QUIKSILVER INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q


(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-15131

QUIKSILVER, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		33-0199426 (I.R.S. Employer Identification Number)

15202 Graham Street
Huntington Beach, California
92649
(Address of principal executive offices)
(Zip Code)

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

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

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

The number of shares outstanding of issuer’s Common Stock,
par value $0.01 per share, at
March 12, 2003 was
27,130,963

TABLE OF CONTENTS


PART I - FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II - OTHER INFORMATION
	Item 2. Changes in Securities and Use of Proceeds
	Item 6. Exhibits and Reports on Form 8K
SIGNATURE
CERTIFICATION
EXHIBIT INDEX
EXHIBIT 99.1
EXHIBIT 99.2

QUIKSILVER, INC.

FORM 10-Q

INDEX


		Page No.

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets January 31, 2003 and October 31, 2002		2
	Condensed Consolidated Statements of Income Three Months Ended January 31, 2003 and 2002		3
	Condensed Consolidated Statements of Comprehensive Income Three Months Ended January 31, 2003 and 2002		3
	Condensed Consolidated Statements of Cash Flows Three Months Ended January 31, 2003 and 2002		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures About Market Risk			15
Item 4. Controls and Procedures			15
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds			16
Item 6. Exhibits and Reports on Form 8-K			16
SIGNATURE			17
Certifications			18

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


			January 31,			October 31,
In thousands, except share amounts			2003			2002

ASSETS
Current assets:
	Cash and cash equivalents		$	10,405		$	2,597
	Trade accounts receivable, less allowance for doubtful accounts of $9,725 (2003) and $6,667 (2002)			173,511			168,237
	Other receivables			9,025			7,415
	Inventories			144,237			95,872
	Deferred income taxes			16,175			14,070
	Prepaid expenses and other current assets			15,021			6,638

		Total current assets		368,374			294,829
Fixed assets, less accumulated depreciation and amortization of $56,306 (2003) and $48,724 (2002)				84,118			73,182
Intangibles, less accumulated amortization of $5,214 (2003) and $5,007 (2002)				61,077			51,134
Goodwill				99,361			26,978
Deferred income taxes				—			1,411
Other assets				5,351			3,055

		Total assets	$	618,281		$	450,589

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Lines of credit		$	71,616		$	32,498
	Accounts payable			74,910			47,279
	Accrued liabilities			44,649			40,137
	Current portion of long-term debt			13,623			10,680
	Income taxes payable			3,247			3,717

Total current liabilities				208,045			134,311
Long-term debt				42,477			43,405
Deferred income taxes				3,215			—

		Total liabilities		253,737			177,716

Stockholders’ equity
	Preferred stock, $.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none			—			—
	Common stock, $.01 par value, authorized shares - 45,000,000; issued and outstanding shares - 27,851,063 (2003) and 24,680,147 (2002)			278			247
Additional paid-in-capital				143,602			66,769
Treasury stock, 721,300 shares				(6,778	)		(6,778	)
Retained earnings				225,606			219,038
Accumulated other comprehensive income (loss)				1,836			(6,403	)

		Total stockholders’ equity		364,544			272,873

		Total liabilities and stockholders’ equity	$	618,281		$	450,589

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


		Three months ended January 31,

In thousands, except per share amounts		2003		2002

Revenues		$	192,080	$	146,959
Cost of goods sold			110,572		92,179

	Gross profit		81,508		54,780
Selling, general and administrative expense			68,425		47,183

	Operating income		13,083		7,597
Interest expense			2,116		2,428
Foreign currency loss			551		6
Other expense			167		160

Income before provision for income taxes			10,249		5,003
Provision for income taxes			3,681		1,917

Net income		$	6,568	$	3,086

Net income per share		$	0.25	$	0.13

Net income per share, assuming dilution		$	0.24	$	0.13

Weighted average common shares outstanding			25,960		23,205

Weighted average common shares outstanding, assuming dilution			27,160		23,890

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


		Three months ended January 31,

In thousands		2003			2002

Net income		$	6,568		$	3,086
Other comprehensive gain (loss):
	Foreign currency translation adjustment		9,439			(2,780	)
	Net unrealized loss on derivative instruments, net of tax		(1,200	)		(529	)

Comprehensive income (loss)		$	14,807		$	(223	)

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


					Three months ended January 31,

In thousands					2003			2002

Cash flows from operating activities:
	Net income				$	6,568		$	3,086
	Adjustments to reconcile net income to net cash (used in) provided by operating activities:
		Depreciation and amortization				4,369			3,047
		Provision for doubtful accounts				1,407			1,037
		Loss on sale of fixed assets				34			—
		Foreign currency loss				14			280
		Interest accretion				196			521
		Changes in operating assets and liabilities:
			Trade accounts receivable			23,542			6,872
			Other receivables			(1,176	)		(579	)
			Inventories			(33,341	)		(10,465	)
			Prepaid expenses and other current assets			(4,986	)		(1,701	)
			Other assets			(91	)		(859	)
			Accounts payable			13,789			10,068
			Accrued liabilities			(7,854	)		4,225
			Income taxes payable			(665	)		(254	)

				Net cash (used in) provided by operating activities		1,806			15,278
Cash flows from investing activities:
	Capital expenditures					(5,847	)		(4,303	)
	Business acquisitions, net of cash acquired					(25,184	)		—

				Net cash used in investing activities		(31,031	)		(4,303	)
Cash flows from financing activities:
	Borrowings on lines of credit					45,148			8,642
	Payments on lines of credit					(7,684	)		(7,000	)
	Borrowings on long-term debt					574			331
	Payments on long-term debt					(6,144	)		(2,673	)
	Proceeds from stock option exercises					3,671			338

				Net cash provided by (used in) financing activities		35,565			(362	)
Effect of exchange rate changes on cash						1,468			(657	)

Net increase in cash and cash equivalents						7,808			9,956
Cash and cash equivalents, beginning of period						2,597			5,002

Cash and cash equivalents, end of period					$	10,405		$	14,958

Supplementary cash flow information - Cash paid during the period for:
		Interest			$	1,432		$	1,283

		Income taxes			$	4,082		$	1,094

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.

The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three months ended January 31, 2003 and 2002. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 2002 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors.

2. New Accounting Pronouncements

Effective November 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which superseded 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. The adoption of SFAS No. 144 had no 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 November 2002, the Financial Accounting Standards Board (“FASB”) issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective beginning with our current financial statements for the three months ended January 31, 2003. The adoption of FIN No. 45 has not had a material impact on our operational results or financial position.

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 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.

3. Inventories

Inventories consist of the following:


	January 31,		October 31,
In thousands	2003		2002

Raw Materials	$	16,105	$	14,232
Work-In-Process		5,811		6,826
Finished Goods		122,321		74,814

	$	144,237	$	95,872

4. Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories and related products. Operating results of the Company’s various product lines have been aggregated because of their common characteristics and their reliance on shared operating functions. Within the consumer products industry, the Company has historically operated in the Americas (primarily the U.S.) and Europe. Effective with its acquisition of Quiksilver Asia/Pacific on December 1, 2002, the Company has added operations in Australia, Japan, New Zealand and other Southeast Asian countries and territories. Accordingly, the Company has revised its geographic segments to include Asia/Pacific and corporate operations. Costs that support all three geographic segments, including trademark protection and maintenance, licensing functions and related royalty income are part of corporate operations. Prior period segment disclosures have been revised to conform to this new segment presentation. No single customer accounts for more than 10% of the Company’s revenues.

Information related to the Company’s geographical segments is as follows:


		Three Months Ended January 31,

In thousands		2003			2002

Revenues:
	Americas	$	101,967		$	89,827
	Europe		77,246			55,979
	Asia/Pacific		12,102			—
	Corporate Operations		765			1,153

		$	192,080		$	146,959

Gross Profit:
	Americas	$	39,150		$	28,460
	Europe		35,380			25,167
	Asia/Pacific		6,213			—
	Corporate Operations		765			1,153

		$	81,508		$	54,780

Operating Income:
	Americas	$	5,754		$	2,181
	Europe		9,093			6,767
	Asia/Pacific		1,759			—
	Corporate Operations		(3,523	)		(1,351	)

		$	13,083		$	7,597

Identifiable assets:
	Domestic	$	239,282		$	237,922
	Europe		241,021			176,330
	Asia Pacific		130,574			—
	Corporate Operations		7,404			14,968

		$	618,281		$	429,220

5. Derivative Financial Instruments

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to its variable rate debt. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company’s consolidated financial statements due to the translation of the operating results and financial position of the Company’s international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage the Company’s exposure to the risk of fluctuations in interest rates.

For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. Other derivatives, which do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks, are marked to fair value with corresponding gains or losses recorded in earnings. As of January 31, 2003, the Company was hedging forecasted transactions expected to occur in the following eight months. Assuming exchange rates at January 31, 2003 remain constant, $3.3 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next eight months. Also included in accumulated other comprehensive income at January 31, 2003 is a $0.3 million loss, net of tax, related to cash flow hedges of the Company’s long-term debt, which is denominated in Australian dollars and matures through fiscal 2005, and the fair value of interest rate swaps, totaling a loss of $1.0 million, net of tax, which is related to the Company’s U.S. dollar denominated long-term debt that matures through fiscal 2007.

On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if 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 three months ended January 31, 2003, the Company reclassified into earnings a net loss of $1.3 million resulting from the expiration, sale, termination, or exercise of derivative contracts. Additionally, a loss of $0.2 million was recognized during the three months ended January 31, 2003 for changes in the value of derivatives that were marked to fair value.

The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.

A summary of derivative contracts at January 31, 2003 is as follows:

Notional

Fair

In thousands

Amount

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

1.		Basis of Presentation

		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.

		The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three months ended January 31, 2003 and 2002. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 2002 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors.

2.		New Accounting Pronouncements

		Effective November 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which superseded 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. The adoption of SFAS No. 144 had no 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 November 2002, the Financial Accounting Standards Board (“FASB”) issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective beginning with our current financial statements for the three months ended January 31, 2003. The adoption of FIN No. 45 has not had a material impact on our operational results or financial position.

		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 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.

4.		Segment Information

		Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories and related products. Operating results of the Company’s various product lines have been aggregated because of their common characteristics and their reliance on shared operating functions. Within the consumer products industry, the Company has historically operated in the Americas (primarily the U.S.) and Europe. Effective with its acquisition of Quiksilver Asia/Pacific on December 1, 2002, the Company has added operations in Australia, Japan, New Zealand and other Southeast Asian countries and territories. Accordingly, the Company has revised its geographic segments to include Asia/Pacific and corporate operations. Costs that support all three geographic segments, including trademark protection and maintenance, licensing functions and related royalty income are part of corporate operations. Prior period segment disclosures have been revised to conform to this new segment presentation. No single customer accounts for more than 10% of the Company’s revenues.

		Information related to the Company’s geographical segments is as follows:

5.		Derivative Financial Instruments

		The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to its variable rate debt. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company’s consolidated financial statements due to the translation of the operating results and financial position of the Company’s international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage the Company’s exposure to the risk of fluctuations in interest rates.

		For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. Other derivatives, which do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks, are marked to fair value with corresponding gains or losses recorded in earnings. As of January 31, 2003, the Company was hedging forecasted transactions expected to occur in the following eight months. Assuming exchange rates at January 31, 2003 remain constant, $3.3 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next eight months. Also included in accumulated other comprehensive income at January 31, 2003 is a $0.3 million loss, net of tax, related to cash flow hedges of the Company’s long-term debt, which is denominated in Australian dollars and matures through fiscal 2005, and the fair value of interest rate swaps, totaling a loss of $1.0 million, net of tax, which is related to the Company’s U.S. dollar denominated long-term debt that matures through fiscal 2007.

		On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if 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 three months ended January 31, 2003, the Company reclassified into earnings a net loss of $1.3 million resulting from the expiration, sale, termination, or exercise of derivative contracts. Additionally, a loss of $0.2 million was recognized during the three months ended January 31, 2003 for changes in the value of derivatives that were marked to fair value.

		The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.