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Note 13 - Form Athletics Purchase and Contingent Purchase Price
 6 Months Ended
Jun. 30, 2011
Business Combination And Contingent Purchase Price Disclosure Text Box
13. Form Athletics Purchase and Contingent Purchase Price

On July 23, 2010, the Company entered into a Membership Interest Purchase Agreement (“Purchase Agreement”) with Form Athletics, LLC (“Form Athletics”) and its Members to purchase Form Athletics for $1,600,000 in cash.  Pursuant to the Purchase Agreement, the Company is obligated to pay additional cash consideration to certain Members of Form Athletics in an amount equal to Form Athletics’ EBITDA for the twelve months ended December 31, 2012 (“Form CPP”).  The purchase price of $1,600,000 and the net present value of the initial estimate of the Form CPP was capitalized.  The fair value of the Form CPP will be determined each quarter based on the net present value of the current quarter’s projection of Form Athletics’ EBITDA for the twelve months ended December 31, 2012.  Any subsequent changes to the Form CPP will be recognized as interest income or interest expense during the applicable quarter.

The acquisition of Form Athletics was recorded as a 100% purchase acquisition and the Form CPP liability was recognized and accordingly, the results of operations of the acquired business were included in the Company’s Consolidated Financial Statements from the date of acquisition.  A trademark asset totaling $3,150,000 and goodwill of $539,000, were recognized for the amount of the excess purchase price paid over fair market value of the net assets acquired.  The amount of goodwill that was deductible for tax purposes was $507,000 and will be amortized over 15 years.  At July 23, 2010, the acquired assets and liabilities assumed in the purchase of Form Athletics was as follows (in thousands):

   
Balance at July 23, 2010
 
Inventories                                                                        
  $ 39  
Intangible assets                                                                        
    3,689  
Total assets                                                                
  $ 3,728  
         
Current liabilities                                                                        
  $ 18  
Form CPP                                                                        
    2,110  
Total liabilities                                                                    
    2,128  
Contribution by K•Swiss Inc.                                                                        
    1,600  
Total stockholders’ equity                                                                    
    1,600  
Total liabilities and stockholders’ equity
  $ 3,728  

The change in the Form CPP for the six and three months ended June 30, 2011 was as follows (in thousands):

   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2011
   
2011
 
Beginning balance
  $ 2,110     $ 2,110  
Change in net present value of the Form CPP
    (2,110 )     (2,110 )
Ending balance
  $ 0     $ 0  

During the second quarter of 2011, after a review of sales, backlog, cash flows and marketing strategy, the Company determined that its investment in the Form Athletics goodwill and trademark was impaired and recognized impairment losses of $3,689,000 (see Note 5) and reversed the Form CPP liability of $2,110,000, which was recognized as interest income.

Form Athletics was established in January 2010 and designs, develops and distributes apparel for mixed martial arts under the Form Athletics brand worldwide.  The purchase of Form Athletics was part of an overall strategy to enter the action sports market.  Since Form Athletics began operating in early 2010, operating results prior to the Company’s purchase of Form Athletics were not significant and pro forma information was not materially different than what was reported on the Company’s Consolidated Financial Statements.