Note 13 - Form Athletics

9 Months Ended

Sep. 30, 2011

Business Combination And Contingent Purchase Price Disclosure Text Box

13.   Form Athletics

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.  Form Athletics was established in January 2010 to design, develop and distribute 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, however, during the third quarter of 2011, the Company decided to no longer pursue operating in this line of business, as discussed below.  Operations of Form Athletics have been accounted for and presented as a discontinued operation in the accompanying Consolidated Financial Statements.

Pursuant to the Purchase Agreement, the Company was 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 was 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 was recognized as interest income or interest expense during the applicable quarter.

The acquisition of Form Athletics was recorded as a 100% purchase 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

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.

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.

The change in the Form CPP for the nine months ended September 30, 2011 and the nine and three months ended September 30, 2010 was as follows (in thousands):

	Nine Months Ended September 30,					Three Months Ended September 30,
	2011			2010		2010
Beginning balance	$	2,110		$	0	$	0
Initial recognition of the net present value of the Form CPP		0			2,110		2,110
Change in net present value of the Form CPP		(2,110	)		0		0
Ending balance	$	0		$	2,110	$	2,110

The operations for Form Athletics for the nine and three months ended September 30, 2011 and 2010 were as follows (in thousands):

	Nine Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011			2010
Revenues	$	555		$	130		$	131		$	130
Cost of goods sold		905			61			558			61
Gross (loss)/profit		(350	)		69			(427	)		69
Selling, general and administrative expenses		3,709			561			1,359			561
Impairment on intangibles and goodwill		3,689			0			0			0
Operating loss		(7,748	)		(492	)		(1,786	)		(492	)
Interest income, net		2,110			0			0			0
Loss from discontinued operations	$	(5,638	)	$	(492	)	$	(1,786	)	$	(492	)