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EX-32 - EXHIBIT 32 - K SWISS INCex32.htm
EX-31.1 - EXHIBIT 31.1 - K SWISS INCex31-1.htm
EX-31.2 - EXHIBIT 31.2 - K SWISS INCex31-2.htm
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, 2012    
 
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 1, 2012:
Class A
Class B
27,561,304
8,039,524
 
 
1

 
 
PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
K•SWISS INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(Unaudited)
 
   
June 30,
2012
   
December 31,
2011
 
ASSETS
         
CURRENT ASSETS
           
Cash and cash equivalents
  $ 41,138     $ 28,701  
Restricted cash and cash equivalents and restricted investments available for sale (Note 3)
    750       22,602  
Investments available for sale (Note 4)
    0       2,057  
Accounts receivable, less allowance for doubtful accounts of $1,477 and $1,678 at June 30, 2012 and December 31, 2011, respectively
    31,294       31,449  
Inventories, net
    74,645       90,380  
Prepaid expenses and other current assets
    3,271       4,927  
Income taxes receivable (Note 9)
    0       770  
Total current assets
    151,098       180,886  
PROPERTY, PLANT AND EQUIPMENT, net (Note 10)
    18,479       19,593  
OTHER ASSETS
               
Intangible assets (Note 5)
    11,433       11,482  
Deferred income taxes (Note 9)
    2,659       2,914  
Other
    4,882       4,736  
Total other assets
    18,974       19,132  
Total assets
  $ 188,551     $ 219,611  
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
CURRENT LIABILITIES
               
Bank lines of credit (Note 7)
  $ 1,539     $ 9,716  
Current portion of long-term debt (Note 7)
    152       250  
Current portion of long-term capital leases (Note 7)
    61       0  
Trade accounts payable
    15,523       18,101  
Accrued income taxes payable
    931       372  
Current portion of contingent purchase price (Note 12)
    3,702       0  
Accrued liabilities
    10,721       13,500  
Total current liabilities
    32,629       41,939  
OTHER LIABILITIES
               
Long-term debt (Note 7)
    0       148  
Long-term capital leases (Note 7)
    84       0  
Contingent purchase price (Notes 12 and 13)
    0       3,739  
Other liabilities
    8,334       7,816  
Total other liabilities
    8,418       11,703  
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; 29,982,921 shares issued, 27,561,304 shares outstanding and 2,421,617 shares held in treasury at June 30, 2012 and 29,982,254 shares issued, 27,560,637 shares outstanding and 2,421,617 shares held in treasury at December 31, 2011
    300       300  
Class B, convertible - authorized 18,000,000 shares of $0.01 par value; 8,039,524 shares issued and outstanding at June 30, 2012 and December 31, 2011
    80       80  
Additional paid-in capital
    71,621       70,975  
Treasury Stock
    (58,190 )     (58,190 )
Retained earnings
    131,366       149,703  
Accumulated other comprehensive earnings:
               
Foreign currency translation
    1,221       2,288  
Net unrealized gain on hedge derivatives (Note 6)
    1,106       811  
Net unrealized gain on investments available for sale and restricted investments available for sale (Notes 3 and 4)
    0       2  
Total stockholders’ equity
    147,504       165,969  
Total liabilities and stockholders’ equity
  $ 188,551     $ 219,611  
 
The accompanying notes are an integral part of these statements.
 
 
2

 
 
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,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues (Note 10)
  $ 114,070     $ 137,738     $ 44,752     $ 65,297  
Cost of goods sold
    74,268       86,782       31,207       42,863  
Gross profit
    39,802       50,956       13,545       22,434  
Selling, general and administrative expenses
    56,226       78,263       24,863       38,710  
Operating loss (Note 10)
    (16,424 )     (27,307 )     (11,318 )     (16,276 )
Other income (Note 11)
    0       3,000       0       0  
Interest (expense)/income, net
    (43 )     (147 )     652       (86 )
Loss before income taxes and discontinued operations
    (16,467 )     (24,454 )     (10,666 )     (16,362 )
Income tax expense (Note 9)
    1,870       1,562       965       1,038  
Loss from continuing operations
    (18,337 )     (26,016 )     (11,631 )     (17,400 )
Loss from discontinued operations, less applicable income taxes of $0 and $0 for the six and three months ended June 30, 2011, respectively (Note 13)
    0       (3,852 )     0       (2,626 )
Net Loss
  $ (18,337 )   $ (29,868 )   $ (11,631 )   $ (20,026 )
                                 
Loss per common share (Note 2)
                               
Basic:
                               
Loss from continuing operations
  $ (0.52 )   $ (0.73 )   $ (0.33 )   $ (0.49 )
Loss from discontinued operations
    (0.00 )     (0.11 )     (0.00 )     (0.07 )
Net Loss
  $ (0.52 )   $ (0.84 )   $ (0.33 )   $ (0.56 )
Diluted:
                               
Loss from continuing operations
  $ (0.52 )   $ (0.73 )   $ (0.33 )   $ (0.49 )
Loss from discontinued operations
    (0.00 )     (0.11 )     (0.00 )     (0.07 )
Net Loss
  $ (0.52 )   $ (0.84 )   $ (0.33 )   $ (0.56 )
                                 
Weighted average number of shares outstanding (Note 2)
                               
Basic
    35,601       35,433       35,601       35,475  
Diluted
    35,601       35,433       35,601       35,475  
                                 
Dividends declared per common share
  $ 0     $ 0     $ 0     $ 0  
                                 
Net Loss
  $ (18,337 )   $ (29,868 )   $ (11,631 )   $ (20,026 )
Other Comprehensive (Loss)/Earnings, net of tax:
                               
Foreign currency translation adjustments, net of income taxes of $0 and $0 for the six months ended June 30, 2012 and 2011, respectively, and net of income taxes of $0 and $0 for the three months ended June 30, 2012 and 2011, respectively
    (1,067 )     3,336       (2,568 )     1,005  
Change in deferred gain/(loss) on hedge derivatives, net of income taxes of $0 and $0 for the six months ended June 30, 2012 and 2011, respectively, and net of income taxes of $0 and $0 for the three months ended June 30, 2012 and 2011, respectively
    295       (779 )     842       187  
Change in deferred loss on investments available for sale and restricted investments available for sale, net of income tax benefit of $(1) and $(30) for the six months ended June 30, 2012 and 2011, respectively, and net of income tax benefit of $(1) and $(16) for the three months ended June 30, 2012 and 2011, respectively
    (2 )     (58 )     (1 )     (31 )
Comprehensive Loss
  $ (19,111 )   $ (27,369 )   $ (13,358 )   $ (18,865 )
 
The accompanying notes are an integral part of these statements.
 
 
3

 
 
K•SWISS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
 
   
Six Months Ended
June 30,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss from continuing operations
  $ (18,337 )   $ (26,016 )
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
               
Depreciation/amortization
    1,842       1,796  
Change in contingent purchase price
    (37 )     459  
Net loss on disposal of property, plant and equipment
    25       43  
Deferred income taxes
    196       (787 )
Stock-based compensation
    646       1,006  
Decrease/(Increase) in accounts receivable
    108       (16,248 )
Decrease/(Increase) in inventories
    16,711       (34,503 )
Decrease in income taxes receivable
    770       770  
Decrease in prepaid expenses and other assets
    939       805  
(Decrease)/Increase in accounts payable and accrued liabilities
    (4,187 )     10,012  
Net cash used in operating activities from continuing operations
    (1,324 )     (62,663 )
Net cash used in discontinued operations
    0       (2,766 )
Net cash used in operating activities
    (1,324 )     (65,429 )
                 
Cash flows from investing activities:
               
Change in restricted cash and cash equivalents
    12,699       462  
Purchase of investments available for sale and restricted investments available for sale
    0       (6,310 )
Proceeds from the maturity or sale of available for sale securities and restricted investments available for sale
    11,028       53,416  
Purchase of property, plant and equipment
    (781 )     (719 )
Proceeds from disposal of property, plant and equipment
    0       31  
Net cash provided by investing activities
    22,946       46,880  
                 
Cash flows from financing activities:
               
Borrowings under bank lines of credit and capital leases
    9,818       22,279  
Repayments on bank lines of credit, long-term debt and capital leases
    (17,952 )     (11,480 )
Proceeds from stock options exercised
    0       920  
Net cash (used in)/provided by financing activities
    (8,134 )     11,719  
                 
Effect of exchange rate changes on cash
    (1,051 )     2,851  
                 
Net increase/(decrease) in cash and cash equivalents
    12,437       (3,979 )
                 
Cash and cash equivalents at beginning of period
    28,701       49,164  
                 
Cash and cash equivalents at end of period
  $ 41,138     $ 45,185  
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for:
               
Interest
  $ 115     $ 77  
Income taxes
  $ 502     $ 328  
 
The accompanying notes are an integral part of these statements.
 
 
4

 
 
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, 2012 and the results of its operations and its cash flows for the six and three months ended June 30, 2012 and 2011 have been included for the periods presented.  The results of operations and cash flows for the six and three months ended June 30, 2012 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, 2011 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, 2011, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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,
 
   
2012
   
2011
   
2012
   
2011
 
   
Shares
   
Per
Share
Amount
   
Shares
   
Per
Share
Amount
   
Shares
   
Per
Share
Amount
   
Shares
   
Per
Share
Amount
 
Basic EPS
    35,601     $ (0.52 )     35,433     $ (0.84 )     35,601     $ (0.33 )     35,475     $ (0.56 )
Effect of Dilutive Stock Options
    0       0.00       0       0.00       0       0.00       0       0.00  
Diluted EPS
    35,601     $ (0.52 )     35,433     $ (0.84 )     35,601     $ (0.33 )     35,475     $ (0.56 )
 
Because the Company had a net loss for the six and three months ended June 30, 2012 and 2011, the number of diluted shares is equal to the number of basic shares at June 30, 2012 and 2011. Outstanding stock options would have had an anti-dilutive effect on diluted EPS for the six and three months ended June 30, 2012 and 2011. Outstanding stock options with either exercise prices or unrecognized compensation cost per share 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,
   
2012
 
2011
 
2012
 
2011
Options to purchase shares of common stock
  3,869   1,160   3,869   1,160
Exercise prices
  $2.76 to $34.75   $11.52 to $34.75   $2.76 to $34.75   $11.52 to $34.75
Expiration dates
 
July 2012 to June 2022
 
May 2012 to April 2021
 
July 2012 to June 2022
 
May 2012 to April 2021

 
 
5

 

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

At June 30, 2012, the Company collateralized certain operational bank accounts at Bank of America and at December 31, 2011, the Company collateralized its Bank of America line of credit with the following (in thousands):
 
   
June 30,
2012
   
December 31,
2011
 
Restricted cash and cash equivalents
  $ 750     $ 13,449  
Restricted investments available for sale:
               
U.S. Treasury Notes
    0       5,007  
Corporate Notes and Bonds
    0       4,062  
Accrued interest income
    0       84  
Total restricted investments available for sale
    0       9,153  
Total restricted cash and cash equivalents and restricted investments available for sale
  $ 750     $ 22,602  
 
The restricted investments were classified as available for sale and were stated at fair value. The Company capitalized any premiums paid or discounts received and amortized the premiums or accreted the discounts on a straight-line basis over the remaining term of the security. Gross unrealized holding gains and losses were as follows (in thousands):
 
   
June 30, 2011
   
Gross unrealized holding gains
  $ 36    
Gross unrealized holding losses
    4    
 
The change in comprehensive income was as follows (in thousands):
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
(Decrease)/increase in comprehensive income
  $ (3 )   $ (13 )   $ (1 )   $ 2  
 
The Company received proceeds from the sale of restricted investments available for sale and realized gain on sale as follows (in thousands):
 
   
Six and Three
Months Ended
June 30, 2012
   
Proceeds from sale of restricted investments
  $ 2,015    
Realized gain on sale of restricted investments
    3    

There were no sales of restricted investments available for sale during the six and three months ended June 30, 2011.  Realized gains and losses are recognized using the actual cost of the investment.

4.   Investments Available for Sale

The Company’s investments were classified as available for sale and stated at fair value and were as follows (in thousands):
 
   
December 31,
2011
 
Corporate Notes and Bonds
  $ 2,024  
Accrued interest income
    33  
Total investments available for sale
  $ 2,057  
 
 
6

 

The Company capitalized any premiums paid or discounts received and amortized the premiums or accreted the discounts on a straight-line basis over the remaining term of the security.  Gross unrealized holding gains and losses were as follows (in thousands):
 
   
June 30,
2011
 
Gross unrealized holding gains
  $ 24  
Gross unrealized holding losses
    2  
 
The change in comprehensive income was as follows (in thousands):
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Increase/(decrease) in comprehensive income
  $ 2     $ (45 )   $ 0     $ (33 )
 
The Company received proceeds from the sale of investments available for sale and realized gain on sale as follows (in thousands):
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Proceeds from sale of investments
  $ 1,013     $ 23,812     $ 0     $ 12,853  
Realized gain on sale of investments
    0       12       0       6  
 
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,
2012
   
December 31,
2011
 
Trademarks
  $ 12,520     $ 12,569  
Less accumulated amortization
    (1,087 )     (1,087 )
Total intangible assets
  $ 11,433     $ 11,482  
 
The change in the carrying amount of intangible assets during the six and three months ended June 30, 2012 was as follows (in thousands):
 
   
Six Months Ended
June 30, 2012
   
Three Months Ended
June 30, 2012
 
Beginning Balance
  $ 11,482     $ 11,547  
Foreign currency translation effects
    (49 )     (114 )
Ending Balance
  $ 11,433     $ 11,433  
 
The Company performed the annual reassessment and impairment test as of October 1, 2011 of its Palladium intangible assets related to trademarks and determined there was no impairment of its intangible assets. See the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The Company does not believe that a triggering event has occurred through June 30, 2012 to require an updated impairment test.

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 and between the Euro and the Pound Sterling.  In 2012 and 2011, 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.
 
 
7

 

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.

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, 2012, forward foreign exchange contracts with a notional value of $24,125,000 were outstanding to exchange various currencies with maturities ranging from July 2012 to March 2013, to sell the equivalent of approximately $3,825,000 in foreign currencies at contracted rates and to buy approximately $20,300,000 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, 2012, 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  
June 30,
2012
   
December 31,
2011
  Balance Sheet  
June 30,
2012
   
December 31,
2011
 
 
Location
 
Fair Value
   
Fair Value
 
Location
 
Fair Value
   
Fair Value
 
Derivatives Designated as Hedging Instruments
                           
Foreign exchange contracts
Prepaid
expenses and
other current
assets
  $ 581     $ 1,321  
Accrued
liabilities
  $ 249     $ 306  
 
The effect of the Company’s derivatives on its Consolidated Statements of Earnings/Loss for the six months ended June 30, 2012 and 2011 were as follows (in thousands):
 
Derivatives in  
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings
(“OCE”) on Derivative
(Effective Portion)
 
Location of
Gain/(Loss)
Reclassified
from OCE
 
Amount of Gain/(Loss)
Reclassified from OCE
into Income (Effective
Portion)
  Location of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
 
Amount of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
 
Cash Flow
Hedging
  Six Months Ended
June 30,
 
into Income
(Effective
  Six Months Ended
June 30,
 
Excluded from
Effectiveness
  Six Months Ended
June 30,
 
Relationships   2012     2011   Portion)   2012     2011   Testing)   2012     2011  
Foreign exchange contracts
  $ 295     $ (779 )
Cost of goods sold
  $ (537 )   $ (124 )
Selling, general
and administrative expenses
  $ 52     $ (25 )
 
 
8

 
 
The effect of the Company’s derivatives on its Consolidated Statements of Earnings/Loss for the three months ended June 30, 2012 and 2011 were as follows (in thousands):
 
Derivatives in  
Amount of Gain/(Loss)
Recognized in Other
Comprehensive Earnings
(“OCE”) on Derivative
(Effective Portion)
 
Location of
Gain/(Loss)
Reclassified
from OCE
 
Amount of Gain/(Loss)
Reclassified from OCE
into Income (Effective
Portion)
  Location of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
 
Amount of Gain/(Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
 
Cash Flow
Hedging
  Three Months Ended
June 30,
 
into Income
(Effective
  Three Months Ended
June 30,
 
Excluded from
Effectiveness
  Three Months Ended
June 30,
 
Relationships   2012     2011   Portion)   2012     2011   Testing)   2012     2011  
Foreign exchange contracts
  $ 842     $ 187  
Cost of goods sold
  $ (232 )   $ (409 )
Selling, general
and administrative expenses
  $ 10     $ (19 )
 
7.   Bank Lines of Credit and Other Debt

The Company’s bank lines of credit, long-term debt, long-term capital leases and outstanding letters of credit were as follows (in thousands):
 
   
June 30,
2012
   
December 31,
2011
 
Bank lines of credit
  $ 1,539     $ 9,716  
Long-term debt
    152       398  
Long-term capital leases
    145       0  
Total bank lines of credit, long-term debt and long-term capital leases
  $ 1,836     $ 10,114  
Outstanding letters of credit, not included above
  $ 294     $ 280  
 
Bank Lines of Credit

Outstanding bank lines of credit were as follows (dollars and Euros in thousands):
 
   
June 30,
2012
   
December 31,
2011
 
Secured Variable Rate Lines of Credit with Financial Institutions:
           
Bank line of credit of $35,000 at an interest rate of 4.50% at June 30, 2012, due April 23, 2016 (1)
  $ 0     $ 0  
Bank line of credit of $21,000 at an interest rate of 2.69% at December 31, 2011, due July 1, 2013 (2)
    0       9,716  
Facility of €4,000, or approximately $5,064, at June 30, 2012, at an interest rate of 1.34%, due December 31, 2012 and approximately $5,182, at December 31, 2011, at an interest rate of 2.13%, due December 31, 2012 (3)
    1,032       0  
Facilities of €1,000, or approximately $1,266, at June 30, 2012, at interest rates ranging from 1.85% to 2.83%, due June 30, 2012 and approximately $1,296, at December 31, 2011, at interest rates ranging from 2.56% to 3.12%, due December 31, 2011 (3) (4)
    507       0  
Total bank lines of credit
  $ 1,539     $ 9,716  
Outstanding letters of credit, not included above
  $ 294     $ 280  

(1)
Secured by all assets of K•Swiss Inc., K•Swiss Sales Corp. and K•Swiss Direct Inc. The amount available to borrow on this line of credit at June 30, 2012 was $20,530. See further discussion below.
(2)
Fully secured by cash (or the Company’s restricted cash and cash equivalents and restricted investments available for sale, see Note 3). This facility was fully paid off on April 25, 2012. See further discussion below.
(3)
These lines of credit are secured by Palladium’s assets including accounts receivable and/or intellectual property rights (i.e. trademarks), as well as Palladium common stock.
(4)
These lines of credit are renewable every six months. Subsequent to June 30, 2012, these lines of credit were renewed until December 31, 2012 and the amount available to borrow will be €1,200 (or approximately $1,519).

 
 
9

 
 
On April 25, 2012, the Company and two of its subsidiaries, K•Swiss Sales Corp. and K•Swiss Direct Inc. (collectively with the Company, the “Borrowers”) entered into a Credit Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association and Wells Fargo Capital Finance, LLC (collectively as “Wells Fargo” or the “Lenders”).  The Credit Facility consists of revolving loans of up to $35,000,000 (subject to the limitations described below) available in U.S. Dollars, Euro and Pound Sterling, and up to $5,000,000 of which may be drawn in the form of letters of credit.  The Credit Facility matures April 23, 2016.

Loans made under the Credit Facility bear interest at:

 
(1)
the greatest of (i) the Federal Funds Rate plus ½%, (ii) the LIBOR Rate plus 1%, and (iii) Wells Fargo’s prime rate (the “Base Rate”); or
 
(2)
the rate per annum appearing on Bloomberg L.P.’s Page BBAM1/Official BBA USD Dollar Libor Fixings two Business Days prior to the commencement of the requested Interest Period, for a term and in an amount comparable to the interest period and the amount requested (the “LIBOR Rate”); or
 
(3)
for loans made in Euros or Pound Sterling, the LIBOR Rate;

plus, in each case, the “Applicable Margin.”

If the average use of the Credit Facility is less than 50% of the Maximum Revolver Amount (as defined below) during the previous fiscal quarter, the Applicable Margin is 1.25% for Base Rate loans, 2.25% for U.S. Dollar LIBOR Rate loans, and 3.00% for loans made in Euros or Pound Sterling.  If the average use of the Credit Facility is more than 50% of the Maximum Revolver Amount, the Applicable Margin is 1.50% for Base Rate loans, 2.50% for U.S. Dollar LIBOR Rate loans, and 3.25% for loans made in Euros or Pound Sterling.

The “Maximum Revolver Amount” is $35,000,000; provided that the amount of revolving loans and letters of credit under the Credit Facility may not exceed (a) 85% of Eligible Accounts (as defined in the Credit Facility) plus the lesser of (i) 85% of Eligible Accounts that are Extended Pay Accounts (as defined in the Credit Facility) and (ii) $1,500,000 (minus any dilution reserve), plus (b) the lesser of (i) $20,000,000 or (ii) an amount equal to (x) the lesser of (1) 65% of Eligible Inventory or (2) 85% of Net Recovery Percentage (each as defined in the Credit Facility), minus (y) a reserve of $3,500,000 and any other reserves established by Wells Fargo in its permitted discretion.

The financial covenants contained in the Credit Facility are as follows (in each case, with respect to the Company and its subsidiaries on a consolidated basis):

 
·
The Company must achieve Minimum EBITDA specified in the Credit Facility for each month through November 30, 2013.
 
·
The Company must maintain a Fixed Charge Coverage Ratio for each twelve month fiscal period, commencing for the fiscal period ending on December 31, 2013, of not less than 1.0:1.0.
 
·
The Company must limit Capital Expenditures for each fiscal year to $2,400,000, except with the Lender’s consent.

These financial covenants apply on the date that Excess Availability (as defined in the Credit Facility) has fallen below 20% of the Maximum Revolver Amount and ends on the date that Excess Availability has been greater than 20% of the Maximum Revolver Amount for any period of thirty consecutive days thereafter.

The obligations of the Borrowers under the Credit Facility are guaranteed by four of the Company’s other domestic subsidiaries (the “Guarantors”) pursuant to a Guaranty and Security Agreement, dated April 25, 2012 (the “Guaranty and Security Agreement”).  Pursuant to the Guaranty and Security Agreement, the Borrowers and the Guarantors pledged substantially all of their respective assets as collateral security for the loans to be made pursuant to the Credit Facility.  The foreign subsidiaries of the Borrowers did not guaranty the Credit Facility or pledge any of their directly-owned assets.  The Company has also granted a security interest in its real property to the Lenders, consisting of a deed of trust securing its corporate headquarters building.

The Credit Facility contains other certain affirmative and negative covenants, as well as event of default provisions.  The affirmative covenants include certain reporting requirements, maintenance of properties, payment of taxes and insurance, compliance with laws, environmental compliance, and other provisions customary in such agreements.  Negative covenants limit or restrict, among other things, dividends, secured and unsecured indebtedness, mergers and fundamental changes, asset sales, investments and acquisitions, liens and encumbrances, transactions with affiliates, redemption distributions to former employees, officers or directors, and other matters customarily restricted in such agreements.
 
 
10

 

Wells Fargo and its affiliates are permitted to make loans to, issue letters of credit, accept deposits, provide Bank Products (as defined in the Credit Facility) to, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with the Company, its subsidiaries and affiliates.

At June 30, 2012, the Company was in compliance with its covenants under the Credit Facility.

On April 25, 2012, the Company drew down approximately $9,924,000 under the Credit Facility to repay in full all indebtedness outstanding under its previous line of credit with Bank of America and to pay fees and expenses related to the Credit Facility. The Company intends to utilize the Credit Facility for working capital, to issue letters of credit in connection with purchases of inventory and other general corporate purposes.

Long-term Debt

Long-term debt outstanding were as follows (dollars and Euros in thousands):
 
   
June 30,
2012
   
December 31,
2011
 
Secured Fixed Rate Term Loans with Financial Institutions of €1,100, or approximately $1,393, at June 30, 2012, with interest rates ranging from 5.42% to 5.60%, due between July 2012 and February 2013 and €1,320, or approximately $1,710, at December 31, 2011, with interest rates ranging from 5.42% to 5.84%, due between February 2012 and February 2013 (1)
  $ 151     $ 394  
Accrued interest
    1       4  
Total long-term debt
  $ 152     $ 398  
Current portion of long-term debt
  $ 152     $ 250  
Long-term debt
  $ 0     $ 148  

(1)
These are secured by Palladium’s assets including accounts receivable and/or intellectual property rights (i.e. trademarks), as well as Palladium common stock.
 
Long-term Capital Leases

Long-term capital leases outstanding were as follows (dollars in thousands):
 
   
June 30,
2012
 
Capital leases for information systems, with interest rates ranging from 2.01% to 5.05%, due between June 2014 and December 2016
  $ 145  
Current portion of long-term capital leases
  $ 61  
Long-term capital leases
  $ 84  
Leased property – Information systems, net
  $ 210  
 
Interest expense

Interest expense incurred on the Company’s bank loans, lines of credit and capital leases are as follows (in thousands):
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest expense
  $ 140     $ 71     $ 65     $ 56  

 
 
11

 

8.   Fair Value of Financial Instruments

On January 1, 2012, the Company adopted Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which ensures 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 how to measure and disclose fair value.  The adoption of ASU 2011-04 did not have a material impact on the Company’s financial position and results of operations.  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, current portion of long-term capital leases, accounts payable and accrued liabilities, the carrying amounts approximate fair value due to their short maturities.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis at June 30, 2012 (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)
 
Forward exchange contracts – assets
  $ 581     $ 0     $ 581     $ 0  
Forward exchange contracts – liabilities
    249       0       249       0  
Contingent purchase price (“CPP”) – Palladium
    3,702       0       0       3,702  
 
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.

The Palladium 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.  See Note 12 for further discussion.

During the six and three months ended June 30, 2012 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, 2012.

9.   Income Taxes

Income tax expense was as follows (in thousands):
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Income tax expense
  $ 1,870     $ 1,562     $ 965     $ 1,038  
 
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.
 
 
12

 

The Company can no longer support future profitability sufficient enough to realize its deferred tax assets in the near future and has a valuation allowance of $48,266,000 at June 30, 2012.  At June 30, 2012, the Company had a net deferred tax asset after valuation allowance of $2,659,000 which consisted of U.S. foreign tax credits of $35,000 for the eventual carryback of foreign tax credits to the 2006 tax year as the Company believes it is more-likely-than-not that it will be utilized and foreign net operating losses of $2,624,000 which is related to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period therefore the Company believes it is more-likely-than-not that the loss carryforward will be utilized.  The ultimate realization of this loss carryforward is dependent upon the generation of future taxable income in France during the periods in which those temporary differences become deductible.  This assessment could change in future periods if the Company does not achieve taxable income in France or projections of future taxable income decline.  Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.  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.  If an increase in the valuation allowance in future periods is required, this would result in an increase in the Company’s income tax expense and could materially impact the effective income tax rate in the period recorded.

At June 30, 2012, uncertain tax positions and the related interest, which are included in other liabilities on the Consolidated Balance Sheet, were $7,539,000 and $1,377,000, respectively, all of which would affect the income tax rate if reversed.  Income tax expense related to uncertain tax positions was as follows (in thousands):
 
    Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Income tax expense related to uncertain tax positions
  $ 427     $ 430     $ 168     $ 210  
Interest expense related to uncertain tax positions
    105       122       53       62  
Total income tax expense related to uncertain tax positions
  $ 532     $ 552     $ 221     $ 272  
 
The federal income tax returns for 2006 through 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 Internal Revenue Service (“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 $1,745,000. This issue has been sent to the IRS Appeal’s office for further consideration. The Company does not believe that an additional tax accrual is required at this time.

In January 2012, the Company received a Notice of Proposed Adjustment for the 2008 tax year, which is similar to the one discussed above.  The 2008 proposed adjustment is approximately $251,000.  Interest will be assessed, and at this time it is estimated at approximately $35,000.  This issue has been sent to the IRS Appeal’s office for further consideration.  This will not create any additional financial statement impact due to the available U.S. tax losses that may be carried back from the 2010 tax year to the 2008 tax year.

The Company does not agree with these adjustments and plans to vigorously defend its position.  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.

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.  The following tables summarize information by geographic region of the Company’s footwear segment (in thousands):
 
 
13

 
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues from unrelated entities (1):
                       
United States
  $ 39,560     $ 63,684     $ 18,748     $ 32,404  
EMEA
    44,864       42,724       13,805       19,239  
Other International
    29,646       31,330       12,199       13,654  
Total revenues from unrelated entities
  $ 114,070     $ 137,738     $ 44,752     $ 65,297  
                                 
Inter-geographic revenues:
                               
United States
  $ 3,557     $ 2,564     $ 950     $ 1,316  
EMEA
    26       1,446       12       1,446  
Other International
    66       136       33       37  
Total inter-geographic revenues
  $ 3,649     $ 4,146     $ 995     $ 2,799  
                                 
Total revenues:
                               
United States
  $ 43,117     $ 66,248     $ 19,698     $ 33,720  
EMEA
    44,890       44,170       13,817       20,685  
Other International
    29,712       31,466       12,232       13,691  
Less inter-geographic revenues
    (3,649 )     (4,146 )     (995 )     (2,799 )
Total revenues
  $ 114,070     $ 137,738     $ 44,752     $ 65,297  
                                 
Operating (loss)/profit:
                               
United States
  $ (12,532 )   $ (16,233 )   $ (5,942 )   $ (7,187 )
EMEA
    (1,221 )     (8,857 )     (3,342 )     (6,634 )
Other International
    2,238       5,322       82       1,188  
Less corporate expenses (2)
    (5,771 )     (7,668 )     (2,430 )     (3,687 )
Eliminations
    862       129       314       44  
Total operating loss
  $ (16,424 )   $ (27,307 )   $ (11,318 )   $ (16,276 )
 
 
   
June 30,
2012
   
December 31,
2011
 
Long-lived assets (3):
           
United States
  $ 15,675     $ 16,719  
EMEA
    1,545       1,519  
Other International
    1,259       1,355  
Total long-lived assets
  $ 18,479     $ 19,593  

 
(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, 2012 decreased as a result of decreases in compensation, legal and data processing expenses.  The decrease in compensation expenses, which includes bonus/incentive related expenses and employee recruiting and relocation expenses, resulted from a reduction in salary related expenses, stock option compensation expenses and interest expense related to the Company’s deferred compensation plan which was terminated in October 2011.  The decrease in legal expenses was a result of decreases in expenses incurred to defend the Company’s trademarks.  The decrease in data processing expenses was a result of decreases in on-going maintenance expenses.
 
(3)
Long-lived assets consist of property, plant and equipment, net.

 During the six and three months ended June 30, 2012 and 2011, there were no customers that accounted for more than 10% of revenues.  At June 30, 2012, approximately 12% of accounts receivable was from one customer.  At December 31, 2011, approximately 10% of accounts receivable was from one customer.
 
 
14

 

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.  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 loss of this distributor did not have a significant impact on the Company’s revenues or gross margin.  The Company is in the process of securing another distributor for this region.
 
12.   Palladium Contingent Purchase Price

The change in the CPP for the six and three months ended June 30, 2012 and 2011 is as follows (in thousands):
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Beginning balance
  $ 3,739     $ 3,689     $ 4,397     $ 3,960  
Change in net present value of the CPP
    (37 )     459       (695 )     188  
Ending balance
  $ 3,702     $ 4,148     $ 3,702     $ 4,148  

 
On July 9, 2012, the Company, entered into Amendment No. 3 to the Share Purchase and Shareholders’ Rights Agreement to revise the terms of the remaining future purchase price for Palladium payable in 2013. The future purchase price will be equal to €1,500,000 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. As a result, on July 12, 2012, the Company made a payment of €1,443,000, or $1,767,000 (which is discounted from €1,500,000), which represents approximately one-half of the minimum future purchase price of €3,000,000, prior to this amendment.

13.   Form Athletics

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 and reversed the Form CPP liability of $2,110,000, which is included in the loss from discontinued operations as interest income.  The change in the Form CPP for the six and three months ended June 30, 2011 is as follows (in thousands):
 
   
Six and Three
Months Ended
June 30,
2011
 
Beginning balance
  $ 2,110  
Change in net present value of the Form CPP
    (2,110 )
Ending balance
  $ 0  
 
 
15

 
 
The operations for Form Athletics for the six and three months ended June 30, 2011 were as follows (in thousands):
 
   
Six Months Ended
June 30, 2011
   
Three Months Ended
June 30, 2011
 
Revenues
  $ 424     $ 245  
Cost of goods sold
    347       172  
Gross profit
    77       73  
Selling, general and administrative expenses
    2,350       1,120  
Impairment on intangibles and goodwill
    3,689       3,689  
Operating loss
    (5,962 )     (4,736 )
Interest income, net
    2,110       2,110  
Net loss from discontinued operations
  $ (3,852 )   $ (2,626 )
 
14. Recent Accounting Pronouncements

On January 1, 2012, the Company adopted ASU 2011-05, “Presentation of Comprehensive Income,” which improves the comparability of financial reporting and ensures that U.S. generally accepted accounting principles are aligned with International Accounting Standards.  The adoption of ASU 2011-05 did not have a material impact on the Company’s financial position and results of operations.
 
 
16

 
 
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; concerns relating to our liquidity, including our ability to reduce operating losses and significantly reduce inventory levels; 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 and boots 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; 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.
 
 
17

 

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 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 decreased 17.2% and 31.5% for the six and three months ended June 30, 2012, respectively, from the six and three months ended June 30, 2011, respectively.  Our overall gross profit margin, as a percentage of revenues, decreased to 34.9% and 30.3% for the six and three months ended June 30, 2012, respectively, compared to 37.0% and 34.3% for the six and three months ended June 30, 2011, respectively, as a result of an increase in the level of closeout product as a percentage of revenues and a decrease in royalty income as a result of lower level of sales by one of our significant licensees in 2012.  Our selling, general and administrative expenses decreased to $56,226,000 and $24,863,000 for the six and three months ended June 30, 2012, respectively, from $78,263,000 and $38,710,000 for the six and three months ended June 30, 2011, respectively.  The decrease for the six and three months ended June 30, 2012 was a result of decreases in advertising, compensation and other warehousing expenses.  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.  At June 30, 2012, our total futures orders with start ship dates from July 2012 through December 2012 were $70,283,000, a decrease of 21.8% from June 30, 2011.  Of this amount, domestic futures orders were $21,532,000, a decrease of 41.8%, and international futures orders were $48,751,000, a decrease of 7.8%.  We incurred a net loss for the six months ended June 30, 2012 of $18,337,000, or $0.52 per diluted share, compared to a net loss of $29,868,000, or $0.84 per diluted share for the six months ended June 30, 2011.  We incurred a net loss for the three months ended June 30, 2012 of $11,631,000, or $0.33 per diluted share, compared to a net loss of $20,026,000, or $0.56 per diluted share for the three months ended June 30, 2011.

During the third quarter of 2011, we decided to no longer pursue operating in the Form Athletics line of business, and accordingly Form Athletics is presented as a discontinued operation in the Consolidated Financial Statements.
 
 
18

 
 
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,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of goods sold
    65.1       63.0       69.7       65.7  
Gross profit
    34.9       37.0       30.3       34.3  
Selling, general and administrative expenses
    49.3       56.8       55.6       59.3  
Other income
    0.0       2.1       0.0       0.0  
Interest (expense)/income, net
    (0.1 )     (0.1 )     1.5       (0.1 )
Loss before income taxes and discontinued operations
    (14.5 )     (17.8 )     (23.8 )     (25.1 )
Income tax expense
    1.6       1.1       2.2       1.6  
Loss from discontinued operations, net of income taxes
    0.0       (2.8 )     0.0       (4.0 )
Net loss
    (16.1 )%     (21.7 )%     (26.0 )%     (30.7 )%
 
Revenues

Total revenues decreased 17.2% to $114,070,000 for the six months ended June 30, 2012 from $137,738,000 for the six months ended June 30, 2011 and total revenues decreased 31.5% to $44,752,000 for the three months ended June 30, 2012 from $65,297,000 for the three months ended June 30, 2011.  The breakdown of revenues (dollar amounts in thousands) is as follows:
 
 
Six Months Ended
June 30,
 
Three Months Ended
June 30,
 
2012
 
2011
 
% Change
 
2012
 
2011
 
% Change
Domestic
                         
K•Swiss brand
$ 36,523   $ 61,690   (40.8 )%   $ 17,398   $ 31,612   (45.0 )%
Palladium brand
  3,037     1,994   52.3       1,350     792   70.5  
Total domestic
$ 39,560   $ 63,684   (37.9 )%   $ 18,748   $ 32,404   (42.1 )%
                                   
International
                                 
K•Swiss brand
$ 56,428   $ 59,148   (4.6 )%   $ 21,341   $ 28,449   (25.0 )%
Palladium brand
  18,082     14,906   21.3       4,663     4,444   4.9  
Total international
$ 74,510   $ 74,054   0.6 %   $ 26,004   $ 32,893   (20.9 )%
                                   
Total revenues
$ 114,070   $ 137,738   (17.2 %)   $ 44,752   $ 65,297   (31.5 )%

 
K•Swiss brand revenues decreased to $92,951,000 and $38,739,000 for the six and three months ended June 30, 2012, respectively, from $120,838,000 and $60,061,000 for the six and three months ended June 30, 2011, respectively, a decrease of $27,887,000, or 23.1%, and $21,322,000, or 35.5%, respectively. The decrease in K•Swiss brand domestic and international sales of 45.0% and 25.0%, respectively, for the three months ended June 30, 2012, is directionally consistent with the trends in futures orders at March 31, 2012. The decrease in sales for the six and three months ended June 30, 2012 was the result of a decrease in the volume of footwear sold and a decrease in average wholesale prices per. The volume of footwear sold decreased to 2,840,000 and 1,274,000 pair for the six and three months ended June 30, 2012, respectively, from 3,666,000 and 1,873,000 pair for the six and three months ended June 30, 2011, respectively. The decrease in the volume of footwear sold for the three months ended June 30, 2012 was primarily the result of decreased sales of the performance and lifestyle categories of 39.6% and 25.8%, respectively. The average wholesale price per pair decreased to $28.94 and $26.74 for the six and three months ended June 30, 2012, respectively, from $29.01 and $28.73 for the six and three months ended June 30, 2011, respectively, a decrease of 0.2% and 6.9%, respectively. The decrease in the average wholesale price per pair for the six and three months ended June 30, 2012 is attributable primarily to decreases in the average wholesale prices per pair in the performance category and product mix of sales, which included a higher level of sales of closeout product compared to the six and three months ended June 30, 2011, slightly offset by increases in the average wholesale prices per pair in the lifestyle category.
 
 
19

 
 
Palladium brand revenues increased to $21,119,000 and $6,013,000 for the six and three months ended June 30, 2012, respectively, from $16,900,000 and $5,236,000 for the six and three months ended June 30, 2011, respectively, an increase of $4,219,000, or 25.0%, and $777,000, or 14.8%, respectively.  The increase in Palladium sales for the six and three months ended June 30, 2012 was primarily 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 577,000 and 164,000 pair for the six and three months ended June 30, 2012, from 473,000 and 153,000 pair for the six and three months ended June 30, 2011, respectively, due primarily to an increase in sales in regions other than France, as discussed above, offset by a decrease in sales in France.  The average underlying wholesale price per pair was $36.32 and $36.23 for the six and three months ended June 30, 2012, respectively, compared to $35.35 and $33.85 for the six and three months ended June 30, 2011, respectively, an increase of 2.7% and 7.0%, respectively, attributable primarily to product mix of sales, a higher level of retail and website sales, which yield higher selling prices, and the geographic mix of sales and a decrease in closeout product in France, as a percentage of sales.

Gross Profit Margin

Gross profit margin, as a percentage of revenues, decreased to 34.9% and 30.3% for the six and three months ended June 30, 2012, respectively, from 37.0% and 34.3% for the six and three months ended June 30, 2011, respectively.  K•Swiss brand gross profit margin, as a percentage of revenues, was 29.5% and 25.1% for the six and three months ended June 30, 2012, respectively, a decrease from 33.1% and 32.2% for the six and three months ended June 30, 2011, respectively.  The decrease in K•Swiss brand gross profit margin was a result of an increase in the level of closeout product as a percentage of revenues, slightly offset by a higher level of international sales as a percentage of revenues which generally yield a higher selling price.  Palladium brand gross profit margin, as a percentage of revenues, was 43.7% and 40.7% for the six and three months ended June 30, 2012, respectively, and 42.9% and 34.7% for the six and three months ended June 30, 2011, respectively.  The increase in gross profit margin for the six and three months ended June 30, 2012 is mainly due to product mix, a higher level of retail and website sales, which carry higher gross profit margins.  In addition, contributing to the decline in overall gross profit margin was a decrease in royalty income as a result of lower level of sales by one of our significant licensees in 2012.

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 $7,080,000 and $3,114,000 for the six and three months ended June 30, 2012, respectively, compared to $8,424,000 and $4,275,000 for the six and three months ended June 30, 2011, respectively.

Selling, General and Administrative Expenses

Overall selling, general and administrative expenses decreased to $56,226,000 (49.3% of revenues) and $24,863,000 (55.6% of revenues) for the six and three months ended June 30, 2012, respectively, from $78,263,000 (56.8% of revenues) and $38,710,000 (59.3% of revenues) for the six and three months ended June 30, 2011, respectively.  The decrease for the six and three months ended June 30, 2012 was a result of decreases in advertising, compensation and other warehousing expenses.  Advertising expenses decreased 48.9% and 60.1% for the six and three months ended June 30, 2012, due to an effort to reduce advertising spending to industry averages of approximately 10% of revenues.  Compensation expenses, which includes commissions, bonus/incentive related expenses and employee recruiting and relocation expenses, decreased 19.5% and 22.2% for the six and three months ended June 30, 2012, as a result of a 20% reduction in salary related expenses from the prior year in the US and Europe, a decrease in stock option compensation expenses and a decrease in interest expense related to the Company’s deferred compensation plan which was terminated in October 2011.  Other warehousing expenses, which do not include compensation expenses, decreased 14.3% and 26.7% for the six and three months ended June 30, 2012, respectively, mainly as a result of the decrease in revenues.  Corporate expenses of $5,771,000 and $2,430,000 for the six and three months ended June 30, 2012, respectively, and $7,668,000 and $3,687,000 for the six and three months ended June 30, 2011, 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.  Corporate expenses for the six and three months ended June 30, 2012 decreased as a result of decreases in compensation, legal and data processing expenses.  The decrease in compensation expenses was due to the reasons discussed above.  The decrease in legal expenses was a result of decreases in expenses incurred to defend the Company’s trademarks.  The decrease in data processing expenses was a result of decreases in on-going maintenance expenses.
 
 
20

 
 
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 its contracts, and there was no litigation.  The loss of this distributor did not have a significant impact on our revenues or gross margin.  We are in the process of securing another distributor for this region.

Net interest expense was $43,000 (0.1% of revenues) and net interest income was $652,000 (1.5% of revenues) for the six and three months ended June 30, 2012, respectively, compared to net interest expense of $147,000 (0.1% of revenues) and $86,000 (0.1% of revenues) for the six and three months ended June 30, 2011, respectively.  The decrease in net interest expense for the six months ended June 30, 2012 and the change in net interest income for the three months ended June 30, 2012 was due to the change in fair value of the Palladium CPP, offset by a decrease in interest income earned on cash, restricted cash, restricted investments available for sale and investments available for sale as a result of lower average balances and an increase on interest expense on debt.

Income tax expense was $1,870,000 and $965,000 for the six and three months ended June 30, 2012, respectively, and was $1,562,000 and $1,038,000 for the six and three months ended June 30, 2011, respectively.  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 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.

We can no longer support future profitability sufficient enough to realize our deferred tax assets in the near future and have a valuation allowance of $48,266,000 at June 30, 2012.  At June 30, 2012, we had a net deferred tax asset after valuation allowance of $2,659,000 which consisted of U.S. foreign tax credits of $35,000 for the eventual carryback of foreign tax credits to the 2006 tax year as the Company believes it is more-likely-than-not that it will be utilized and foreign net operating losses of $2,624,000 which is related to the pre-acquisition losses of Palladium, a French company, which has an unlimited carryforward period therefore the Company believes it is more-likely-than-not that the loss carryforward will be utilized.  The ultimate realization of this loss carryforward is dependent upon the generation of future taxable income in France during the periods in which those temporary differences become deductible.  This assessment could change in future periods if we do not achieve taxable income in France or projections of future taxable income decline.  Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time.  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.  If an increase in the valuation allowance in future periods is required, this would result in an increase in our income tax expense and could materially impact the effective income tax rate in the period recorded.
 
 
21

 

At June 30, 2012, uncertain tax positions and the related interest, which are included in other liabilities on the Consolidated Balance Sheet, were $7,539,000 and $1,377,000, respectively, all of which would affect the income tax rate if reversed.  Income tax expense related to uncertain tax positions was as follows (in thousands):
 
   
Six Months Ended
June 30,
   
Three Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Income tax expense related to uncertain tax positions
  $ 427     $ 430     $ 168     $ 210  
Interest expense related to uncertain tax positions
    105       122       53       62  
Total income tax expense related to uncertain tax positions
  $ 532     $ 552     $ 221     $ 272  
 
The federal income tax returns for 2006 through 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 Internal Revenue Service (“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 $1,745,000. This issue has been sent to the IRS Appeal’s office for further consideration. We do not believe that an additional tax accrual is required at this time.

In January 2012, we received a Notice of Proposed Adjustment for the 2008 tax year, which is similar to the one discussed above.  The 2008 proposed adjustment is approximately $251,000.  Interest will be assessed, and at this time it is estimated at approximately $35,000.  This issue has been sent to the IRS Appeal’s office for further consideration.  This will not create any additional financial statement impact due to the available U.S. tax losses that may be carried back from the 2010 tax year to the 2008 tax year.

We do not agree with these adjustments and plan to vigorously defend our position.  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, 2012 was $18,337,000, or $0.52 per diluted share, compared to a net loss of $29,868,000, or $0.84 per diluted share for the six months ended June 30, 2011.  The net loss for the three months ended June 30, 2012 was $11,631,000, or $0.33 per diluted share, compared to a net loss of $20,026,000, or $0.56 per diluted share for the three months ended June 30, 2011.

Futures Orders

At June 30, 2012 and 2011, total futures orders with start ship dates from July 2012 and 2011 through December 2012 and 2011 were approximately $70,283,000 and $89,907,000, respectively, a decrease of 21.8%.  The 21.8% decrease in total futures orders is comprised of a 20.2% decrease in the third quarter 2012 futures orders and a 26.3% decrease in the fourth quarter 2012 futures orders.  At June 30, 2012 and 2011, domestic futures orders with start ship dates from July 2012 and 2011 through December 2012 and 2011 were approximately $21,532,000 and $37,016,000, respectively, a decrease of 41.8%.  At June 30, 2012 and 2011, international futures orders with start ship dates from July 2012 and 2011 through December 2012 and 2011 were approximately $48,751,000 and $52,891,000, respectively, a decrease of 7.8%.  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.

Liquidity and Capital Resources

We experienced net cash used in operating activities from continuing operations of $1,324,000 and $62,663,000 during the six months ended June 30, 2012 and 2011, respectively.  The change in net cash used in operating activities for the six months ended June 30, 2012 was due to the differences in the amounts of changes in inventories and accounts receivables and the decrease in net loss, offset by the differences in the amounts of changes in accounts payable and accrued liabilities.  The change in inventory was due to the timing of sales to customers and purchases from suppliers and starting in 2012, a focus on improving our inventory management.  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.

We had net cash inflows from our investing activities of $22,946,000 and $46,880,000 for the six months ended June 30, 2012 and 2011, respectively.  The change in cash inflows from investment activities was mainly due to the changes in proceeds from the sale or maturity of investments and restricted investments available for sale, offset by the change in restricted cash and cash equivalents and the change in purchase of investments and restricted investments available for sale.  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.  For the six months ended June 30, 2012, the restrictions on a significant amount of cash were released as a result of entering into a new loan facility in April 2012.
 
 
22

 

We had net cash outflows from our financing activities of $8,134,000 for the six months ended June 30, 2012 compared to net cash inflows from our financing activities of approximately $11,719,000 for the six months ended June 30, 2011.  The change in cash flows from financing activities for the six months ended June 30, 2012 compared to the same period of the prior year was due to a decrease in borrowings on our lines of credit and an increase in net repayments on our lines of credit and long-term debt.  For the six months ended June 30, 2012, as a result of entering into a new loan facility in April 2012, we paid off our previous line of credit.

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, 2012, $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 1, 2012 (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.

Our bank lines of credit, long-term debt, long-term capital leases and outstanding letters of credit were as follows (dollars and Euros in thousands):
 
   
June 30,
2012
   
December 31,
2011
 
Bank Lines of Credit – Secured Variable Rate Lines of Credit with Financial Institutions:
           
Bank line of credit of $35,000 at an interest rate of 4.50% at June 30, 2012, due April 23, 2016 (1)
  $ 0     $ 0  
Bank line of credit of $21,000 at an interest rate of 2.69% at December 31, 2011, due July 1, 2013 (2)
    0       9,716  
Facility of €4,000, or approximately $5,064, at June 30, 2012, at an interest rate of 1.34%, due December 31, 2012 and approximately $5,182, at December 31, 2011, at an interest rate of 2.13%, due December 31, 2012 (3)
    1,032       0  
Facilities of €1,000, or approximately $1,266, at June 30, 2012, at interest rates ranging from 1.85% to 2.83%, due June 30, 2012 and approximately $1,296, at December 31, 2011, at interest rates ranging from 2.56% to 3.12%, due December 31, 2011 (3) (4)
    507       0  
Total bank lines of credit
    1,539       9,716  
Secured Fixed Rate Term Loans with Financial Institutions of €1,100, or approximately $1,393, at June 30, 2012, with interest rates ranging from 5.42% to 5.60%, due between July 2012 and February 2013 and €1,320, or approximately $1,710, at December 31, 2011, with interest rates ranging from 5.42% to 5.84%, due between February 2012 and February 2013 (3)
    151       394  
Accrued interest
    1       4  
Total long-term debt
    152       398  
Capital leases for information systems, with interest rates ranging from 2.01% to 5.05%, due between June 2014 and December 2016
    145       0  
Total bank lines of credit, long-term debt and long-term capital leases
  $ 1,836     $ 10,114  
Outstanding letters of credit, not included above
  $ 294     $ 280  

(1)
Secured by all assets of K•Swiss Inc., K•Swiss Sales Corp. and K•Swiss Direct Inc. The amount available to borrow on this line of credit at June 30, 2012 was $20,530. See further discussion below.
(2)
Fully secured by cash (or the Company’s restricted cash and cash equivalents and restricted investments available for sale, see Note 3). This facility was fully paid off on April 25, 2012. See further discussion below.
(3)
These lines of credit are secured by Palladium’s assets including accounts receivable and/or intellectual property rights (i.e. trademarks), as well as Palladium common stock.
(4)
These lines of credit are renewable every six months. Subsequent to June 30, 2012, these lines of credit were renewed until December 31, 2012 and the amount available to borrow will be €1,200 (or approximately $1,519).

 
 
23

 
 
On April 25, 2012, the Company and two of its subsidiaries, K•Swiss Sales Corp. and K•Swiss Direct Inc. (collectively with the Company, the “Borrowers”) entered into a Credit Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association and Wells Fargo Capital Finance, LLC (collectively as “Wells Fargo” or the “Lenders”).  The Credit Facility consists of revolving loans of up to $35,000,000 (subject to the limitations described below) available in U.S. Dollars, Euro and Pound Sterling, and up to $5,000,000 of which may be drawn in the form of letters of credit.  The Credit Facility matures April 23, 2016.

Loans made under the Credit Facility bear interest at:

 
(1)
the greatest of (i) the Federal Funds Rate plus ½%, (ii) the LIBOR Rate plus 1%, and (iii) Wells Fargo’s prime rate (the “Base Rate”); or
 
(2)
the rate per annum appearing on Bloomberg L.P.’s Page BBAM1/Official BBA USD Dollar Libor Fixings two Business Days prior to the commencement of the requested Interest Period, for a term and in an amount comparable to the interest period and the amount requested (the “LIBOR Rate”); or
 
(3)
for loans made in Euros or Pound Sterling, the LIBOR Rate;

plus, in each case, the “Applicable Margin.”

If the average use of the Credit Facility is less than 50% of the Maximum Revolver Amount (as defined below) during the previous fiscal quarter, the Applicable Margin is 1.25% for Base Rate loans, 2.25% for U.S. Dollar LIBOR Rate loans, and 3.00% for loans made in Euros or Pound Sterling.  If the average use of the Credit Facility is more than 50% of the Maximum Revolver Amount, the Applicable Margin is 1.50% for Base Rate loans, 2.50% for U.S. Dollar LIBOR Rate loans, and 3.25% for loans made in Euros or Pound Sterling.

The “Maximum Revolver Amount” is $35,000,000; provided that the amount of revolving loans and letters of credit under the Credit Facility may not exceed (a) 85% of Eligible Accounts (as defined in the Credit Facility) plus the lesser of (i) 85% of Eligible Accounts that are Extended Pay Accounts (as defined in the Credit Facility) and (ii) $1,500,000 (minus any dilution reserve), plus (b) the lesser of (i) $20,000,000 or (ii) an amount equal to (x) the lesser of (1) 65% of Eligible Inventory or (2) 85% of Net Recovery Percentage (each as defined in the Credit Facility), minus (y) a reserve of $3,500,000 and any other reserves established by Wells Fargo in its permitted discretion.

The financial covenants contained in the Credit Facility are as follows (in each case, with respect to the Company and its subsidiaries on a consolidated basis):

 
·
We must achieve Minimum EBITDA specified in the Credit Facility for each month through November 30, 2013.
 
·
We must maintain a Fixed Charge Coverage Ratio for each twelve month fiscal period, commencing for the fiscal period ending on December 31, 2013, of not less than 1.0:1.0.
 
·
We must limit Capital Expenditures for each fiscal year to $2,400,000, except with the Lender’s consent.

These financial covenants apply on the date that Excess Availability (as defined in the Credit Facility) has fallen below 20% of the Maximum Revolver Amount and ends on the date that Excess Availability has been greater than 20% of the Maximum Revolver Amount for any period of thirty consecutive days thereafter.

Our obligations under the Credit Facility are guaranteed by four of the Company’s other domestic subsidiaries (the “Guarantors”) pursuant to a Guaranty and Security Agreement, dated April 25, 2012 (the “Guaranty and Security Agreement”).  Pursuant to the Guaranty and Security Agreement, the Borrowers and the Guarantors pledged substantially all of their respective assets as collateral security for the loans to be made pursuant to the Credit Facility.  The foreign subsidiaries of the Borrowers did not guaranty the Credit Facility or pledge any of their directly-owned assets.  We also granted a security interest in our real property to the Lenders, consisting of a deed of trust securing our corporate headquarters building.

The Credit Facility contains other certain affirmative and negative covenants, as well as event of default provisions.  The affirmative covenants include certain reporting requirements, maintenance of properties, payment of taxes and insurance, compliance with laws, environmental compliance, and other provisions customary in such agreements.  Negative covenants limit or restrict, among other things, dividends, secured and unsecured indebtedness, mergers and fundamental changes, asset sales, investments and acquisitions, liens and encumbrances, transactions with affiliates, redemption distributions to former employees, officers or directors, and other matters customarily restricted in such agreements.

Wells Fargo and its affiliates are permitted to make loans to, issue letters of credit, accept deposits, provide Bank Products (as defined in the Credit Facility) to, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with us.
 
 
24

 

At June 30, 2012, the Company was in compliance with its covenants under the Credit Facility.

On April 25, 2012, we drew down approximately $9,924,000 under the Credit Facility to repay in full all indebtedness outstanding under our previous line of credit with Bank of America and to pay fees and expenses related to the Credit Facility.  We intend to utilize the Credit Facility for working capital, to issue letters of credit in connection with purchases of inventory and other general corporate purposes.

We anticipate future cash needs for repayments required pursuant to borrowings under our lines of credit facilities and term loans.  In addition, additional funds will be required by our operations if operating results continue to be weak.  No other material capital commitments exist at June 30, 2012.  With our new asset-based line of credit, we believe our present sources of capital are sufficient to sustain our anticipated capital needs for the next twelve months.  However, the negative cash flow we have sustained has reduced our working capital and continued negative cash flow would materially and negatively affect our ability to fund our operations.  While we have taken and continue to take actions intended to improve our results including implementing a major cost reduction program in which we reduced compensation costs, advertising and promotion costs and inventories, the availability of necessary working capital is subject to many factors beyond our control.  Such factors include, among others, our ability to increase revenues and to reduce our losses from operations, economic conditions, market acceptance of our products, the intensity of competition in our markets and the level of demand for our products.  Our present 2012 forecasted operating loss is estimated at approximately $25,000,000 to $30,000,000.  There is no assurance that this forecast can be achieved although we have already made significant decreases to operating expenses, as mentioned above, compared to last year and in line with our 2012 forecast.

Our working capital decreased $20,478,000 to $118,469,000 at June 30, 2012 from $138,947,000 at December 31, 2011.  Working capital decreased during the six months ended June 30, 2012 mainly due to decreases in restricted cash and cash equivalents and restricted investments available for sale, inventories, investments available for sale and prepaid expenses and other assets and increases in CPP, offset by increases in cash and cash equivalents and decreases in bank lines of credit, accrued liabilities and trade accounts payable.

Off-Balance Sheet Arrangements

We did not enter into any off-balance sheet arrangements during the six and three months ended June 30, 2012 or 2011, nor did we have any off-balance sheet arrangements outstanding at June 30, 2012 or 2011.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

During the six months ended June 30, 2012, 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, 2011.

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, 2012, 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, 2012 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, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
25

 

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

Except as set forth below, 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, 2011, which Item 1A is hereby incorporated by reference.

If we continue to incur significant losses and are unable to access sufficient working capital from our operations or through external financings, our liquidity will be impaired.

We have incurred substantial net losses in each of the last three fiscal years. As reflected in our financial statements, we have experienced net losses of $70,471,000, $68,212,000 and $27,962,000 for the years ended December 31, 2011, 2010 and 2009, respectively. As a result the total amount of our cash and cash equivalents, restricted cash and cash equivalents and restricted investments available for sale, and investments available for sale declined from $207,423,000 at December 31, 2008 to $53,360,000 at December 31, 2011.  The negative cash flow we have sustained has reduced our working capital and continued negative cash flow would materially and negatively affect our ability to fund our operations. While we have taken and continue to take actions intended to improve our results, including implementing a major cost reduction program in which we reduced compensation costs, advertising and promotion costs and inventories, the availability of necessary working capital is subject to many factors beyond our control. Such factors include, among others, our ability to obtain additional financing, our ability to increase revenues and to reduce our losses from operations, economic conditions, market acceptance of our products, the intensity of competition in our markets and the level of demand for our products. In an effort to increase the amount of credit available to us, we replaced our existing credit facility with a $35,000,000 asset-based facility.  If we are unable to reduce our operating losses and significantly reduce our inventories, our liquidity would be impaired.

Restrictions imposed by the terms of our Credit Facility may limit our operating and financial flexibility.

On April 25, 2012, we entered into a new revolving credit facility (“Credit Facility”) with Wells Fargo Bank, National Association and Wells Fargo Capital Finance, LLC (collectively as “Wells Fargo”).  The Credit Facility, among other things, largely prevents us from incurring any additional indebtedness, limits capital expenditures and restricts dividends and stock repurchases.  The Credit Facility also provides for financial covenants, which include a minimum monthly EBITDA for each month through November 30, 2013 and a fixed charge coverage ratio for each twelve month fiscal period commencing for the fiscal period ending on December 31, 2013 which applies when the excess availability has fallen below a certain level.  In addition, our ability to access the Credit Facility will be affected by the amount and value of our assets which are used to determine the borrowing base under the Credit Facility.  The borrowing base is reduced by availability limits and reserves established by Wells Fargo pursuant to the terms of the Credit Facility.  As a result of the foregoing, our operation and financial flexibility may be limited, which may prevent us from engaging in transactions that might further our growth strategy or otherwise be considered beneficial to us.

The Credit Facility contains events of default that include failure to pay principal or interest when due, failure to comply with the covenants set forth in the Credit Facility, bankruptcy events, cross-defaults and judgments involving an aggregate amount of $1,000,000 or more and the occurrence of a change of control, in each case subject to the grace periods, qualifications and thresholds specified in the Credit Facility.  If the indebtedness under the Credit Facility were to be accelerated, we cannot be certain that we will have sufficient funds available to pay such indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all.  Any such acceleration could also result in a foreclosure on all or substantially all of our assets, which would have a negative impact on the value of our common stock and jeopardize our ability to continue as a going concern.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

During the second quarter of 2012, 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.
 
 
26

 

As discussed in Part I, Item 2, the Company’s Credit Facility limits the Company’s ability to pay dividends. Pursuant to the Credit Facility, the Company may pay a dividend provided that (i) no Event of Default (as defined in the Credit Facility) has occurred and is continuing or would result from the payment of the dividend, (ii) the aggregate dividend amount does not to exceed $3,000,000 per fiscal year, (iii) there will be Excess Availability (as defined in the Credit Facility) equal to or greater than $10,000,000 immediately after payment of the dividend, (iv) the Company remains in compliance with the financial covenants in the Credit Facility, after giving effect to the payment of the dividend, and (v) the Fixed Charge Coverage Ratio (as defined in the Credit Facility) for the most recent twelve month period ended prior to paying a dividend is greater than or equal to 1.0:1.0.

Item 3.   Defaults Upon Senior Securities

None.

Item 4.   Mine Safety Disclosures

Not Applicable.

Item 5.   Other Information

None.

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)
 
 
27

 
 
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 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 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)
 
 
28

 
 
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
Second Amendment to Loan Agreement dated January 24, 2012 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 January 25, 2012)

10.27
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)

10.28
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)

10.29
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)

10.30
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)

10.31
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)

10.32
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)

10.33
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)

10.34
Amendment No. 3 to Share Purchase and Shareholders’ Rights Agreement, dated July 9, 2012 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 July 12, 2012)

10.35
Credit Agreement dated April 25, 2012 between K•Swiss Inc., K•Swiss Sales Corp. and K•Swiss Direct Inc. and Wells Fargo Bank, National Association and Wells Fargo Capital Finance, LLC (incorporated by reference to exhibit 10.1 to the Registrant’s Form 8-K filed with the S.E.C. on April 30, 2012)

10.36
Guaranty and Security Agreement, dated as of April 25, 2012, among the persons listed on the signature pages thereto as “Grantors” and those additional entities that thereafter become parties thereto by executing a Joinder thereto, and Wells Fargo Bank, National Association, in its capacity as administrative agent for the Lender Group and Bank Product Providers (incorporated by reference to exhibit 10.2 to the Registrant’s Form 8-K filed with the S.E.C. on April 30, 2012)

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
 
 
29

 
 
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*
 
*
To be filed by amendment during the 30-day grace period provided by Rule 405(a)(2) of Regulation S-T.
 
 
30

 
 
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 1, 2012   
By:
/s/ George Powlick  
   
George Powlick,
Vice President Finance, Chief Administrative
Officer and Chief Financial Officer
 
 
 
31

 
 
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*
 
*
To be filed by amendment during the 30-day grace period provided by Rule 405(a)(2) of Regulation S-T.