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 June 30, 2011

OR

 

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission File number 0-18490

 

 

K•SWISS INC.

(Exact name of registrant as specified in its charter)

 

Delaware		95-4265988
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
31248 Oak Crest Drive, Westlake Village, California		91361
(Address of principal executive offices)		(Zip code)

818-706-5100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨		Accelerated filer  x		Non-accelerated filer  ¨		Smaller reporting company  ¨
						(Do not check if a smaller     reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Shares of common stock outstanding at August 3, 2011:

 

Class A			27,521,971
Class B			8,039,524

 

 

 

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PART I—FINANCIAL INFORMATION

 

Item 1.

Financial Statements

K•SWISS INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands)

(Unaudited)

 

		June 30, 2011				December 31, 2010
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	45,185			$	49,164
Restricted cash and cash equivalents and restricted investments available for sale (Note 3)			22,698				22,918
Investments available for sale (Note 4)			17,730				66,277
Accounts receivable, less allowance for doubtful accounts of $2,107 and $1,780 for June 30, 2011 and December 31, 2010, respectively			40,401				24,040
Inventories			101,120				66,959
Prepaid expenses and other current assets (Note 6)			5,544				5,058
Income taxes receivable (Note 9)			0				770
Total current assets			232,678				235,186
PROPERTY, PLANT AND EQUIPMENT, net (Note 10)			19,663				20,695
OTHER ASSETS
Intangible assets (Notes 5 and 8)			14,715				18,212
Deferred income taxes (Note 9)			4,730				3,913
Other			10,140				10,159
Total other assets			29,585				32,284
Total assets		$	281,926			$	288,165
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Bank lines of credit (Note 7)		$	11,281			$	273
Current portion of long-term debt (Note 7)			316				293
Trade accounts payable			28,336				19,111
Accrued income taxes payable			916				203
Accrued liabilities (Note 6)			12,375				13,068
Total current liabilities			53,224				32,948
OTHER LIABILITIES
Long-term debt (Note 7)			173				404
Contingent purchase price (Notes 12 and 13)			4,148				5,799
Other liabilities			14,907				14,101
Total other liabilities			19,228				20,304
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred Stock – authorized 2,000,000 shares of $0.01 par value; none issued and outstanding			0				0
Common Stock:
Class A – authorized 90,000,000 shares of $0.01 par value; 29,943,588 shares issued, 27,521,971 shares outstanding and 2,421,617 shares held in treasury at June 30, 2011 and 29,761,756 shares issued, 27,340,139 shares outstanding and 2,421,617 shares held in treasury at December 31, 2010			299				298
Class B, convertible – authorized 18,000,000 shares of $0.01 par value; 8,039,524 shares issued and outstanding at June 30, 2011 and December 31, 2010			80				80
Additional paid-in capital			70,993				69,064
Treasury Stock			(58,190	)			(58,190	)
Retained earnings			190,306				220,174
Accumulated other comprehensive earnings/(loss):
Foreign currency translation			6,879				3,543
Net unrealized loss on hedge derivatives (Note 6)			(929	)			(150	)
Net unrealized gain on investments available for sale and restricted investments available for sale (Notes 3 and 4)			36				94
Total stockholders’ equity			209,474				234,913
Total liabilities and stockholders’ equity		$	281,926			$	288,165

The accompanying notes are an integral part of these statements.

 

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K•SWISS INC.

CONSOLIDATED STATEMENTS OF EARNINGS/LOSS

AND COMPREHENSIVE EARNINGS/LOSS

(Dollar amounts and shares in thousands, except per share amounts)

(Unaudited)

 

		Six Months Ended June 30,								Three Months Ended June 30,
		2011				2010				2011				2010
Revenues (Note 10)		$	138,162			$	112,701			$	65,542			$	46,831
Cost of goods sold (Note 6)			87,129				66,529				43,035				29,305
Gross profit			51,033				46,172				22,507				17,526
Selling, general and administrative expenses (Note 6)			80,613				68,303				39,830				32,980
Impairment on intangibles and goodwill (Notes 5 and 8)			3,689				0				3,689				0
Operating loss (Note 10)			(33,269	)			(22,131	)			(21,012	)			(15,454	)
Other income/(expense) (Note 11)			3,000				(3,320	)			0				(3,320	)
Interest income, net			1,963				367				2,024				228
Loss before income taxes			(28,306	)			(25,084	)			(18,988	)			(18,546	)
Income tax expense/(benefit) (Note 9)			1,562				(5,841	)			1,038				(4,001	)
Net Loss		$	(29,868	)		$	(19,243	)		$	(20,026	)		$	(14,545	)
Loss per common share (Note 2)
Basic		$	(0.84	)		$	(0.55	)		$	(0.56	)		$	(0.41	)
Diluted		$	(0.84	)		$	(0.55	)		$	(0.56	)		$	(0.41	)
Weighted average number of shares outstanding (Note 2)
Basic			35,433				35,164				35,475				35,186
Diluted			35,433				35,164				35,475				35,186
Dividends declared per common share		$	0			$	0			$	0			$	0
Net Loss		$	(29,868	)		$	(19,243	)		$	(20,026	)		$	(14,545	)
Other Comprehensive Earnings/(Loss), net of tax:
Foreign currency translation adjustments, net of income taxes of $0 and $0 for the six months ended June 30, 2011 and 2010, respectively, and net of income taxes of $0 and $0 for the three months ended June 30, 2011 and 2010, respectively			3,336				(6,996	)			1,005				(3,876	)
Change in deferred (loss)/gain on hedge derivatives, net of income taxes of $0 and $0 for the six months ended June 30, 2011 and 2010, respectively, and net of income taxes of $0 and $0 for the three months ended June 30, 2011 and 2010, respectively			(779	)			1,610				187				826
Change in deferred (loss)/gain on investments available for sale and restricted investments available for sale, net of income tax (benefit)/expense of ($30) and $1 for the six months ended June 30, 2011 and 2010, respectively, and net of income tax (benefit) of ($16) and ($5) for the three months ended June 30, 2011 and 2010, respectively			(58	)			2				(31	)			(10	)
Comprehensive Loss		$	(27,369	)		$	(24,627	)		$	(18,865	)		$	(17,605	)

The accompanying notes are an integral part of these statements.

 

3

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K•SWISS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2011				2010
Cash flows from operating activities:
Net loss		$	(29,868	)		$	(19,243	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation/amortization			1,801				1,685
Impairment on intangibles and goodwill			3,689				0
Change in contingent purchase price			(1,651	)			3,320
Net loss on disposal of property, plant and equipment			43				0
Deferred income taxes			(787	)			(5,868	)
Stock-based compensation			1,006				969
Increase in accounts receivable			(16,366	)			(2,692	)
(Increase)/Decrease in inventories			(34,981	)			1,687
Decrease in income taxes receivable			770				0
Decrease/(Increase) in prepaid expenses and other assets			778				(3,904	)
Increase in accounts payable and accrued liabilities			10,137				7,468
Net cash used in operating activities			(65,429	)			(16,578	)
Cash flows from investing activities:
Change in restricted cash and cash equivalents			462				14,266
Purchase of investments available for sale and restricted investments available for sale			(6,310	)			(65,053	)
Proceeds from the maturity or sale of available for sale securities and restricted investments available for sale			53,416				0
Purchase of property, plant and equipment			(719	)			(758	)
Proceeds from disposal of property, plant and equipment			31				0
Net cash provided by/(used in) investing activities			46,880				(51,545	)
Cash flows from financing activities:
Borrowings under bank lines of credit			22,279				19,315
Repayments on bank lines of credit and long-term debt			(11,480	)			(21,359	)
Proceeds from stock options exercised			920				535
Net cash provided by/(used in) financing activities			11,719				(1,509	)
Effect of exchange rate changes on cash			2,851				(6,110	)
Net decrease in cash and cash equivalents			(3,979	)			(75,742	)
Cash and cash equivalents at beginning of period			49,164				139,663
Cash and cash equivalents at end of period		$	45,185			$	63,921
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	77			$	75
Income taxes		$	328			$	824

The accompanying notes are an integral part of these statements.

 

4

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K•SWISS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.	Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “S.E.C.”). Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position of K•Swiss Inc. (the “Company” or “K•Swiss”) as of June 30, 2011 and the results of its operations and its cash flows for the six and three months ended June 30, 2011 and 2010 have been included for the periods presented. The results of operations and cash flows for the six and three months ended June 30, 2011 are not necessarily indicative of the results to be expected for any other interim period or the full year. The balance sheet at December 31, 2010 has been derived from the audited financial statements at that date but does not include all the information and notes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in combination with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain reclassifications have been made to the 2010 presentation to conform to the 2011 presentation.

 

2.	Loss per Share

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted loss per share (“EPS”) computations (shares in thousands):

 

		Six Months Ended June 30,																Three Months Ended June 30,
		2011								2010								2011								2010
		Shares				Per Share Amount				Shares				Per Share Amount				Shares				Per Share Amount				Shares				Per Share Amount
Basic EPS			35,433			$	(0.84	)			35,164			$	(0.55	)			35,475			$	(0.56	)			35,186			$	(0.41	)
Effect of Dilutive Stock Options			0				0.00				0				0.00				0				0.00				0				0.00
Diluted EPS			35,433			$	(0.84	)			35,164			$	(0.55	)			35,475			$	(0.56	)			35,186			$	(0.41	)

Because the Company had a net loss for the six and three months ended June 30, 2011 and 2010, the number of diluted shares is equal to the number of basic shares at June 30, 2011 and 2010, respectively. Outstanding stock options would have had an anti-dilutive effect on diluted EPS for the six and three months ended June 30, 2011 and 2010. Outstanding stock options with exercise prices greater than the average market price of a share of the Company’s common stock also have an anti-dilutive effect on diluted EPS and were as follows (shares in thousands):

 

		Six Months Ended June 30,				Three Months Ended June 30,
		2011		2010		2011		2010
Options to purchase shares of common stock		1,160		1,004		1,160		276
Exercise prices		$11.52 to  $34.75		$11.52 to  $34.75		$11.52 to  $34.75		$12.53 to  $34.75
Expiration dates		May 2012 to  April 2021		May 2012 to May 2020		May 2012 to  April 2021		May 2013 to  May 2020

 

5

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3.	Restricted Cash and Cash Equivalents and Restricted Investments Available for Sale

The Company collateralizes its lines of credit (non-Palladium) with the following (in thousands):

 

		June 30, 2011				December 31, 2010
Restricted cash and cash equivalents		$	7,374			$	7,835
Restricted investments available for sale:
U.S. Treasury Notes			10,036				15,055
Corporate Notes and Bonds			5,172				0
Accrued interest income			116				28
Total restricted investments available for sale			15,324				15,083
Total restricted cash and cash equivalents and restricted investments available for sale		$	22,698			$	22,918

The restricted investments are classified as available for sale and are stated at fair value. At June 30, 2011, gross unrealized holding gains were $36,000 and gross unrealized holding losses were $4,000 and at June 30, 2010, gross unrealized holding gains were $54,000. Included in comprehensive income was a change in net unrealized losses of $13,000 for the six months ending June 30, 2011 and a change in net unrealized holding gains of $35,000 for the six months ended June 30, 2010. Included in comprehensive income were changes in net unrealized holding gains of $3,000 and $39,000 for the three months ended June 30, 2011 and 2010, respectively. The Company capitalizes any premiums paid or discounts received and amortizes the premiums or accretes the discounts on a straight-line basis over the remaining term of the security. Investments by contractual maturities as of June 30, 2011 were as follows (in thousands):

 

Within one year		$	21,628
After one year through five years			1,070
After five years through ten years			0
After ten years			0
		$	22,698

 

4.	Investments Available for Sale

The Company’s investments are classified as available for sale and are stated at fair value. The Company’s investments available for sale were as follows (in thousands):

 

		June 30, 2011				December 31, 2010
U.S. Treasury Notes		$	5,004			$	15,068
U.S. Government Corporations and Agencies			1,502				3,502
Corporate Notes and Bonds			10,991				47,005
Accrued interest income			233				702
Total investments available for sale		$	17,730			$	66,277

At June 30, 2011 and 2010, gross unrealized holding gains were $24,000 and $132,000, respectively, and gross unrealized holding losses were $2,000 and $146,000, respectively. Included in comprehensive income were changes in unrealized holding losses of $45,000 and $34,000 for the six and three months ended June 30, 2011, respectively. Included in comprehensive income were changes in unrealized holding losses of $33,000 and $49,000 for the six and three months ended June 30, 2010, respectively. The Company capitalizes any premiums paid or discounts received and amortizes the premiums or accretes the discounts on a straight-line basis over the remaining term of the security. Investments by contractual maturities as of June 30, 2011 were as follows (in thousands):

 

Within one year		$	16,225
After one year through five years			1,505
After five years through ten years			0
After ten years			0
		$	17,730

 

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During the six and three months ended June 30, 2011, the Company received proceeds from the sale of investments available for sale of $23,812,000 and $12,853,000, respectively, and related gains on sale of $12,000 and $6,000, respectively. There were no sales of investments available for sale during the six and three months ended June 30, 2010. Realized gains and losses are recognized using the actual cost of the investment.

 

5.	Intangible Assets

Intangible assets consist of the following (in thousands):

 

		June 30, 2011				December 31, 2010
Goodwill		$	4,611			$	5,150
Trademarks			12,784				15,742
Less accumulated amortization			(2,680	)			(2,680	)
Total intangible assets		$	14,715			$	18,212

The change in the carrying amount of goodwill and intangible assets during the six and three months ended June 30, 2011 was as follows (in thousands):

 

		Six Months Ended June 30, 2011				Three Months Ended June 30, 2011
Beginning Balance		$	18,212			$	18,352
Impairment losses – goodwill			(539	)			(539	)
Impairment losses – trademarks			(3,150	)			(3,150	)
Foreign currency translation effects			192				52
Ending Balance		$	14,715			$	14,715

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 trademarks was impaired. As a result, the Company evaluated the future discounted net cash flows and recognized impairment losses of $3,689,000, which represents a 100% impairment of the Form Athletics goodwill and trademarks, for the six and three months ended June 30, 2011.

The Company performed the annual reassessment and impairment test as of October 1, 2010 of its Palladium intangible assets related to trademarks and determined there was no impairment of its intangible assets. The Company does not believe that a triggering event has occurred through June 30, 2011 to require an updated impairment test. See the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

6.	Financial Risk Management and Derivatives

Sales denominated in currencies other than the U.S. dollar, which are primarily sales to customers in Europe, expose the Company to market risk from material movements in foreign exchange rates between the U.S. dollar and the foreign currency. The Company’s primary risk exposures are from changes in the rates between the U.S. dollar and the Euro, U.S. dollar and the Pound Sterling and between the Euro and the Pound Sterling. In 2011 and 2010, the Company entered into forward foreign exchange contracts to exchange Euros for U.S. dollars and Pound Sterling for Euros. The extent to which forward foreign exchange contracts are used is modified periodically in response to management’s estimate of market conditions and the terms and length of specific sales contracts.

The Company enters into forward foreign exchange contracts in order to reduce the impact of foreign currency fluctuations and not to engage in currency speculation. The use of derivative financial instruments allows the Company to reduce its exposure to the risk that the eventual net cash inflow resulting from the sale of products to foreign customers will be materially affected by changes in exchange rates. The Company does not hold or issue financial instruments for trading purposes. The forward foreign exchange contracts are designated for firmly committed or forecasted sales. These contracts settle in less than one year.

 

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The forward foreign exchange contracts generally require the Company to exchange Euros for U.S. dollars or Pound Sterling for Euros at maturity, at rates agreed upon at the inception of the contracts. The Company’s counterparties to derivative transactions are major financial institutions with an investment grade or better credit rating; however, the Company is exposed to credit risk with these institutions. The credit risk is limited to the unrealized gains in such contracts should these counterparties fail to perform as contracted.

At June 30, 2011, forward foreign exchange contracts with a notional value of $21,943,000 were outstanding to exchange various currencies with maturities ranging from July 2011 to March 2012, to sell the equivalent of approximately $5,043,000 in foreign currencies at contracted rates and to buy approximately $16,900,000 in foreign currencies at contracted rates. These contracts have been designated as cash flow hedges. Cash flows from these forward foreign exchange contracts are classified in the same category as the cash flows from the items being hedged on the Consolidated Statements of Cash Flows. At June 30, 2011, the Company did not have any forward foreign exchange contracts that do not qualify as hedges.

The fair value of the Company’s derivatives on its Consolidated Balance Sheets were as follows (in thousands):

 

Asset Derivatives

Liability Derivatives

Balance Sheet Location

June 30, 2011

December 31, 2010

Balance Sheet Location

June 30, 2011

December 31, 2010

Fair Value

Fair Value

Fair Value

Fair Value

Derivatives Designated as Hedging Instruments

Foreign exchange contracts

Prepaid expenses and other current assets

$

253

$

244

Accrued liabilities

$

640

$

671

The effect of the Company’s derivatives on its Consolidated Statements of Earnings/Loss for the six months ended June 30, 2011 and 2010 were as follows (in thousands):

 

Derivatives in Cash Flow Hedging Relationships		Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings (“OCE”) on Derivative (Effective Portion)								Location of Gain/(Loss) Reclassified from OCE into Income (Effective Portion)		Amount of Gain/(Loss) Reclassified from OCE into Income (Effective Portion)								Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)		Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
		Six Months Ended June 30,										Six Months Ended June 30,										Six Months Ended June 30,
		2011				2010						2011				2010						2011				2010
Foreign exchange contracts		$	(779	)		$	1,610			Cost of goods sold		$	(124	)		$	(584	)		Selling, general and administrative expenses		$	(25	)		$	68

The effect of the Company’s derivatives on its Consolidated Statements of Earnings/Loss for the three months ended June 30, 2011 and 2010 were as follows (in thousands):

 

Derivatives in Cash Flow Hedging Relationships		Amount of Gain/(Loss) Recognized in Other Comprehensive Earnings (“OCE”) on Derivative (Effective Portion)								Location of Gain/(Loss) Reclassified from OCE into Income (Effective Portion)		Amount of Gain/(Loss) Reclassified from OCE into Income (Effective Portion)								Location of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)		Amount of Gain/(Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
		Three Months Ended June 30,										Three Months Ended June 30,										Three Months Ended June 30,
		2011				2010						2011				2010						2011				2010
Foreign exchange contracts		$	187			$	826			Cost of goods sold		$	(409	)		$	(236	)		Selling, general and administrative expenses		$	(19	)		$	69

 

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7.	Bank Lines of Credit and Other Debt

At June 30, 2011 and December 31, 2010, the Company had debt outstanding of $11,770,000 and $970,000, respectively, (excluding outstanding letters of credit of $792,000 at June 30, 2011 and $2,362,000 at December 31, 2010).

Debt outstanding under the Company’s Loan Agreement (the “Loan Agreement”) with Bank of America, N.A. (the “Bank”) (not including borrowings by Palladium) was $10,824,000 at June 30, 2011 and there were no borrowings at December 31, 2010. The terms of and current borrowings under the Loan Agreement as of June 30, 2011 were as follows (dollars in thousands):

 

Amount Outstanding		Outstanding Letters of Credit				Unused Lines of Credit				Total				Interest Rate		Expiration Date
$10,824		$	792			$	9,384			$	21,000			2.74%(1)		July 2011 to October 2011 (2)

 

(1)	This represents the weighted average interest rate of the current borrowings under the Loan Agreement. The interest is at the Company’s option at (i) the Bank’s prime rate minus 0.75 percentage points, or (ii) IBOR plus 1.25 percentage points.

(2)	This represents the expiration dates of the current borrowings under the Loan Agreement. The Loan Agreement expires July 1, 2013.

Pursuant to the Loan Agreement, the Company has agreed to secure its obligations under the Facility with securities and other investment property owned by the Company in certain securities accounts (the “Collateral Accounts,” or the Company’s restricted cash and cash equivalents and restricted investments available for sale, see Note 3) and to guarantee the obligations of certain of the Company’s foreign subsidiaries under their credit facilities with the Bank, or any affiliate of the Bank. The obligations of the Company under the Loan Agreement are guaranteed by its wholly owned subsidiary, K•Swiss Sales Corp. On April 18, 2011, the Company and K•Swiss Sales Corp. entered into the First Amendment to the Loan Agreement with the Bank which permits the Company, among other things, to incur borrowings denominated in Euros, Pound Sterling and Canadian Dollars, in addition to borrowings denominated in U.S. Dollars.

Palladium debt outstanding under its lines of credit and term loans was $946,000 and $970,000 at June 30, 2011 and December 31, 2010, respectively. The terms of and current borrowings under Palladium’s lines of credit facilities and term loans at June 30, 2011 was as follows (dollars and Euros in thousands):

 

		Amount Outstanding				Outstanding Letters of Credit				Unused Lines of Credit				Total				Interest Rate		Expiration Date
Secured lines of credit (1)		$	422			$	0			$	1,526			$	1,948			Variable, 2.71% to 3.63%		June 30, 2011
Secured line of credit			35				0				5,738				5,773			Variable, 2.07%		December 31, 2011
Fixed rate loans			486				0				0				486			5.42% to 5.84%		2012 to 2013
Accrued interest			3				0				0				3
		$	946			$	0			$	7,264			$	8,210

 

(1)

Under these lines of credit, the facility amount available between January 1 through June 30, 2011 ranged from €1,150 to €1,350 (or approximately $1,660 to $1,948). These lines of credit have been renewed until December 31, 2011 with a facility amount available between July 1 through December 31, 2011 of €1,000 (or approximately $1,443).

Interest expense of $71,000 and $68,000 was incurred on all bank loans and lines of credit during the six months ended June 30, 2011 and 2010, respectively. Interest expense of $56,000 and $28,000 was incurred on all bank loans and lines of credit during the three months ended June 30, 2011 and 2010, respectively.

 

9

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8.	Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, outstanding borrowings under the lines of credit, current portion of long-term debt, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities. In addition, the Company has long-term debt with financial institutions. The fair value of long-term debt is measured by obtaining the current interest rate from the financial institutions and then comparing that to the actual interest rate owed on the debt. At June 30, 2011, the fair value of the long-term debt is estimated at $172,000.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis at June 30, 2011 (in thousands):

 

						Fair Value Measurements Using
		Total Carrying Value				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Restricted investments available for sale		$	15,324			$	10,063			$	5,261			$	0
Investments available for sale			17,730				5,025				12,705				0
Forward exchange contracts – assets			253				0				253				0
Forward exchange contracts – liabilities			640				0				640				0
Contingent purchase price – Palladium (1)			4,148				0				0				4,148

 

(1)	See Note 12 for further discussion of valuation.

The Company purchases its investments available for sale and restricted investments available for sale through several major financial institutions. These financial institutions have hired third parties to measure the fair value of these investments.

U.S. Treasury Notes are measured at fair value by obtaining information from a number of live data sources including active market makers and inter-dealer brokers. These data sources are reviewed based on their historical accuracy for individual issues and maturity ranges.

U.S. Government Corporations and Agency securities and Corporate Notes and Bonds are measured at fair value by obtaining (a) a bullet (non-call) spread scale that is created for each issuer going out to forty years (these spreads represent credit risk and are obtained from the new issue market, secondary trading and dealer quotes), (b) an option adjusted spread model which is incorporated to adjust spreads of issues that have early redemption features and (c) final spreads are added to the U.S. Treasury curve and a special cash discounting yield/price routine calculates prices from final yields to accommodate odd coupon payment dates. Evaluators maintain quality by surveying the dealer community, obtaining benchmark quotes, incorporating relevant trade data and updating spreads daily.

The Company’s counterparty (“Counterparty”) to a majority of its forward exchange contracts is a major financial institution. These forward exchange contracts are measured at fair value by the Counterparty based on a variety of pricing factors, which include the market price of the derivative instrument available in the dealer-market.

During the six and three months ended June 30, 2011, there were no transfers between Level 1, Level 2 and Level 3 measurements. In addition, there were no changes in the valuation technique of assets and liabilities measured on a recurring basis during the six and three months ended June 30, 2011.

 

10

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The following table provides Form Athletics goodwill, intangible assets and contingent purchase price carried at fair value measured on a non-recurring basis (in thousands):

 

		June 30, 2011																Six and Three Months Ended June 30, 2011
						Fair Value Measurements Using
		Total Carrying Value				Quoted Prices in Active Markets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobser- vable Inputs (Level 3)
																		Total Gains/ (Losses)
Form Athletics Goodwill (1)		$	0			$	0			$	0			$	0			$	(539	)
Form Athletics Trademarks (1)			0				0				0				0				(3,150	)
Form Contingent Purchase Price (2)			0				0				0				0				2,110

 

(1)	See Note 5 for further discussion of valuation.

(2)	See Note 13 for further discussion of valuation.

 

9.	Income Taxes

Income tax expense for the six and three months ended June 30, 2011 was $1,562,000 and $1,038,000, respectively, and the income tax benefit for the six and three months ended June 30, 2010 was $5,841,000 and $4,001,000, respectively. The income tax benefit for the six and three months ended June 30, 2010 was ultimately reversed in the third quarter of 2010, as discussed below.

The Company evaluates its deferred tax assets, including net operating losses and tax credits, to determine if a valuation allowance is required. The Company assesses whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable.

At June 30, 2011, the Company had a net deferred tax asset after valuation allowance of $4,730,000 which consists of $770,000 for U.S. tax losses that will be carried back to the 2008 tax year and foreign net operating losses which are primarily related to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period. The U.S. deferred tax asset was classified as an income tax receivable at December 31, 2010. In March 2011, the Company was informed by the Internal Revenue Service (“IRS”) that the refund for the carryback of the 2010 loss to the 2008 tax year would not be paid until the conclusion of the 2008 IRS tax audit (see below). The Company has not recorded a valuation allowance against the net deferred tax asset as the Company believes it is more-likely-than-not that the income tax receivable will be recognized and the loss carryforward will be utilized. The ultimate realization of the loss carryforward is dependent upon the generation of future taxable income outside of the U.S. during the periods in which those temporary differences become deductible. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The deferred tax assets for which valuation allowances were not established relate to foreign jurisdictions where the Company expects to realize these assets. The accounting for deferred taxes is based upon an estimate of future operating results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.

During the second quarter of 2010, the Company moved into a three year pre-tax cumulative loss but had sufficient objectively verifiable evidence to demonstrate that its U.S. deferred tax asset would be realized, such as strong earnings history, no evidence of tax losses expiring unused and the end of its aggressive advertising campaign during 2010. During the third quarter of 2010, the Company continued to have the significant weight of the three year pre-tax cumulative loss to overcome. In addition to other significant positive evidence considered in the prior quarter, the Company decided during the third quarter of 2010 to continue with its aggressive advertising campaign into 2011. As such, the Company could no longer rely on a decrease in advertising expenses during 2011 to support future profitability sufficient enough to realize its U.S. deferred tax assets in the near future. Therefore, during the third quarter of 2010, the Company recorded a valuation allowance of $20,222,000 against its U.S. deferred tax assets.

 

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At June 30, 2011, uncertain tax positions and the related interest, which are included in other liabilities on the Consolidated Balance Sheet, were $6,732,000 and $1,165,000, respectively, all of which would affect the income tax rate if reversed. During the six and three months ended June 30, 2011, the Company recognized income tax expense related to uncertain tax positions of $430,000 and $210,000, respectively, and interest expense related to uncertain tax positions of $122,000 and $62,000, respectively. During the six and three months ended June 30, 2010, the Company recognized income tax expense related to uncertain tax positions of $370,000 and $140,000, respectively, and interest expense related to uncertain tax positions of $134,000 and $67,000, respectively.

The federal income tax returns for 2006, 2007, 2008 and 2009 and certain state returns for 2007 and 2008 are currently under various stages of audit by the applicable taxing authorities. The Company received a Notice of Proposed Adjustment from the IRS for tax years 2006 and 2007 of $7,114,000 (which includes $1,186,000 in penalties). Interest will be assessed, and at this time it is estimated at approximately $1,488,000. This issue has been sent to the IRS Appeal’s office for further consideration. The Company does not agree with this adjustment and plans to vigorously defend its position. The Company does not believe that an additional tax accrual is required at this time. The amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. The Company’s material tax jurisdiction is the United States.

 

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10.	Segment Information

The Company’s predominant business is the design, development and distribution of athletic footwear. The Company has identified its footwear products business to be its only segment as substantially all of the Company’s revenues are from sales of footwear products. The Company is organized into three geographic regions: the United States, Europe, Middle East and Africa (“EMEA”) and Other International. The Company’s Other International geographic region includes the Company’s operations in Asia. Certain reclassifications have been made to the 2010 presentation to conform to the 2011 presentation. The following tables summarize information by geographic region of the Company’s footwear segment (in thousands):

 

		Six Months Ended June 30,								Three Months Ended June 30,
		2011				2010				2011				2010
Revenues from unrelated entities (1):
United States		$	64,035			$	46,644			$	32,576			$	22,704
EMEA			42,746				39,548				19,261				12,390
Other International			31,381				26,509				13,705				11,737
Total revenues from unrelated entities		$	138,162			$	112,701			$	65,542			$	46,831
Inter-geographic revenues:
United States		$	2,715			$	2,444			$	1,388			$	1,133
EMEA			1,446				0				1,446				0
Other International			136				67				37				32
Total inter-geographic revenues		$	4,297			$	2,511			$	2,871			$	1,165
Total revenues:
United States		$	66,750			$	49,088			$	33,964			$	23,837
EMEA			44,192				39,548				20,707				12,390
Other International			31,517				26,576				13,742				11,769
Less inter-geographic revenues			(4,297	)			(2,511	)			(2,871	)			(1,165	)
Total revenues		$	138,162			$	112,701			$	65,542			$	46,831
Operating (loss)/profit:
United States		$	(18,280	)		$	(14,868	)		$	(8,125	)		$	(7,517	)
EMEA			(8,854	)			(3,025	)			(6,631	)			(5,341	)
Other International			5,328				3,649				1,194				1,381
Less corporate expenses (2)			(11,592	)			(8,125	)			(7,494	)			(4,022	)
Eliminations			129				238				44				45
Total operating loss		$	(33,269	)		$	(22,131	)		$	(21,012	)		$	(15,454	)

 

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		June 30, 2011				December 31, 2010
Long-lived assets (3):
United States		$	17,237			$	18,271
EMEA			999				993
Other International			1,427				1,431
Total long-lived assets		$	19,663			$	20,695

 

(1)	Revenue is attributable to geographic regions based on the location of the Company’s subsidiaries.

(2)

Corporate expenses include expenses such as salaries and related expenses for executive management and support departments such as accounting and treasury, information technology and legal which benefit the entire Company and are not segment/region specific. Corporate expenses for the six and three months ended June 30, 2011 increased as a result of an impairment charge on the goodwill and intangible assets related to Form Athletics and an increase in compensation expenses, offset by a decrease in legal expenses. The increase in compensation expenses, which includes bonus/incentive related expenses and employee recruiting and relocation expenses, resulted from a partial reserve of an employee receivable, an increase in head count and an increase in stock option compensation expense. The decrease in legal expenses was a result of decreases in expenses incurred to defend the Company’s trademarks.

(3)	Long-lived assets consist of property, plant and equipment, net.

During the six and three months ended June 30, 2011 and 2010, there were no customers that accounted for more than 10% of revenues. At June 30, 2011, approximately 41% of accounts receivable were from six customers. At December 31, 2010, approximately 39% of accounts receivable were from six customers.

 

11.	Other Income/Expense

During the six months ended June 30, 2011, the Company and one of its international distributors entered into a mutual settlement and termination agreement in which the Company agreed to an early termination of this distributor’s contracts for $3,000,000. This amount was received on February 8, 2011 and was included in Other Income on the Company’s Consolidated Financial Statements. The contracts with this distributor were terminated as a result of this distributor not performing in accordance with their contracts, and there was no litigation. The Company is in the process of securing another distributor for this region. The loss of this distributor will not have a significant impact on the Company’s revenues or gross margin.

Other expense for the six and three months ended June 30, 2010 consists of the recognition of $3,320,000, which represents the net present value of the estimated Contingent Purchase Price related to Palladium as described in Note 12.

 

12.	Palladium Contingent Purchase Price

On May 1, 2010, the Company entered into Amendment No. 2 to the Share Purchase and Shareholders’ Rights Agreement with Palladium to revise the terms of the remaining future purchase price for Palladium payable in 2013. Pursuant to Amendment No. 2, the fair value of the future purchase price for Palladium, i.e. the Contingent Purchase Price (“CPP”), will be equal to the net present value of €3,000,000 plus up to €500,000 based on an amount calculated in accordance with a formula driven by Palladium’s EBITDA for the twelve months ended December 31, 2012. The €500,000 CPP will be determined each quarter based on the current quarter’s projection of Palladium’s EBITDA for the twelve months ended December 31 of the current year. Excluding the initial recognition of the CPP, any change in CPP is based on the change in net present value of the €3,000,000 and the current quarter’s EBITDA projection, and will be recognized as interest income or interest expense during the current quarter.

 

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

 

		Six Months Ended June 30,								Three Months Ended June 30,
		2011				2010				2011				2010
Beginning balance		$	3,689			$	0			$	3,960			$	0
Initial recognition of the net present value of the CPP			0				3,320				0				3,320
Change in net present value of the CPP			459				0				188				0
Ending balance		$	4,148			$	3,320			$	4,148			$	3,320

 

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

 

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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, 2011				Three Months Ended June 30, 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.

 

14.	Recent Accounting Pronouncements

Fair Value Measurement

Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” ensures that U.S. generally accepted accounting principles are aligned with International Accounting Standards. ASU 2011-04 does not modify the requirements for when fair value measurements apply, but rather clarifies on how to measure and disclose fair value under Accounting Standards Codification (“ASC”) No. 820, “Fair Value Measurement.” ASU 2011-04 clarifies the following:

 

•

The highest and best use and valuation premise concepts apply only to nonfinancial assets;

 

•

The option to measure certain groups of financial assets and liabilities on a net basis;

 

•

Provides guidance on incorporating certain premiums and discounts in fair value measurement;

 

•

Provides guidance on measuring the fair value of items classified in shareholders’ equity; and

 

•

New disclosures include:

 

•

For both recurring and nonrecurring fair value measurements, the reason for the measurement;

 

•

All transfers between levels of the fair value hierarchy;

 

•

For Level 2 fair value measurements, a description of the valuation technique(s) and inputs used in those measurements;

 

•

For Level 3 fair value measurement:

 

•

Quantitative information about significant unobservable inputs;

 

•

Description of the valuation processes;

 

•

Qualitative discussion about the sensitivity of the measurements;

 

•

Information about the use of a nonfinancial asset when it differs from the asset’s highest and best use; and

 

•

The level of fair value hierarchy for assets and liabilities that are not measured at fair value but whose fair value is required to be disclosed.

Any revisions resulting from a change in valuation technique or its application will be accounted for as a change in accounting estimate, in accordance with ASC No. 250, “Accounting Changes and Error Corrections.” If an entity changes a valuation technique and related inputs as a result of applying the amended guidance, then the entity must disclose the change and quantify its total effect, if practicable. ASU 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. The Company does not expect ASU 2011-04 will have a material impact on its financial position and results of operations, however, it may change certain fair value disclosures.

 

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Comprehensive Income

ASU 2011-05, “Presentation of Comprehensive Income,” improves the comparability of financial reporting and ensures that U.S. generally accepted accounting principles are aligned with International Accounting Standards. ASU 2011-05 requires entities to present all nonowner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. The components of other comprehensive income (“OCI”) have not changed, nor has the guidance on when OCI items are reclassified to net income, however, ASU 2011-05 requires entities to present all reclassification adjustments to OCI to net income on the face of the statement of comprehensive income. Similarly, ASU 2011-05 does not change the guidance to disclose OCI components gross or net of the effect of income taxes, provided that the tax effects are presented on the face of the statement in which OCI is presented or disclosed in the notes to the financial statements. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. ASU 2011-05 should be applied retrospectively and early adoption is permitted. The Company does not expect ASU 2011-05 will have a material impact on its financial position and results of operations, however, it may change certain disclosures.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note Regarding Forward-Looking Statements and Analyst Reports

“Forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), include certain written and oral statements made, or incorporated by reference, by us or our representatives in this report, other reports, filings with the Securities and Exchange Commission (the “S.E.C.”), press releases, conferences, or otherwise. Such forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,” “will be,” “will continue,” “will likely result,” or any variations of such words with similar meaning. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Investors should carefully review the risk factors set forth in the reports and documents we file with the S.E.C., including Forms 10-Q, 10-K and 8-K. Some of the other risks and uncertainties that should be considered include, but are not limited to, the following: international, national and local general economic and market conditions; the size and growth of the overall athletic footwear and apparel markets; the size of our competitors; intense competition among designers, marketers, distributors and sellers of athletic footwear and apparel for consumers and endorsers; market acceptance of all our product offerings; popularity of particular designs, categories of products, and sports; seasonal and geographic demand for our products; the size, timing and mix of purchases of our products; performance and reliability of products; difficulties in anticipating or forecasting changes in consumer preferences, demographics and demand for our product, and various market factors described above; the amount of consumer disposable income; the availability of credit facilities for our customers and/or the stability of credit markets; fluctuations and difficulty in forecasting operating results, including, without limitation, the fact that advance “futures” orders may not be indicative of future revenues due to the changing mix of futures and at-once orders; potential cancellation of future orders; our ability to continue, manage or forecast our growth and inventories; new product development and timely commercialization; fluctuations in the price, availability and quality of raw materials; the loss of, or reduction in, sales to a significant customer or distributor; the success, willingness to purchase and financial resources of our customers; pressure to decrease the prices of our products; the ability to secure and protect trademarks, patents, and other intellectual property; inadvertent and nonwillful infringement on others’ trademarks, patents and other intellectual property; difficulties in implementing, operating, maintaining, and protecting our increasingly complex information systems and controls including, without limitation, the systems related to demand and supply planning, and inventory control; difficulties in maintaining SAP information management software; interruptions in data and communication systems; concentration of production in China; changes in our effective tax rates as a result of changes in tax laws or changes in our geographic mix of sales and level of earnings; potential earthquake disruption due to the location of our warehouse and headquarters; potential disruption in supply chain due to various factors including but not limited to natural disasters, epidemic diseases or customer purchasing habits; the continued operation and ability of our manufacturers to satisfy our production requirements; our ability to secure sufficient manufacturing capacity, or the loss of, or reduction in, manufacturing capacity from significant suppliers; responsiveness of customer service; adverse publicity; concentration of credit risk to a few customers; business disruptions; increased costs of freight and transportation to meet delivery deadlines; increased material and/or labor costs; the effects of terrorist actions on business activities, customer orders and cancellations, and the United States and international governments’ responses to these terrorist actions; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation, exchange rate fluctuations, import duties, tariffs, quotas and political and economic instability; changes in government regulations; liability and other claims asserted against us; the ability to attract and retain qualified personnel; a limited number of our stockholders can exert significant influence over the Company; transitional challenges of integrating newly acquired companies into our business; and other factors referenced or incorporated by reference in this report and other reports.

K•Swiss Inc. (the “Company,” “K•Swiss,” “we,” “us,” and “our”) operates in a very competitive and rapidly changing environment. New risk factors can arise and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Investors should also be aware that while we communicate, from time to time, with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts or others contain any projections, forecasts or opinions, such reports are not our responsibility.

 

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the S.E.C. The preparation of these financial statements required us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the policies for revenue recognition, the reserve for uncollectible accounts receivable, inventory reserves, income taxes and goodwill and intangible assets. These policies require that we make estimates in the preparation of our financial statements as of a given date.

Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.

Overview

Our total revenues increased 22.6% and 40.0% in the six and three months ended June 30, 2011, respectively, from the six and three months ended June 30, 2010, respectively. Our overall gross profit margin, as a percentage of revenues, decreased to 36.9% and 34.3% for the six and three months ended June 30, 2011, respectively, compared to 41.0% and 37.4% for the six and three months ended June 30, 2010, respectively, as a result of an increase in inventory and royalty reserves, greater discounts given to customers due to production delays by our factories and increase in product costs during the six and three months ended June 30, 2011 compared to the six and three months ended June 30, 2010. Our selling, general and administrative expenses increased to $80,613,000 and $39,830,000 for the six and three months ended June 30, 2011, respectively, from $68,303,000 and $32,980,000 for the six and three months ended June 30, 2010, respectively, as a result of increases in advertising, compensation and other warehousing expenses, and for the six months ended June 30, 2011, offset by a decrease in legal expenses. In addition for the six and three months ended June 30, 2011, an impairment charge of $3,689,000 on goodwill and intangible assets related to the trademarks of the Form Athletics brand, offset by a reversal of $2,110,000 of the Form Contingent Purchase Price, which was recorded in interest income, net, were recognized. Other income for the six months ended June 30, 2011 consists of the recognition of $3,000,000 resulting from the settlement and termination of one of our agreements with an international distributor. Other expense for the six and three months ended June 30, 2010 consists of the recognition of $3,320,000, which represents the net present value of the estimated Contingent Purchase Price for Palladium. At June 30, 2011, our total futures orders with start ship dates from July 2011 through December 2011 were $89,915,000, an increase of 39.2% from June 30, 2010. Of this amount, domestic futures orders were $37,016,000, an increase of 47.9%, and international futures orders were $52,899,000, an increase of 33.7%. We incurred a net loss for the six months ended June 30, 2011 of $29,868,000 (including other income described above), or $0.84 per diluted share, compared to a net loss of $19,243,000 (including other expense described above), or $0.55 per diluted share for the six months ended June 30, 2010. We incurred a net loss for the three months ended June 30, 2011 of $20,026,000 (including other income described above), or $0.56 per diluted share, compared to a net loss of $14,545,000 (including other expense described above), or $0.41 per diluted share for the three months ended June 30, 2010.

In April 2010 one of our contract manufacturers ceased its operations. As a result we secured production capacity in new facilities during 2010, which caused production delays throughout the remainder of 2010 and 2011, as these facilities gained expertise in producing our product. At June 30, 2011, these production delays have been significantly reduced. Starting in 2011, we began to experience the inflationary pressures of our contract manufacturing in Asia, especially in China, with increases in, among other things, labor, raw materials and freight/transportation. As a result of the increase in these product costs, we have raised selling prices approximately 6% in the United States for all orders received after May 15, 2011, which will mainly affect future order shipments after November 30, 2011.

 

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Results of Operations

The following table sets forth, for the periods indicated, the percentage of certain items in the Consolidated Statements of Earnings/Loss relative to revenues.

 

		Six Months Ended June 30,								Three Months Ended June 30,
		2011				2010				2011				2010
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			63.1				59.0				65.7				62.6
Gross profit			36.9				41.0				34.3				37.4
Selling, general and administrative expenses			58.3				60.6				60.8				70.4
Impairment on intangibles and goodwill			2.7				0.0				5.6				0.0
Other income/(expense)			2.2				(3.0	)			0.0				(7.1	)
Interest income, net			1.4				0.3				3.1				0.5
Loss before income taxes			(20.5	)			(22.3	)			(29.0	)			(39.6	)
Income tax expense/(benefit)			1.1				(5.2	)			1.6				(8.5	)
Net loss			(21.6	)%			(17.1	)%			(30.6	)%			(31.1	)%

Revenues

Total revenues increased 22.6% to $138,162,000 for the six months ended June 30, 2011 from $112,701,000 for the six months ended June 30, 2010 and total revenues increased 40.0% to $65,542,000 for the three months ended June 30, 2011 from $46,831,000 for the three months ended June 30, 2010. The breakdown of revenues (dollar amounts in thousands) is as follows:

 

		Six Months Ended June 30,												Three Months Ended June 30,
		2011				2010				% Change				2011				2010				% Change
Domestic
K•Swiss brand		$	61,690			$	45,754				34.8	%		$	31,612			$	22,350				41.4	%
Palladium brand			1,994				890				124.0				792				354				123.7
Form brand			351				0				0				172				0				0
Total domestic		$	64,035			$	46,644				37.3	%		$	32,576			$	22,704				43.5	%
International
K•Swiss brand		$	59,148			$	54,665				8.2	%		$	28,449			$	21,496				32.3	%
Palladium brand			14,906				11,392				30.8				4,444				2,631				68.9
Form brand			73				0				0				73				0				0
Total international		$	74,127			$	66,057				12.2	%		$	32,966			$	24,127				36.6	%
Total revenues		$	138,162			$	112,701				22.6	%		$	65,542			$	46,831				40.0	%

K•Swiss brand revenues increased to $120,838,0000 and $60,061,000 for the six and three months ended June 30, 2011, respectively, from $100,419,000 and $43,846,000 for the six and three months ended June 30, 2010, respectively, an increase of $20,419,000, or 20.3%, and $16,215,000, or 37.0%, respectively. The increase in K•Swiss brand domestic and international sales of 41.4% and 32.3%, respectively, for the three months ended June 30, 2011, is directionally consistent with the trends in futures orders at March 31, 2011. The increase for the six and three months ended June 30, 2011 was the result of an increase in average wholesale prices per pair and an increase in the volume of footwear sold. The volume of footwear sold increased to 3,666,000 and 1,874,000 pair for the six and three months ended June 30, 2011, respectively, from 3,326,000 and 1,476,000 pair for the six and three months ended June 30, 2010, respectively. The increase in the volume of footwear sold for the three months ended June 30, 2011 was primarily the result of an increase in sales of the performance category of 78.8% and the lifestyle category of 3.1%. The average wholesale price per pair increased to $29.01 and $28.73 for the six and three months ended June 30, 2011, respectively, from $26.85 and $26.39 for the six and three months ended June 30, 2010, respectively, an increase of 8.0% and 8.9%, respectively. The increase in the average wholesale price per pair is attributable primarily to product mix of sales offset slightly by a higher level of sales of closeout product during the six and three months ended June 30, 2011 compared to the six and three months ended June 30, 2010.

 

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Palladium brand revenues increased 37.6% and 75.4% to $16,900,000 and $5,236,000 for the six and three months ended June 30, 2011, respectively, compared to $12,282,000 and $2,985,000 for the six and three months ended June 30, 2010, respectively. The increase in Palladium sales for the six and three months ended June 30, 2011 was due to the increase in worldwide sales in regions other than France. This increase in Palladium brand worldwide sales in regions other than France is due to our continued marketing and selling efforts of Palladium product in these regions beginning in the second half of 2009. The volume of footwear sold increased to 473,000 and 153,000 pair for the six and three months ended June 30, 2011, respectively, from 381,000 and 117,000 pair for the six and three months ended June 30, 2010, respectively, due to an increase in sales in regions other than France, as discussed above. The average underlying wholesale price per pair was $35.35 and $33.85 for the six and three months ended June 30, 2011, respectively, and $32.04 and $25.01 for the six and three months ended June 30, 2010, respectively, an increase of 10.3% and 35.3%, respectively, attributable primarily to product mix, geographic mix of sales and a decrease in closeout product in France, as a percentage of sales, which sell at lower prices.

Gross Profit Margin

Gross profit margin, as a percentage of revenues, decreased to 36.9% and 34.3% for the six and three months ended June 30, 2011, respectively, from 41.0% and 37.4% for the six and three months ended June 30, 2010, respectively. K•Swiss brand gross profit margin, as a percentage of revenues, was 33.1% and 32.2% for the six and three months ended June 30, 2011, respectively, a decrease from 38.6% and 36.0% for the six and three months ended June 30, 2010, respectively. The decrease was the result of an increase in inventory and royalty reserves, greater discounts given to customers due to production delays by our factories and an increase in product costs during the six and three months ended June 30, 2011 compared to the six and three months ended June 30, 2010. In April 2010 one of our contract manufacturers ceased its operations. As a result we secured production capacity in new facilities during 2010, which caused production delays throughout the remainder of 2010 and 2011, as these facilities gained expertise in producing our product. At June 30, 2011, these production delays have been significantly reduced. Starting in 2011, we began to experience the inflationary pressures of our contract manufacturing in Asia, especially in China, with increases in, among other things, labor, raw materials and freight/transportation. As a result of the increase in these product costs, we have raised selling prices approximately 6% in the United States for all orders received after May 15, 2011, which will mainly affect future order shipments after November 30, 2011. Palladium brand gross profit margin, as a percentage of revenues, was 42.9% and 34.7% for the six and three months ended June 30, 2011, an increase from 40.7% and 23.4% for the six and three months ended June 30, 2010, respectively. The increase in gross profit margin is mainly due to a lower percentage of sales of close out product for the six and three months ended June 30, 2011. Our gross profit margin may not be comparable to our competitors as we recognize warehousing costs within selling, general and administrative expenses. These warehousing costs were $8,448,000 and $4,287,000 for the six and three months ended June 30, 2011, respectively, compared to $6,810,000 and $3,111,000 for the six and three months ended June 30, 2010, respectively.

Selling, General and Administrative Expenses

Overall selling, general and administrative expenses increased to $80,613,000 (58.3% of revenues) and $39,830,000 (60.8% of revenues) for the six and three months ended June 30, 2011, respectively, from $68,303,000 (60.6% of revenues) and $32,980,000 (70.4% of revenues) for the six and three months ended June 30, 2010, respectively, as a result of increases in advertising, compensation and other warehousing expenses, and for the six months ended June 30, 2011, offset by a decrease in legal expenses. Advertising expenses increased 18.7% and 18.8% for the six and three months ended June 30, 2011, respectively, as a result of strategic efforts to drive revenue in domestic and international markets. Compensation expenses, which includes commissions, bonus/incentive related expenses and employee recruiting and relocation expenses, increased 21.5% and 22.0% for the six and three months ended June 30, 2011, respectively, as a result of an increase in headcount and a partial reserve of an employee receivable. Other warehousing expenses, which do not include compensation expenses, increased 29.1% and 45.1% for the six and three months ended June 30, 2011, respectively, as a result of increases in freight and transportation costs to customers, rent and storage expenses and third party handling fees as a result of an increase in inventory balances, increase in sales, and increase in the number of customers and increase in volume of shipments to customers. Legal expenses decreased 39.9% for the six months June 30, 2011 as a result of decreased expenses incurred to defend our trademarks. Corporate expenses of $7,903,000 and $3,805,000 for the six and three months ended June 30, 2011, respectively, and $8,125,000 and $4,022,000 for the six and three months ended June 30, 2010, respectively, are included in selling, general and administrative expenses and include expenses such as salaries and related expenses for executive management and support departments such as accounting and treasury, information technology and legal which benefit the entire Company. The decrease in corporate expenses for the six and three months ended June 30, 2011 was due to the decrease in legal expenses, partially offset by compensation expenses for reasons described above.

 

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Impairment on Intangibles and Goodwill

An impairment charge of $3,689,000 on goodwill and intangible assets related to the Form Athletics brand was recognized in the six and three months ended June 30, 2011, after a review of sales, backlog, cash flows and marketing strategy was undertaken. These impairment charges are included as corporate expenses for 2011 for the six and three months ended June 30, 2011.

Other Income, Interest and Taxes

Other income for the six months ended June 30, 2011 consisted of a $3,000,000 settlement agreement between us and one of our international distributors relating to the termination of this distributor’s contracts. The contracts with this distributor were terminated as a result of this distributor not performing in accordance with their contracts, and there was no litigation. We are in the process of securing another distributor for this region. The loss of this distributor will not have a significant impact on our revenues or gross margin. Other expense for the six and three months ended June 30, 2010 consisted of the recognition of $3,320,000, which represents the net present value of the estimated Contingent Purchase Price for Palladium, as discussed below.

On May 1, 2010, we entered into Amendment No. 2 to the Share Purchase and Shareholders’ Rights Agreement with Palladium to revise the terms of the remaining future purchase price for Palladium payable in 2013. Pursuant to Amendment No. 2, the fair value of the future purchase price for Palladium, i.e. the Contingent Purchase Price (“CPP”), will be equal to the net present value of €3,000,000 plus up to €500,000 based on an amount calculated in accordance with a formula driven by Palladium’s EBITDA for the twelve months ended December 31, 2012. The €500,000 CPP will be determined each quarter based on the current quarter’s projection of Palladium’s EBITDA for the twelve months ended December 31 of the current year. For the six and three months ended June 30, 2010, we recognized the initial fair value of the CPP of $3,320,000 as other expense in the Consolidated Statement of Earnings/Loss, which represents the net present value of €3,000,000 at June 30, 2010.

Net interest income was $1,963,000 (1.4% of revenues) and $2,024,000 (3.1% of revenue) for the six and three months ended June 30, 2011, respectively, and net interest income was $367,000 (0.3% of revenue) and $228,000 (0.5% of revenues) for the six and three months ended June 30, 2010, respectively. The increase in net interest income for the six and three months ended June 30, 2011 was a primarily a result of the reversal of the Form CPP of $2,110,000 and slightly higher interest rates earned on cash, restricted cash and investments available for sale and investments available for sale, offset by the amount recognized for the change in the fair value of the Palladium CPP, increase in interest expense on debt and lower average balances in cash and investments available for sale.

Income tax expense for the six and three months ended June 30, 2011 was $1,562,000 and $1,038,000, respectively, and the income tax benefit for the six and three months ended June 30, 2010 was $5,841,000 and $4,001,000, respectively. The income tax benefit for the six and three months ended June 30, 2010 was ultimately reversed in the third quarter of 2010, as discussed below.

We evaluate our deferred tax assets, including net operating losses and tax credits, to determine if a valuation allowance is required. We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable.

On a quarterly basis, we estimate what our effective tax rate will be for the full calendar year by estimating pre-tax income, excluding significant or infrequently occurring items, and tax expense for the remaining quarterly periods of the year. The estimated annual effective tax rate is then applied to year-to-date pre-tax income to determine the estimated year-to-date and quarterly tax expense. The income tax effects of infrequent or unusual items are recognized in the quarterly period in which they occur. As the year progresses, we continually refine our estimate based upon actual events and earnings. This continual estimation process periodically results in a change to our expected annual effective tax rate. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date income tax provision equals the estimated annual rate. Our effective tax rate fluctuates mainly due to our geographic mix of sales and earnings. In addition, starting January 1, 2005, provision has not been made for United States income taxes on earnings of selected international subsidiary companies as these are intended to be permanently invested.

At June 30, 2011, we had a net deferred tax asset after valuation allowance of $4,730,000 which consists of $770,000 for U.S. tax losses that will be carried back to the 2008 tax year and foreign net operating losses which are

 

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primarily related to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period. The U.S. deferred tax asset was classified as an income tax receivable at December 31, 2010. In March 2011, we were informed by the Internal Revenue Service (“IRS”) that the refund for the carryback of the 2010 loss to the 2008 tax year would not be paid until the conclusion of the 2008 IRS tax audit (see below). We have not recorded a valuation allowance against the net deferred tax asset as we believe it is more-likely-than-not that the income tax receivable will be recognized and the loss carryforward will be utilized. The ultimate realization of the loss carryforward is dependent upon the generation of future taxable income outside of the U.S. during the periods in which those temporary differences become deductible. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The deferred tax assets for which valuation allowances were not established relate to foreign jurisdictions where we expect to realize these assets. The accounting for deferred taxes is based upon an estimate of future operating results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position.

During the second quarter of 2010, we moved into a three year pre-tax cumulative loss but had sufficient objectively verifiable evidence to demonstrate that our U.S. deferred tax asset would be realized, such as strong earnings history, no evidence of tax losses expiring unused and the end of our aggressive advertising campaign during 2010. During the third quarter of 2010, we continued to have the significant weight of the three year pre-tax cumulative loss to overcome. In addition to other significant positive evidence considered in the prior quarter, we decided during the third quarter of 2010 to continue with our aggressive advertising campaign into 2011. As such, we could no longer rely on a decrease in advertising expenses during 2011 to support future profitability sufficient enough to realize our U.S. deferred tax assets in the near future. Therefore, during the third quarter of 2010, we recorded a valuation allowance of $20,222,000 against our U.S. deferred tax assets.

At June 30, 2011, uncertain tax positions and the related interest, which are included in other liabilities on the Consolidated Balance Sheet, were $6,732,000 and $1,165,000, respectively, all of which would affect the income tax rate if reversed. During the six and three months ended June 30, 2011, we recognized income tax expense related to uncertain tax positions of $430,000 and $210,000, respectively, and interest expense related to uncertain tax positions of $122,000 and $62,000, respectively. During the six and three months ended June 30, 2010, we recognized income tax expense related to uncertain tax positions of $370,000 and $140,000, respectively, and interest expense related to uncertain tax positions of $134,000 and $67,000, respectively.

The federal income tax returns for 2006, 2007, 2008 and 2009 and certain state returns for 2007 and 2008 are currently under various stages of audit by the applicable taxing authorities. We received a Notice of Proposed Adjustment from the IRS for tax years 2006 and 2007 of $7,114,000 (which includes $1,186,000 in penalties). Interest will be assessed, and at this time it is estimated at approximately $1,488,000. This issue has been sent to the IRS Appeal’s office for further consideration. We do not agree with this adjustment and plan to vigorously defend our position. We do not believe that an additional tax accrual is required at this time. The amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Our material tax jurisdiction is the United States.

The net loss for the six months ended June 30, 2011 was $29,868,000, or $0.84 per diluted share, compared to a net loss of $19,243,000, or $0.55 per diluted share for the six months ended June 30, 2010. The net loss for the three months ended June 30, 2011 was $20,026,000, or $0.56 per diluted share, compared to a net loss of $14,545,000, or $0.41 per diluted share for the three months ended June 30, 2010.

Futures Orders

At June 30, 2011 and 2010, total futures orders with start ship dates from July 2011 and 2010 through December 2011 and 2010 were approximately $89,915,000 and $64,601,000, respectively, an increase of 39.2%. The 39.2% increase in total futures orders is comprised of a 48.5% increase in the third quarter 2011 futures orders and an 18.5% increase in the fourth quarter 2011 futures orders. At June 30, 2011 and 2010, domestic futures orders with start ship dates from July 2011 and 2010 through December 2011 and 2010 were approximately $37,016,000 and $25,034,000, respectively, an increase of 47.9%. At June 30, 2011 and 2010, international futures orders with start ship dates from July 2011 and 2010 through December 2011 and 2010 were approximately $52,899,000 and $39,567,000, respectively, an increase of 33.7%. The mix of “futures” and “at-once” orders can vary significantly from quarter to quarter and year to year and therefore “futures” are not necessarily indicative of revenues for subsequent periods. Orders generally may be canceled by customers without financial penalty.

 

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Liquidity and Capital Resources

We experienced net cash outflows from our operating activities of approximately $65,429,000 and $16,578,000 during the six months ended June 30, 2011 and 2010, respectively. The increase in operating cash outflows for the six months ended June 30, 2011 is due to the differences in the amounts of changes in inventories, accounts receivables, CPP and the increase in net loss, offset by the differences in the amounts of changes in deferred income taxes, prepaid expenses and other assets, impairment on intangibles and goodwill and accounts payable and accrued liabilities. The change in inventory was due to the timing of sales to customers and purchases from suppliers. In addition, during the six months ended June 30, 2011, there was an overall increase in inventory to support strategic initiatives and growth in futures orders. The change in accounts receivable was due to the timing of sales to customers and receipts from customers. The change in accounts payable and accrued liabilities was due to the timing of payments to suppliers. The change in prepaid expenses and other assets was due to changes in premiums or discounts on investments available for sale and restricted investments available for sale, prepaid payments to vendors, prepaid minimum royalty balances and foreign exchange contracts. The change in the deferred income taxes was mainly due to the change in the tax valuation allowance. The change in CPP and impairment of intangibles and goodwill is related to the impairment of Form Athletics goodwill and trademarks and the reversal of the related CPP liability.

We had net cash inflows from our investing activities of approximately $46,880,000 for the six months ended June 30, 2011 and net cash outflows of $51,545,000 for the six months ended June 30, 2010. The change in cash inflows from investing activities for the six months ended June 30, 2011 compared to the same period of the prior year was due to a decrease of purchases of investments available for sale and an increase of proceeds from the maturity or sale of investments available for sale and restricted investments available for sale, offset by changes in restricted cash and cash equivalents. The changes in restricted cash and cash equivalents, restricted investments available for sale and investments available for sale are due to the Company’s strategy to shift to higher yielding liquid investments or liquidation of investments into cash for operating activities.

We had net cash inflows from our financing activities of approximately $11,719,000 for the six months ended June 30, 2011 and net cash outflows from financing activities of $1,509,000 for the six months ended June 30, 2010. The increase in net cash inflows from financing activities for the six months ended June 30, 2011 compared to the same period of the prior year was due to an increase in net borrowings on our lines of credit and long-term debt. The increase in bank borrowings during the six months ended June 30, 2011 is primarily to support inventory growth for strategic initiatives and growth in futures orders, as discussed above, in Europe, as we can borrow funds in Euros, which reduces the Company’s overall exposure to foreign exchange fluctuations.

In November 2009, the Board of Directors approved a stock repurchase program to purchase through December 31, 2014 up to $70,000,000 of the Company’s Class A Common Stock. As of June 30, 2011, $70,000,000 is remaining in this program. We adopted the $70,000,000 program because we believed that depending upon the then-array of alternatives, repurchasing our shares could be a good use of excess cash. We have made purchases under all stock repurchase programs from August 1996 through August 3, 2011 (the day prior to the filing of this Form 10-Q) of 25.5 million shares at an aggregate cost totaling approximately $166,759,000, at an average price of $6.55 per share. See Part II – Other Information, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

At June 30, 2011 and December 31, 2010, we had debt outstanding of $11,770,000 and $970,000, respectively, (excluding outstanding letters of credit of $792,000 at June 30, 2011 and $2,362,000 at December 31, 2010).

Debt outstanding under our Loan Agreement (the “Loan Agreement)” with Bank of America, N.A. (the “Bank”) (not including borrowings by Palladium) was $10,824,000 at June 30, 2011 and there were no borrowings at December 31, 2010. The terms of and current borrowings under the Loan Agreement as of June 30, 2011 were as follows (dollars in thousands):

 

Amount Outstanding		Outstanding Letters of Credit				Unused Lines of Credit				Total				Interest Rate		Expiration Date
$ 10,824		$	792			$	9,384			$	21,000			2.74%(1)		July 2011 to October 2011 (2)

 

(1)	This represents the weighted average interest rate of the current borrowings under the Loan Agreement. The interest is at our option at (i) the Bank’s prime rate minus 0.75 percentage points, or (ii) IBOR plus 1.25 percentage points.

(2)	This represents the expiration dates of the current borrowings under the Loan Agreement. The Loan Agreement expires July 1, 2013.

 

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Pursuant to the Loan Agreement, we have agreed to secure our obligations under the Facility with securities and other investment property owned by us in certain securities accounts (the “Collateral Accounts,” or our restricted cash and cash equivalents and restricted investments available for sale) and to guarantee the obligations of certain of our foreign subsidiaries under their credit facilities with the Bank, or any affiliate of the Bank. The obligations of the Company under the Loan Agreement are guaranteed by our wholly owned subsidiary, K•Swiss Sales Corp. On April 18, 2011, the Company and K•Swiss Sales Corp. entered into the First Amendment to the Loan Agreement with the Bank which permits us, among other things, to incur borrowings denominated in Euros, Pound Sterling and Canadian Dollars, in addition to borrowings denominated in U.S. Dollars.

Palladium debt outstanding under its lines of credit and term loans was $946,000 and $970,000 at June 30, 2011 and December 31, 2010, respectively. The terms of and current borrowings under Palladium’s lines of credit facilities and term loans at June 30, 2011 was as follows (dollars and Euros in thousands):

 

		Amount Outstanding				Outstanding Letters of Credit				Unused Lines of Credit				Total				Interest Rate		Expiration Date
Secured lines of credit (1)		$	422			$	0			$	1,526			$	1,948			Variable, 2.71% to 3.63%		June 30, 2011
Secured line of credit			35				0				5,738				5,773			Variable, 2.07%		December 31, 2011
Fixed rate loans			486				0				0				486			5.42% to 5.84%		2012 to 2013
Accrued interest			3				0				0				3
		$	946			$	0			$	7,264			$	8,210

 

(1)

Under these lines of credit, the facility amount available between January 1 through June 30, 2011 ranged from €1,150 to €1,350 (or approximately $1,660 to $1,948). These lines of credit have been renewed until December 31, 2011 with a facility amount available between July 1 through December 31, 2011 of €1,000 (or approximately $1,443).

Interest expense of $71,000 and $68,000 was incurred on all bank loans and lines of credit during the six months ended June 30, 2011 and 2010, respectively. Interest expense of $56,000 and $28,000 was incurred on all bank loans and lines of credit during the three months ended June 30, 2011 and 2010, respectively.

No other material capital commitments existed at June 30, 2011. Depending on our future growth rate, funds may be required by our operating activities. With continued use of our revolving credit facilities, existing cash balances and internally generated funds, we believe our present and currently anticipated sources of capital (including asset based financing) are sufficient to sustain our anticipated capital needs for the remainder of 2011. At June 30, 2011, we were in compliance with all relevant covenants under our credit facilities.

Our working capital decreased $22,784,000 to $179,454,000 at June 30, 2011 from $202,238,000 at December 31, 2010. Working capital decreased during the six months ended June 30, 2011 mainly due to decreases in investments available for sale and cash and cash equivalents and increases in bank lines of credit and trade accounts payable, offset by increases in inventories and accounts receivable.

Off-Balance Sheet Arrangements

We did not enter into any off-balance sheet arrangements during the six and three months ended June 30, 2011 or 2010, nor did we have any off-balance sheet arrangements outstanding at June 30, 2011 or 2010.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from the information previously reported under Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

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Item 4.

Controls and Procedures

Disclosure Controls and Procedures

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s President and Chief Executive Officer and Vice President of Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (“Exchange Act”)) as of June 30, 2011, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s President and Chief Executive Officer along with the Company’s Vice President of Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of June 30, 2011 are effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the S.E.C.’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

No changes in the Company’s internal control over financial reporting were identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) or 15d-15(d) during the three months ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

The Company is, from time to time, a party to litigation which arises in the normal course of its business operations. The Company does not believe that it is presently a party to litigation which will have a material adverse effect on its business or operations.

 

Item 1A.

Risk Factors

There have been no material changes from the information previously reported under Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which Item 1A is hereby incorporated by reference.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the second quarter of 2011, the Company did not repurchase any shares of K•Swiss Class A Common Stock. $70,000,000 remains available for repurchase under the Company’s repurchase program.

 

Item 3.

Defaults Upon Senior Securities

None.

 

Item 4.

(Removed and Reserved)

 

Item 5.

Other Information

None.

 

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Item 6.

Exhibits

 

3.1		Second Amended and Restated Bylaws of K•Swiss Inc. (incorporated by reference to exhibit 3.1 to the Registrant’s Form 8-K filed with the S.E.C. on March 27, 2009)
3.2		Amended and Restated Certificate of Incorporation of K•Swiss Inc. (incorporated by reference to exhibit 3.2 to the Registrant’s Form 10-K for fiscal year ended December 31, 2004)
4.1		Certificate of Designations of Class A Common Stock of K•Swiss Inc. (incorporated by reference to exhibit 3.2 to the Registrant’s Form S-1 Registration Statement No. 33-34369)
4.2		Certificate of Designations of Class B Common Stock of K•Swiss Inc. (incorporated by reference to exhibit 3.3 to the Registrant’s Form S-1 Registration Statement No. 33-34369)
4.3		Specimen K•Swiss Inc. Class A Common Stock Certificate (incorporated by reference to exhibit 4.1 to the Registrant’s Form S-1 Registration Statement No. 33-34369)
4.4		Specimen K•Swiss Inc. Class B Common Stock Certificate (incorporated by reference to exhibit 4.2 to the Registrant’s Form S-1 Registration Statement No. 33-34369)
10.1		K•Swiss Inc. 1990 Stock Incentive Plan, as amended through October 28, 2002 (incorporated by reference to exhibit 10.1 to the Registrant’s Form 10-K for the year ended December 31, 2002)
10.2		Form of Amendment No. 1 to K•Swiss Inc. Employee Stock Option Agreement Pursuant to the 1990 Stock Incentive Plan (incorporated by reference to exhibit 10.2 to the Registrant’s Form 10-K for the year ended December 31, 2002)
10.3		K•Swiss Inc. 1999 Stock Incentive Plan, as amended through October 26, 2004 (incorporated by reference to exhibit 4.1 to the Registrant’s Form S-8 filed with the S.E.C. on February 23, 2005)
10.4		Form of Amendment No. 1 to K•Swiss Inc. Employee Stock Option Agreement Pursuant to the 1999 Stock Incentive Plan (incorporated by reference to exhibit 10.4 to the Registrant’s Form 10-K for the year ended December 31, 2002)
10.5		K•Swiss Inc. 2009 Stock Incentive Plan (incorporated by reference to exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 filed with the S.E.C. on May 22, 2009)
10.6		K•Swiss Inc. Employee Stock Option Agreement (Officers) Pursuant to the 2009 Stock Incentive Plan (incorporated by reference to exhibit 10.2 to the Registrant’s Form 8-K filed with the S.E.C. on May 22, 2009)
10.7		K•Swiss Inc. Non-Employee Director Stock Option Agreement Pursuant to the 2009 Stock Incentive Plan (incorporated by reference to exhibit 10.3 to the Registrant’s Form 8-K filed with the S.E.C. on May 22, 2009)
10.8		K•Swiss Inc. Profit Sharing Plan, as amended (incorporated by reference to exhibit 10.3 to the Registrant’s Form S-1 Registration Statement No. 33-34369)
10.9		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan (incorporated by reference to exhibit 10.35 to the Registrant’s Form 10-K for the year ended December 31, 1993)
10.10		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated May 26, 1994 (incorporated by reference to exhibit 10.32 to the Registrant’s Form 10-K for the year ended December 31, 1994)
10.11		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated January 1, 2000 (incorporated by reference to exhibit 10.30 to the Registrant’s Form 10-K for the year ended December 31, 1999)
10.12		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated January 23, 2002 (incorporated by reference to exhibit 10 to the Registrant’s Form 10-Q for the quarter ended March 31, 2002)
10.13		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated January 10, 2003 (incorporated by reference

 

27

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		to exhibit 10.23 to the Registrant’s Form 10-Q for the quarter ended June 30, 2003)
10.14		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated October 9, 2003 (incorporated by reference to exhibit 10.11 to the Registrant’s Form 10-Q for the quarter ended June 30, 2004)
10.15		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated May 23, 2005 (incorporated by reference to exhibit 10.12 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005)
10.16		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated June 1, 2005 (incorporated by reference to exhibit 10.13 to the Registrant’s Form 10-Q for the quarter ended June 30, 2005)
10.17		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated January 1, 2007 (incorporated by reference to exhibit 10.14 to the Registrant’s Form 10-Q for the quarter ended March 31, 2007)
10.18		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated December 31, 2007 (incorporated by reference to exhibit 10.15 to the Registrant’s Form 10-K for the year ended December 31, 2007)
10.19		Amendment to K•Swiss Inc. 401(k) and Profit Sharing Plan dated August 1, 2009 (incorporated by reference to exhibit 10.19 to the Registrant’s Form 10-Q for the quarter ended September 30, 2009)
10.20		Form of Indemnity Agreement entered into by and between K•Swiss Inc. and directors (incorporated by reference to exhibit 10.4 to the Registrant’s Form S-1 Registration Statement No. 33-34369)
10.21		Employment Agreement between the Registrant and Steven B. Nichols dated as of December 22, 2010 (incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the S.E.C. on December 23, 2010)
10.22		Lease Agreement dated March 11, 1997 by and between K•Swiss Inc. and Space Center Mira Loma, Inc. (incorporated by reference to exhibit 10 to the Registrant’s Form 10-Q for the quarter ended March 31, 1997)
10.23		Amendment No. 2 to Lease Agreement entered into on March 11, 1997 between K•Swiss Inc. and Space Center Mira Loma, Inc. dated July 1, 2008 (incorporated by reference to exhibit 10.19 to the Registrant’s Form 10-Q for the quarter ended June 30, 2008)
10.24		Loan Agreement dated June 30, 2010, between the K•Swiss Inc. and Bank of America, N.A. (incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the S.E.C. on July 2, 2010)
10.25		First Amendment to Loan Agreement dated April 18, 2011 between K•Swiss Inc., K•Swiss Sales Corp. and Bank of America, N.A. (incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the S.E.C. on April 21, 2011)
10.26		K•Swiss Inc. Deferred Compensation Plan, Master Plan Document (incorporated by reference to exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended March 31, 1998)
10.27		K•Swiss Inc. Deferred Compensation Plan, Master Trust Agreement (incorporated by reference to exhibit 10.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 1998)
10.28		K•Swiss Inc. Directors’ Deferred Compensation Plan effective December 31, 2007 (incorporated by reference to exhibit 10.24 to the Registrant’s Form 10-K for the year ended December 31, 2007)
10.29		Share Purchase and Shareholders’ Rights Agreement, dated as of May 16, 2008 by and among Christophe Mortemousque, Palladium SAS and K•Swiss Inc. (incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the S.E.C. on May 22, 2008)
10.30		Assignment and Assumption Agreement, dated as of March 28, 2008, by and between Palladium SAS and K•Swiss Inc. (incorporated by reference to exhibit 10.2 to the Registrant’s Form 8-K filed with the S.E.C. on May 22, 2008)

 

28

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10.31		Amendment No. 1 to Share Purchase and Shareholders’ Rights Agreement, dated June 2, 2009 by and among Christophe Mortemousque, Palladium SAS and K•Swiss Inc. (incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the S.E.C. on June 4, 2009)
10.32		Amendment No. 2 to Share Purchase and Shareholders’ Rights Agreement, dated May 1, 2010 by and among Christophe Mortemousque, Palladium SAS and K•Swiss Inc. (incorporated by reference to exhibit 10.35 to the Registrant’s Form 10-Q for the quarter ended March 31, 2010)
14.1		K•Swiss Inc. Code of Ethics for the Chief Executive Officer, Senior Financial Officers and Board of Directors (incorporated by reference to exhibit 14 to the Registrant’s Form 10-K for the year ended December 31, 2003)
14.2		K•Swiss Inc. Code of Ethics for Directors, Officers and Employees (incorporated by reference to exhibit 14.2 to the Registrant’s Form 10-Q for the quarter ended March 31, 2004)
31.1		Certification of President and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14
31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14
32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

*

Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.

 

29

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

						K•Swiss Inc.
Date: August 3, 2011						By:		/s/ George Powlick
								George Powlick, Vice President Finance, Chief Administrative Officer, Chief Financial Officer and Secretary

 

30

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EXHIBIT INDEX

Exhibit

 

31.1		Certification of President and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14
31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14
32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

 

*

Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.