		different liability standards, and
•		difficulties in enforcing intellectual property laws of other countries.

The occurrence or consequences of any of these factors may restrict our ability to operate in the affected region and/or decrease the profitability of our operations in that region.

Foreign Currency and Derivatives

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are 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 our variable rate debt. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the operating results and financial position of our international subsidiaries. As part of our overall strategy to limit the level of exposure to the risk of fluctuations in foreign currency exchange rates, we use various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage our exposure to the risk of fluctuations in interest rates.

Loss or Infringement of Our Trademarks

We believe that our trademarks are important to our success and competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks on a worldwide basis. We cannot assure that our actions taken to establish and protect our trademarks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violative of their trademarks and proprietary rights. Moreover, we cannot assure that others will not assert rights in, or ownership of, our trademarks or that we will be able to successfully resolve such conflicts. In addition, the laws of certain foreign countries may not protect trademarks to the same extent as do the laws of the U.S. The loss of such trademarks, or the loss of the exclusive use of our trademarks, could have a material adverse effect on our business, financial condition and results of operations.

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Item 2. PROPERTIES

Certain information concerning our principal facilities in excess of 40,000 rentable square feet, all of which are leased, is as follows:

     *     Includes extension periods exercisable at our option.

As of October 31, 2003, we operated 60 retail stores in the Americas, 58 European retail stores, and 20 retail stores in Asia/Pacific on leased premises. The leases for our facilities required aggregate annual rentals of approximately $24.8 million in fiscal 2003. We anticipate that we will be able to extend those leases that expire in the near future on terms satisfactory to us or, if necessary, locate substitute facilities on acceptable terms.

Item 3. LEGAL PROCEEDINGS

In March 2002, we filed a lawsuit against GMT Corporation, our then licensee for watches in the U.S., and simultaneously terminated our license agreement with GMT, based on our allegations that GMT was in material breach of the agreement. GMT disputed our right to terminate and brought claims against us for wrongful termination and other alleged breaches by us of the license agreement. In January 2004, this dispute was litigated and we prevailed, resulting in no material impact on our financial condition or results of operations.

We are otherwise involved from time to time in legal claims involving trademark and intellectual property, licensing, employee relations and other matters incidental to our business. We believe the resolution of any such matter currently pending will not have a material adverse effect on our financial condition or results of operations.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted for a vote of our stockholders during the fourth quarter of the fiscal year ended October 31, 2003.

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “ZQK.” The high and low sales prices of our common stock, as reported by the NYSE for the two most recent fiscal years, are set forth below.

* Note: Prices have been adjusted to reflect a 2-for-1 stock split effected on May 9, 2003.

We have historically reinvested our earnings in our business and have never paid a cash dividend. No change in this practice is currently being considered. Our payment of cash dividends in the future will be determined by the Board of Directors, considering conditions existing at that time, including our earnings, financial requirements and condition, opportunities for reinvesting earnings, business conditions and other factors. In addition, under our principal credit agreement with a bank group, we must obtain the bank group’s prior consent to pay dividends.

On January 20, 2004, there were approximately 450 holders of record of our common stock and an estimated 11,000 beneficial stockholders.

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Item 6. SELECTED FINANCIAL DATA

The statement of income and balance sheet data shown below were derived from our consolidated financial statements. Our consolidated financial statements as of October 31, 2003 and 2002 and for each of the three years in the period ended October 31, 2003, included herein, have been audited by Deloitte & Touche LLP, our independent auditors. You should read this selected financial data together with our consolidated financial statements and related notes, as well as the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

(1)		Fiscal 2003 includes the operations of Asia/Pacific since its acquisition effective December 1, 2002. See Note 2 of our financial statements.
(2)		Per share amounts and shares outstanding have been adjusted to reflect a two-for-one stock split effected on May 9, 2003 and a three-for-two stock split effected on April 23, 1999, each in the form of a stock dividend.
(3)		Computed based on net income divided by the average of beginning and ending stockholders’ equity.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion below should be read together with our consolidated financial statements and related notes, which are included in this report, and the “Risk Factors” information in the “Business” section of this report.

Overview

We began our domestic operations in 1976 as a designer and manufacturer of Quiksilver branded boardshorts designed for the sport of surfing. We grew our business through the late 1980’s by expanding our Quiksilver products into a full range of sportswear, and we bought our U.S. trademark from the Quiksilver brand’s Australian founders in 1988. The distribution of our products was primarily through surf shops. Since the early 1990’s, we have diversified and grown our business by increased sales of our Quiksilver product line, the creation of new brands such as Roxy, the introduction of new products, the development of our retail operations, and acquisitions. We acquired the Quiksilver licensee in Europe in 1991 to expand geographically, we purchased Quiksilver International in 2000 to gain global ownership of the Quiksilver brand, and we acquired Quiksilver Asia/Pacific at the end of 2002 to unify our global operating platform and take advantage of available synergies in product development and sourcing, among other things. We also acquired various other smaller businesses and brands. Brand building has been a key to our growth, and we have always maintained our roots in the boardriding lifestyle. Today our products are sold throughout the world, primarily in surf shops and specialty stores that provide an outstanding retail experience for our customers.

Over the last five years, our revenues have grown from $446 million in fiscal 1999 to $975 million in fiscal 2003. We design, produce and distribute clothing, accessories and related products exclusively in the consumer products industry. Through fiscal 2002, we had two geographic segments, the Americas and Europe. We also now have the Asia/Pacific segment as a result of an acquistion in fiscal 2003. The Americas segment includes revenues from the U.S., Canada and other exports from the U.S. The European segment includes revenues primarily from Western Europe. The Asia/Pacific segment includes revenues primarily from Australia, New Zealand, and Japan. Royalties earned from various licenses in other international territories are categorized in corporate operations. Revenues by geographic segment are as follows:

We operate in markets that are highly competitive, and our ability to evaluate and respond to changing consumer demands and tastes is critical to our success. Shifts in consumer preferences could have a negative effect on companies that misjudge these preferences. We believe that our historical success is due to the development of an experienced team of designers, artists, sponsored athletes, merchandisers, pattern makers, and cutting and sewing contractors. It’s this team and the heritage and current strength of our brands that has helped us remain in the forefront of design in our markets. Our success in the future will depend on our ability to continue to design products that are acceptable to the marketplace. There can be no assurance that we can do this. The consumer products industry is fragmented, and in order to retain and/or grow our market share, we must continue to be competitive in the areas of quality, brand image, distribution methods, price, customer service, and intellectual property protection.

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Results of Operations

The table below shows the components in our statements of income as a percentage of revenues:

Fiscal 2003 Compared to Fiscal 2002

Revenues

Total revenues increased 38% in fiscal 2003 primarily as a result of increased unit sales and new products. Revenues in the Americas increased 18%, and European revenues increased 37%. Primarily because we acquired the business of our Australian and Japanese licensees in the first quarter of fiscal 2003, our royalty income decreased to $2.2 million from $4.8 million. Instead we now report product sales in this geographic region, which totaled $94.2 million in fiscal 2003.

Americas’ revenues in our men’s category, which includes the Quiksilver Young Men’s, Boys, Toddlers, Wintersports, Quiksilveredition, Hawk Clothing and Fidra divisions, increased 13% to $258.8 million in fiscal 2003 from $229.2 million the year before. Americas’ revenues in our women’s category, which includes the Roxy, Roxy Girl, Teenie Wahine, Raisins, Leilani and Radio Fiji divisions, increased 25% to $223.1 million from $178.4 million for those same periods. Wintersports hardgoods are sold primarily under the Lib Technologies, Gnu and Bent Metal brands and totaled $10.5 million in fiscal 2003 compared to $10.4 million in the previous year. Men’s revenues in the Americas increased generally across all divisions. The women’s increase came from both the Roxy and Raisins divisions. We believe that our product design and marketing efforts are resulting in increased consumer demand for our products in the Americas.

European revenues were approximately 40% of our consolidated total in fiscal 2003. In U.S. dollars, revenues in the men’s category increased 41% to $293.1 million in fiscal 2003 from $208.3 million in the previous year. Women’s revenues increased 25% to $93.1 million from $74.4 million for those same periods. Revenue growth was the largest in France, Spain and the United Kingdom. We believe that our product design and marketing efforts are resulting in increased consumer demand for our products in the European market. For consolidated financial statement reporting, euro results must be translated into U.S. dollar amounts at average exchange rates, but this can distort performance when exchange rates change from year to year. To understand our European fiscal 2003 growth and better assess competitive performance and market share gains, it is important to look at revenues in euros as well, which is our operational currency in Europe. In euros, revenues grew 15% in fiscal 2003. This is lower than the 37% growth rate in U.S. dollars because the U.S. dollar was worth fewer euros on average in fiscal 2003 compared to fiscal 2002.

Gross Profit

Our consolidated gross profit margin increased 380 basis points in fiscal 2003. The gross profit margin in the Americas increased to 40.1% from 36.7%, while our European gross profit margin increased to 49.1% from 45.3%. The Asia/Pacific gross profit margin was 46.9%. The Americas improvement occurred primarily due to an increase in our gross profit margin in the first half of fiscal 2003 because we lowered inventory levels toward the end of fiscal 2002. Consequently, our end-of season clearance business was down compared to the year before, and our gross margins on those sales were up. In the second half, the Americas’ gross profit margin was 39.3%. Our European gross profit margin increased in the second half of fiscal 2003 primarily as a result of the weaker U.S. dollar. Because a portion of our European product is

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purchased with U.S. dollars, product costs in euros decrease as the U.S. dollar decreases in value in comparison to the euro. Additionally, both the Americas’ and European gross profit margins improved because we had a higher percentage of our sales through company-owned retail stores. We earn higher gross margins on sales in company-owned stores, but these higher gross margins are offset by store operating costs.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 53% in fiscal 2003. In the Americas, it increased 28% to $151.7 million from $118.2 million, and in Europe it increased 47% to $127.5 million from $86.6 million for those same periods. The Asia/Pacific segment added $32.0 million of these expenses. Higher personnel costs and other costs related to increased sales volume were the primary reasons for these increases. As a percentage of revenues, selling general and administrative expense increased to 34.0% in fiscal 2003 from 30.7% in fiscal 2002. Selling, general and administrative expense increased as a percentage of revenues primarily due to the incremental operating costs of new company-owned retail stores, and to a lesser extent additional marketing expenses.

Interest Expense and Income Taxes

Interest expense decreased 4% in fiscal 2003. Additional interest on debt incurred to acquire and operate the new Asia/Pacific segment was more than offset by lower interest rates in Europe and in the Americas.

The Company’s income tax rate decreased to 35.0% in fiscal 2003 from 37.3% in fiscal 2002. This improvement resulted primarily because a higher percentage of our fiscal 2003 profits were generated in countries with lower tax rates.

Net Income

Net income in fiscal 2003 increased 56%, and earnings per share on a diluted basis increased 34%.

Fiscal 2002 Compared to Fiscal 2001

Revenues

Total revenues increased 14% in fiscal 2002 primarily as a result of increased unit sales and new products. Revenues in the Americas increased 7%, and European revenues increased 26%. Royalty income decreased in fiscal 2002 from 2001 because we acquired our domestic outlet store licensee during the fourth quarter of fiscal year 2002 and terminated our domestic watch licensee. Accordingly, royalty income was $4.8 million in fiscal 2002 compared to $5.2 million in fiscal 2001.

In the Americas, our men’s revenues increased 7% to $229.2 million in fiscal 2002 from $214.3 million the year before. Women’s revenues increased 8% to $178.4 million from $165.9 million for those same periods. Wintersports hardgoods totaled $10.4 million in fiscal 2002 compared to $11.3 million in the previous year. Revenues in our men’s category increased generally across all divisions. The increase in our women’s category was the result of increases in both the Roxy and Raisins divisions. We believe that our product design and marketing efforts resulted in increased consumer demand for our products.

European revenues were approximately 40% of our consolidated total in fiscal 2002. In U.S. dollars, revenues in our men’s category increased 19% to $208.3 million in fiscal 2002 from $175.2 million in the previous year. Revenues in our women’s category increased 53% to $74.4 million from $48.7 million for those same periods. Revenue growth was the largest in France, the United Kingdom and Spain. We believe that our product design and marketing efforts resulted in increased consumer demand for our products in the European market. In euros, revenues grew 22% in fiscal 2002. This is lower than the 26% growth rate in U.S. dollars because the U.S. dollar was worth fewer euros on average in fiscal 2002 compared to fiscal 2001.

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Gross Profit

Our consolidated gross profit margin increased 230 basis points in fiscal 2002. In the Americas, the gross profit margin increased to 36.7% from 34.7%, while our European gross profit margin increased to 45.3% from 43.2%. The majority of the improvement in the Americas gross profit margin was related to events in the prior year. We recorded a $6.0 million write-down in the carrying value of our domestic inventory in the fourth quarter of fiscal 2001. In the aftermath of September 11, 2001, the market for consumer products, including casual lifestyle apparel, experienced a dramatic falloff in demand and resulted in a substantial amount of customer order cancellations. This phenomenon created an industry wide glut of excess product available to the traditional off-price channel thereby driving the price of certain seasonal product below cost. Accordingly, a reduction in the carrying value of our domestic inventories was required. We had no such reduction in fiscal 2002. The domestic gross profit margin improved in the second half of fiscal 2002 because we lowered inventory levels toward the end of the year. Consequently, our end-of season clearance business was down compared to the year before, and our gross margins on those sales were up. This offset lower domestic gross margins on sales of end-of-season inventories in the first half of the year. Our European gross profit margin increased primarily due to lower production costs. Additionally, both the Americas and European gross profit margins improved because we had a higher percentage of our sales through company-owned retail stores. We earn higher gross margins on sales in company-owned stores, but these higher gross margins are offset by store operating costs.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 20% in fiscal 2002. In the Americas, it increased 9% to $118.2 million from $108.5 million, and in Europe it increased 34% to $86.6 million from $64.8 million for those same periods. Higher personnel costs and other costs related to increased sales volume were the primary reasons for these increases. As a percentage of revenues, selling general and administrative expense increased to 30.7% in fiscal 2002 from 29.2% in fiscal 2001. Selling, general and administrative expense increased as a percentage of revenues primarily due to the incremental operating costs of new company-owned retail stores.

Interest Expense and Income Taxes

Interest expense decreased 21% in fiscal 2002. This decrease was due primarily to lower average balances and lower interest rates on our debt in the Americas.

Our income tax rate decreased to 37.3% in fiscal 2002 from 38.3% in fiscal 2001. This improvement resulted primarily because a higher percentage of our fiscal 2002 profits were generated in countries with lower tax rates. Our rate also decreased because we adopted SFAS No. 142 during fiscal 2002 and discontinued the amortization of certain intangible assets, which was not tax deductible.

Net Income

Net income in fiscal 2002 increased 34%, and earnings per share on a diluted basis increased 31%.

Financial Position, Capital Resources and Liquidity

We finance our working capital needs and capital investments with operating cash flows and bank revolving lines of credit. Multiple banks in the U.S., Europe and, now, Australia and Japan, make these lines of credit available. Term loans are used to supplement these lines of credit and are typically used to finance long-term assets.

Cash and cash equivalents totaled $27.9 million at October 31, 2003 versus $2.6 million at October 31, 2002. Working capital amounted to $286.6 million at October 31, 2003, compared to $160.5 million at October 31, 2002, an increase of 79%. Our strategy is to keep cash balances low and maintain adequate liquidity in our credit facilities to supplement operating cash flows as needed. We believe that our current cash flows and credit facilities are adequate to cover our cash needs for the foreseeable future. Furthermore, we believe that increases in our credit facilities can be obtained if needed to fund future growth.

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Operating Cash Flows

We generated $36.6 million from operations in fiscal 2003 compared to $76.8 million in fiscal 2002. This $40.2 decrease was primarily caused by the increase in inventories combined with the small decrease in accounts payable, which together used $32.1 of cash, a $53.2 million increase in cash used compared to $21.1 of cash provided the year before. This more than offset the $28.2 million increase in cash from higher net income adjusted for noncash expenses. Changes in other working capital components also used $15.2 of additional cash compared to the year before.

We generated $76.8 million from operations in fiscal 2002 compared to $5.8 million in fiscal 2001. This $71.0 million improvement resulted from several factors. The largest factor was the decrease in inventories. We used $17.7 million in fiscal 2001 as inventories increased and accounts payable decreased. By contrast, we generated $21.1 million in fiscal 2002 as inventories decreased and trade accounts payable increased, an improvement of $38.8 million. Cash flows increased by $10.1 million from higher net income adjusted for noncash expenses, and accounts receivable increased at a slower rate, resulting in an $8.0 million improvement. The increases in accrued liabilities and income taxes payable resulted in an additional $18.9 million of positive cash flows compared to the year before.

Capital Expenditures

We have avoided high levels of capital expenditures for our manufacturing functions by using independent contractors for sewing and other processes such as washing, dyeing and embroidery. We perform the cutting process in-house in the Americas to enhance control and efficiency, and we screenprint a portion of our product in-house in both the Americas and in Europe.

Fiscal 2003 capital expenditures were $33.1 million, which was approximately $11.0 million higher than the $22.2 million we spent in fiscal 2002 and the $22.6 million spent in fiscal 2001. In fiscal 2003, we increased our investment in company-owned retail stores and in computer systems. Investments in warehouse equipment, computer equipment and fixtures continued in fiscal 2003 as in the previous years.

New company-owned retail stores are again part of our plans in fiscal 2004. Computer hardware and software will also be added to continuously improve systems. Capital spending for these and other projects in fiscal 2004 is expected to range between $35.0 million and $40.0 million, depending on the pace of our retail expansion.

Acquisitions

Effective December 1, 2002, we acquired our licensees in Australia and Japan to unify our global operating platform and take advantage of available synergies in product development and sourcing, among other things. This group of companies is referred to as “Asia/Pacific” and comprises two Australian operating companies, Ug Manufacturing Co. Pty Ltd. and QSJ Holdings Pty Ltd., one Japanese operating company, Quiksilver Japan KK, and the holding company, Quiksilver Australia Pty Ltd. Ug Manufacturing Co. Pty Ltd. was still owned by the founders of the Quiksilver brand and was the original Quiksilver operating company that has been producing Quiksilver products in Australia and surrounding countries and territories for over 30 years. Along with a Japanese partner, the founders also started Quiksilver Japan KK, which has been the Quiksilver licensee in Japan for approximately 20 years. The operations of Asia/Pacific have been included in the Company’s results since December 1, 2002.

The initial purchase price, excluding transaction costs, includes cash of $25.3 million and 5.6 million shares of our common stock valued at $71.3 million. Transaction costs totaled $2.5 million. The valuation of the common stock issued in connection with the acquisition was based on the quoted market price for 5 days before and after the announcement date. The initial purchase price was subject to adjustment based on the closing balance sheet, which was finalized in the third quarter of fiscal 2003. The sellers are entitled to future payments denominated in Australian dollars ranging from zero to $23.1 million if certain sales and earnings targets are achieved during the three years ending October 31, 2005. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made.

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.

License agreements will be amortized over their remaining lives through June 2012. Goodwill is not subject to amortization and is generally not expected to be deductible for tax purposes.

Effective November 1, 2002, we acquired the operations of our European licensee for eyewear and wetsuits, Omareef Europe, S.A. The initial purchase price was $5.2 million, and includes cash of $4.9 million and assumed debt of $0.3 million. This transaction was recorded using the purchase method of accounting and resulted in goodwill of $3.5 million.

Effective February 1, 2003, we acquired our U.S. eyewear licensee, Q.S. Optics, Inc. The initial purchase price was $2.9 million, and includes cash of $2.4 million and assumed debt of $0.5 million. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $2.1 million.

The operating results for each of the acquisitions are included in our consolidated results since their acquisition dates. Assuming each of these acquisitions had occurred as of November 1, 2001, consolidated revenues would have been $981.6 million and $789.2 million for fiscal 2003 and 2002, respectively. Net income would have been $58.5 million and $44.2 million, respectively, for those same years, and diluted earnings per share would have been $1.03 and $0.81, respectively.

Effective September 15, 2002, we acquired Beach Street, Inc., a company that operates 26 Quiksilver outlet stores. The acquisition of Beach Street has increased our control over our brands and distribution and has enabled us to capture some incremental gross margin. We issued 596,184 shares of our common stock valued at $6.9 million as consideration for the acquisition.

Effective July 1, 2000, we acquired Quiksilver International, an Australian company that owns the worldwide trademark rights to the Quiksilver brand name (other than in the United States and Mexico where those rights were already owned by us). The initial acquisition payment was $23.6 million, which included cash consideration of $23.1 million and transaction costs, net of imputed interest, of $0.5 million. Under the terms of the purchase agreement, two additional payments were to be made. One was made at the end of fiscal 2002, and another is to be made at the end of fiscal 2005. These additional payments, which are denominated in Australian dollars, are contingent on the computed earnings of Quiksilver International through June 20, 2005, subject to specified minimums. The deferred minimum purchase price payments, which were discounted to present value, totaled $17.3 million at the date of the acquisition and were included as a component of the purchase price recorded at July 1, 2000. The payment made at the end of fiscal 2002 was increased by $9.6 million, with a corresponding increase to Trademarks, as a result of Quiksilver International’s operations for the two years ended June 30, 2002, resulting in a total payment of $20.7 million. The obligation related to the remaining deferred purchase price payment is reflected in our consolidated balance sheet as a component of debt.

We believe that we have benefited and will continue to benefit from unified ownership of the Quiksilver brand worldwide. Global product decisions can be controlled by us, and the opportunities for coordinated global sourcing and marketing programs are enhanced.

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Debt Structure

A syndication of U.S. banks finances our business in the Americas, European banks finance our European business, and Australian and Japanese banks finance our Asia/Pacific business. Our debt structure includes short-term lines of credit and long-term loans as follows:

In June 2003, we replaced our syndicated bank facility in the Americas with a new syndicated revolving line of credit. The line of credit expires June 2006 and provides for borrowings up to $170.0 million. The line of credit bears interest based on the bank’s reference rate or based on LIBOR for borrowings committed to be outstanding for 30 days or longer. However, the interest rate on a portion of the borrowings under the facility is fixed through interest rate swaps, which were valued at a loss of $0.3 million at October 31, 2003. The weighted average interest rate at October 31, 2003 was 3.2%. The line of credit can be accessed by some of our foreign subsidiaries and includes a $75.0 million sublimit for letters of credit and a $35.0 million sublimit for borrowings in certain foreign currencies. The line of credit agreement contains restrictive covenants. The most significant covenants relate to maintaining certain leverage and fixed charge coverage ratios. The payment of dividends is restricted, among other things, and our U.S. assets, other than trademarks and other intellectual property, generally have been pledged as collateral. At October 31, 2003, we were in compliance with such covenants.

In Europe, we have arrangements with several banks that provide approximately $76.0 million for cash borrowings and approximately $52.0 million for letters of credit. These lines of credit expire on various dates through April 2004, and we believe that the banks will continue to make these facilities available with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2003 was $12.4 million at an average interest rate of 2.7%.

In Asia/Pacific, we have revolving lines of credit with banks that provide up to approximately $18.0 million for cash borrowings and letters of credit. These lines of credit will be reviewed by the banks in January 2004 and September 2004, and we believe the banks will continue to make these facilities available with substantially similar terms. The amount outstanding on these lines of credit at October 31, 2003 was $8.6 million at an average interest rate of 7.1%.

These line of credit commitments and agreements in the Americas, Europe and Asia/Pacific allow for total maximum cash borrowings and letters of credit of $316.0 million. Commitments totaling $146.0 million expire in fiscal 2004, while $170.0 million expire in fiscal 2006. We had $81.9 million of borrowings drawn on these lines of credit as of October 31, 2003, and letters of credit issued at that time totaled $67.8 million.

We also have a term loan with a single bank in the Americas that amounted to $8.0 million on October 31, 2003 and is repayable in installments of $0.1 million per month with a final balloon payment due on October 29, 2004. We anticipate that these monthly payments and final balloon payment will be paid from borrowings on our Americas’ line of credit. This term loan was established in April 2000 and is secured by the leasehold improvements at our headquarters in Huntington Beach, California. The interest rate structure and restrictive covenants are substantially the same as those under the line of credit. However, we entered into an interest rate swap agreement, which was valued at a loss of $0.8 million at October 31, 2003, to fix the interest rate at 8.4% per year. This swap agreement is effective through April 2007 and is an effective hedge of the related interest rate exposure.

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In Europe, we also have $37.1 million of long-term debt with several banks, most of which is collateralized by fixed assets. This debt bears interest at rates ranging generally from 2.9% to 5.9%. Principal and interest payments are required either monthly, quarterly or annually, and the loans are due at various dates through 2011.

Our financing activities provided $48.0 million of cash in fiscal 2003 as debt was increased to fund the capital expenditures and business acquisitions discussed above. By contrast in fiscal 2002 debt was reduced, and our financing activities used $35.7 million. In fiscal 2001, $19.9 million was provided by our financing activities to fund capital expenditures.

Contractual Obligations and Commitments

We lease certain land and buildings under non-cancelable operating leases. The leases expire at various dates through 2014, excluding extensions at our option, and contain various provisions for rental adjustments including, in certain cases, adjustments based on increases in the Consumer Price Index. The leases generally contain renewal provisions for varying periods of time. We also have long-term debt and obligations related to business acquisitions. Additional payments to the sellers, ranging from zero to $23.1 million, could be required for our acquisition of Asia/Pacific if certain sales and earnings targets are achieved. Our deferred purchase price obligation related to our acquisition of Quiksilver International could increase based on the computed earnings of Quiksilver International through June 2005. Our significant contractual obligations and commitments as of October 31, 2003 are summarized in the following table:

Professional Athlete Sponsorships

We establish relationships with professional athletes in order to promote our products and brands. We have entered into endorsement agreements with professional athletes in sports such as surfing, snowboarding, skateboarding, windsurfing and golf. Many of these contracts provide incentives for magazine exposure and competitive victories while wearing or using our products. Accordingly, the amounts of future payments under the terms of these agreements cannot be predicted with certainty. Such expenses are an ordinary part of our operations and are expensed as incurred.

Trade Accounts Receivable and Inventories

Our trade accounts receivable were $224.4 million at October 31, 2003 versus $168.2 million the previous year, an increase of 33%. Of those totals, receivables in the Americas increased 1% to $81.9 million compared to $80.8 million, and European receivables increased 26% to $109.9 million from $87.4 million. The new Asia/Pacific segment added $32.6 million at October 31, 2003. Accounts receivable grew more slowly than revenues in the Americas and Europe primarily because of improved collections. The European accounts receivable increase was only 6% as measured in euros. Our overall average days sales outstanding decreased approximately three days at the end of fiscal 2003 compared to the end of fiscal 2002.

Consolidated inventories increased 53% to $146.4 million at October 31, 2003 from $95.9 million the year before. Inventories in the Americas increased 25% to $86.4 million from $69.0 million, and European inventories increased 63% to $43.8 million from $26.9 million. Inventories in the new Asia/Pacific division totaled $16.2 million at October 31, 2003.

Inventories in the Americas increased primarily as a result of the earlier production of current season goods, which increased inventories $6.0 million, and a $7.0 million increase in inventories held based on

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assortment planning for the outlet stores that were acquired in the fourth quarter of fiscal 2002. In addition, newly opened, company-owned retail stores added about $3.0 million of additional inventory.

Inventories in Europe increased 63% as a result of several factors. The stronger euro in relation to the U.S. dollar increased the U.S. dollar value of European inventories by approximately $5.0 million. In addition, there was approximately $5.0 million of current season goods on hand at October 31, 2003, which were produced early compared to the previous year, and we had $3.0 million of inventory held for our company-owned outlet stores which was a new practice in fiscal 2003.

Inflation

Inflation has been modest during the years covered by this report. Accordingly, inflation has had an insignificant impact on our sales and profits.

New Accounting Pronouncements

Effective with our financial statements for the quarterly period ended April 30, 2003, we adopted the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation - - Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS No. 148 amended 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 amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We apply Accounting Principles Board Opinion 25 and related interpretations in accounting for our stock option plans. No stock-based employee compensation expense is reflected in net income, as all options granted under our stock option plans had exercise prices equal to the market value of the underlying common stock on the grant dates. The following table contains the pro forma disclosure requirements: