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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on October 18, 2005January 9, 2006

Registration No. 333-127526



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Amendment No. 23
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


CROCS, INC.
(Exact name of Registrant as specified in its charter)


Delaware 3021 20-2164234
(State or other jurisdiction of
incorporation or organization)
 (Primary Standard Industrial
Classification Code Number)
 (I.R.S. Employer
Identification No.)

6273 Monarch Park Place
Niwot, Colorado 80503
(303) 468-4260
(Address, including zip code and telephone number, including area code, of Registrant's principal executive offices)

Ronald R. Snyder
President and Chief Executive Officer
Crocs, Inc.
6273 Monarch Park Place
Niwot, Colorado 80503
(303) 468-4260
(Name, address, including zip code and telephone number, including area code, of agent for service)


Copies to:

James H. Carroll, Esq.
Faegre & Benson LLP
1900 Fifteenth Street
Boulder, Colorado 80302
Phone: (303) 447-7700
Fax: (303) 447-7800
 William J. Campbell, Esq.
Faegre & Benson LLP
3200 Wells Fargo Center
1700 Lincoln Street
Denver, Colorado 80203
Phone: (303) 607-3500
Fax: (303) 607-3600
 Jeffrey D. Saper, Esq.
Donna M. Petkanics, Esq.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Phone: (650) 493-9300
Fax: (650) 493-6811

Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: o


The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the Securities and Exchange Commission declares our registration statement effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to completion, dated October 18, 2005January 9, 2006

                        Shares

CROCS, INC.

Common Stock

$            per share
 LOGOLOGO

Crocs, Inc. is offering                        shares and the selling stockholders are offering                        shares. We will not receive any proceeds from the sale of our shares by the selling stockholders.

We anticipate that the initial public offering price will be between $            and $            per share.

This is our initial public offering and no public market currently exists for our shares.

Reserved trading symbol: Nasdaq National Market—CROX


This investment involves risk. See "Risk Factors" beginning on page 10.



 

 

Per Share


 

Total

Public offering price $             $            
Underwriting discount $             $            
Proceeds, before expenses, to Crocs, Inc. $             $            
Proceeds to selling stockholders $             $            

 

 

 

 

 

 

 

The underwriters have a 30-day option to purchase up to                        additional shares of common stock from the selling stockholders to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved of anyone's investment in these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Piper Jaffray Thomas Weisel Partners LLC



SG Cowen & Co.

BB&T Capital Markets

 

 

D.A. Davidson & Co.

 

 

Wedbush Morgan Securities

The date of this prospectus is                        , 2005.2006.


Outside Front GateOutside Front Gate


Inside Front GateInside Front Gate



TABLE OF CONTENTS

 
Summary

Risk Factors

A Special Note Regarding Forward-Looking Statements

Use of Proceeds

Dividend Policy

Capitalization

Dilution

Selected Consolidated Financial Data

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

Business

Management

Executive Compensation

Certain Relationships and Related Party Transactions

Principal and Selling Stockholders

Description of Capital Stock

Shares Eligible for Future Sale

U.S. Federal Tax Considerations for Non-U.S. Holders

Underwriting

Legal Matters

Experts

Where You Can Find More Information

Index to Consolidated Financial Statements

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus is complete and accurate as of the date on the front cover, but the information may have changed since that date.

We have registered the trademark "crocs" for footwear in Australia, the European Union, Japan, Mexico, New Zealand and Panama. "crocs," "Foam Creations," our shoe model names and our logos are our common law trademarks in the U.S. and certain other countries. This prospectus also contains trademarks and service marks belonging to other entities.

i



SUMMARY

You should read the following summary together with the more detailed information concerning our company, the common stock being sold in this offering and our financial statements appearing in this prospectus. Because this is only a summary, you should read the rest of this prospectus before you invest in our common stock. Read this entire prospectus carefully, especially information contained in the "Risk Factors" section. As used in this prospectus, the terms the "Company," "we," "our," or "us" refer to Crocs, Inc., and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

Crocs, Inc.

We are a rapidly growing designer, manufacturer and marketer of footwear for men, women and children under thecrocs brand. All of our footwear products incorporate our proprietary closed-cell resin material, which we believe represents a substantial innovation in footwear comfort and functionality. Our proprietary closed-cell resin enables us to produce a soft and lightweight, non-marking, slip- and odor-resistant shoe. These unique properties make our footwear ideal for casual wear, as well as for recreational uses such as boating, hiking, fishing or gardening, and have enabled us to successfully market our products to a broad range of consumers. We have combined the unique properties of our resin with fun colors and innovative designs to provide a new level of comfort, functionality and style in the casual lifestyle footwear category at attractive retail price points ranging from $29.99 to $59.99. Since we began marketing our first model in November 2002, we have expanded our product line to include nine10 models in up to 1718 different colors, and we expect to introduce one additional color in 2005.colors. We recorded $13.5 million of revenues in 2004, compared to $1.2 million of revenues in 2003, and we recorded $36.7$75.0 million of revenues in the sixnine months ended JuneSeptember 30, 2005. Our net loss was $1.5 million in 2004, and we recorded net income of $6.1$12.8 million in the sixnine months ended JuneSeptember 30, 2005.

The broad appeal of our footwear has enabled us to successfully market our products to a wide range of distribution channels. Our footwear is currently sold through traditional footwear channels, including specialty footwear stores such as Brown's Shoe Fit and Journeys, sporting goods and outdoor retailers such as The Sports Authority, Dick's Sporting Goods, REI, Bass Pro Shops and West Marine, and department stores, including Dillard's, Nordstrom and Nordstrom.Von Maur. Our products are also sold through a variety of other specialty channels, including gift shops, uniform suppliers, independent bicycle dealers, specialty food retailers, health and beauty stores and other specialty stores. We distribute our products through over 5,7006,000 store locations domestically and we have begun selling our products in over 3040 additional countries worldwide. We also sell our products directly to consumers through our website, www.crocs.com, and through several company-operated kiosks that are located in high foot traffic areas. Our website and kiosks serve to promote our products and increase our brand awareness.

We currently manufacture our footwear products in our own facilities in North America, and in third party manufacturers' facilities located around the world. A core element of our business strategy is to maintain the flexibility to offer our retailers timely inventory fulfillment throughout the year while capitalizing on the efficiencies and cost advantages of large scale contract manufacturing. As part of this strategy, we intend to produce a significant portion of our footwear in our company-operated North American manufacturing facilities, which provide us maximum production flexibility to more quickly meet changing customer demand. In addition, the geographic diversity of our company-operated and third party manufacturing facilities allows us to more efficiently and cost-effectively serve specific geographic markets.



Our Business Strategy

We seek to differentiate thecrocs brand and our product offerings by focusing on several core strategies. Our principal strategies are to:

Our Growth Strategy

We seek to increase our market share and drive further growth in our business by pursuing the following strategies:


Our History

We were organized as a limited liability company in 1999, and began marketing and distributing footwear products in the U.S. under thecrocs brand in November 2002, shortly after completing the modification and improvement of a shoe produced by Foam Creations, Inc., formerly known as Finproject N.A., Inc. The unique characteristics of the proprietary closed-cell resin developed by Foam Creations enabled us to offer consumers an innovative shoe unlike any other footwear model then available. Initially we targeted our products to water sports enthusiasts, but the comfort and functionality of our products appealed to a more diverse group of consumers who used our footwear in a wide range of activities. To capitalize on the broad appeal of our footwear, we expanded our sales infrastructure, strengthened our senior management team and developed relationships with a range of retailers in the U.S through 2003 and 2004. In June 2004, we acquired Foam Creations, including its manufacturing operations, product lines and rights to the trade secrets for the proprietary closed-cell resin used in our products.

Since June 2004, we have significantly expanded all aspects of our operations in order to take advantage of what we believe to be an attractive market opportunity. We have substantially increased the depth and breadth of our distribution and currently sell our products in over 5,7006,000 domestic store locations and in over 3040 countries worldwide. To meet the growing demand for our footwear, we have increased our production capacity from 70,000 pairs per month in June 2004, manufactured at a single Foam Creations facility, to over 1.2approximately 2.2 million pairs per month in JulyDecember 2005, manufactured at sevensix facilities located around the world. Additionally, we have expanded our product line to include nine10 models in up to 1718 different colors, and we expect to introduce one additional color during the remainder of 2005.colors.

Risks Affecting Us

We face a number of competitive challenges and potential risks, as discussed in "Risk Factors." In particular, our business and growth strategies could be negatively impacted if we are not able to manage our future growth effectively; if the popularity of our footwear products does not continue to grow as rapidly as in the past, or declines; if we are unable to successfully expand our product line; or if we are unable to fill all customer orders for our products due to limited manufacturing capabilities. In addition, we face significant competition, including from companies that produce footwear products that are very similar in design and materials to our products. We must also effectively implement additional processes and management information systems in order to accurately manage our business and report our financial results on a timely basis. Furthermore, the most recent audit of our financial statements identified material weaknesses in our internal control over financial reporting, which could cause a material misstatement in our financial results.



Corporate Information

We were organized as a limited liability company in Colorado in 1999, converted to a Colorado corporation in January 2005, and reincorporated in Delaware in June 2005. Our principal executive offices are located at 6273 Monarch Park Place, Niwot, Colorado 80503. Our telephone number at that location is (303) 468-4260. Our website address is www.crocs.com. This is a textual reference only. We do not incorporate the information on our website into this prospectus and you should not consider any information on, or that can be accessed through, our website as part of this prospectus.


The Offering

Common stock offered:  
 By Crocs, Inc.                 shares
 By the selling stockholders                 shares
  Total                 shares
Common stock to be outstanding after the offering                 shares
Offering price $        per share
Use of proceeds We intend to use the proceeds we receive from this offering to repay amounts outstanding under our U.S. credit facility ($5.55.9 million as of September 30,December 31, 2005) and Canadian credit facility and bank loans ($5.05.7 million as of September 30,December 31, 2005) and for working capital and general corporate purposes. We will not receive any proceeds from the sale of common stock by the selling stockholders. See "Use of Proceeds."
Reserved Nasdaq National Market symbol CROX

The information in this prospectus is based on the number of shares outstanding as of September 30,December 31, 2005 and unless otherwise indicated:



Summary Consolidated Financial and Operating Data

The summary financial data presented below under the heading "Consolidated Statement of Operations Data" for the years ended December 31, 2002, 2003 and 2004 and the summary financial data presented below under the heading "Consolidated Balance Sheet Data" as of December 31, 2003 and 2004 have been derived from, and are qualified by reference to, the consolidated financial statements included elsewhere in this prospectus. The summary financial data presented below under the headings "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" for the sixnine months ended and as of JuneSeptember 30, 2004 and 2005 are unaudited, have been derived from unaudited consolidated financial statements that are included elsewhere in this prospectus and have been prepared on the same basis as the annual consolidated financial statements. The summary financial data presented below under the heading "Consolidated Balance Sheet Data" as of and for the year ended December 31, 2002 are derived from our unaudited financial statements. The summary financial data presented below also includes unaudited pro forma financial information under the heading "Pro Forma for acquisition of Foam Creations Year Ended December 31, 2004" to reflect the acquisition of Foam Creations as if it had occurred on January 1, 2004. Such unaudited pro forma financial information does not necessarily reflect the results of operations that may have actually resulted had the acquisition occurred on January 1, 2004, and should not be taken as necessarily indicative of our future results of operations. The unaudited pro forma financial information has been derived from, and is qualified by reference to, the "Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations" included in this prospectus. In the opinion of management, the unaudited summary financial data presented below under the headings "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" reflect all adjustments, which include only normal and recurring adjustments, necessary to present fairly our results of operations for and as of the periods presented. Historical results are not necessarily indicative of the results of operations to be expected for future periods. You should read the summary consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and with our consolidated financial statements and related notes included in this prospectus.


 
  
  
  
 Pro Forma for
acquisition of
Foam Creations
Year Ended
December 31, 2004(2)

 Six Months
Ended June 30,

 
 Year Ended December 31,
 
 2002(1)
 2003
 2004
 2004
 2005(3)
 
 (dollars in thousands, except per share data)

Consolidated Statement of Operations Data                  
Revenues $24 $1,165 $13,520 $16,921 $3,020 $36,727
Cost of sales (including stock-based compensation expense of $—, $—, $—, $—, $— and $29, respectively)  16  891  7,162  8,529  1,706  15,919
  
 
 
 
 
 
Gross profit  8  274  6,358  8,392  1,314  20,808
Selling, general and administrative expense (including stock-based compensation expense of $240, $356, $1,792, $1,792, $1,008 and $1,231, respectively)  453  1,471  7,929  9,325  2,217  12,104
  
 
 
 
 
 
Income (loss) from operations  (445) (1,197) (1,571) (933) (903) 8,704
Interest expense    3  47  101  1  202
Other expense—net      19  19    23
  
 
 
 
 
 
Income (loss) before income taxes  (445) (1,200) (1,637) (1,053) (904) 8,479
Income tax expense (benefit)(3)      (143) 31    2,397
  
 
 
 
 
 
Net income (loss)  (445) (1,200) (1,494) (1,084) (904) 6,082
Dividends on redeemable convertible
preferred shares(4)
      142  275    136
  
 
 
 
 
 
Net income (loss) attributable to
common stockholders
 $(445)$(1,200)$(1,636)$(1,359)$(904)$5,946
  
 
 
 
 
 
Unaudited pro forma income tax benefit (Note 2)(5)        (441)    (346)  
        
    
   
Unaudited pro forma net loss (Note 2)(5)       $(1,053)   $(558)  
        
    
   
Income (loss) per common share:                  
 Basic $(12.54)$(13.44)$(15.51)$(12.88)$(8.73)$42.55
 Diluted $(12.54)$(13.44)$(15.51)$(12.88)$(8.73)$40.42
Weighted average common shares:                  
 Basic  35,479  89,271  105,479  105,479  103,546  107,855
 Diluted  35,479  89,271  105,479  105,479  103,546  150,487
Pro forma income per common share(6)                  
 Basic       $(7.67)   $(4.12)$43.51
 Diluted       $(7.67)   $(4.12)$40.42
Pro forma weighted average shares outstanding(6)                  
 Basic        137,379     135,446  139,755
 Diluted        137,379     135,446  150,487

Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Pairs ofcrocs footwear sold  1,500  76,000  649,000     181,000  2,178,000

 


 

As of December 31,


 

As of June 30,

 
 2002(1)
 2003
 2004
 2004
 2005
 
 (in thousands)

Consolidated Balance Sheet Data               
Cash and cash equivalents $73 $326 $1,054 $345 $3,165
Total assets  454  1,304  16,224  11,923  39,938
Long-term obligations    400  3,660  2,919  3,995
Redeemable common shares    1,800  1,800  1,800  1,800
Redeemable convertible preferred shares      5,500  5,000  5,500
Total stockholders' equity (deficit)  389  (1,642) (3,591) (1,263) 3,517
 
  
  
  
 Pro Forma for
acquisition of
Foam Creations
Year Ended
December 31, 2004(2)

 Nine Months
Ended September 30,

 
 Year Ended December 31,
 
 2002(1)
 2003
 2004
 2004
 2005(3)
 
 (dollars in thousands, except per share data)

Consolidated Statement of Operations Data                  
Revenues $24 $1,165 $13,520 $16,921 $8,137 $75,022
Cost of sales (including stock-based compensation expense of $—, $—, $—, $—, $— and $56, respectively)  16  891  7,162  8,529  4,188  32,032
  
 
 
 
 
 
Gross profit  8  274  6,358  8,392  3,949  42,990
Selling, general and administrative expense (including stock-based compensation expense of $240, $356, $1,792, $1,792, $1,435 and $3,399, respectively)  453  1,471  7,929  9,325  4,430  23,059
  
 
 
 
 
 
Income (loss) from operations  (445) (1,197) (1,571) (933) (481) 19,931
Interest expense    3  47  101  19  380
Other expense—net      19  19  14  25
  
 
 
 
 
 
Income (loss) before income taxes  (445) (1,200) (1,637) (1,053) (514) 19,526
Income tax expense (benefit)(3)      (143) 31  44  6,724
  
 
 
 
 
 
Net income (loss)  (445) (1,200) (1,494) (1,084) (558) 12,802
Dividends on redeemable convertible
preferred shares(4)
      142  275  69  206
  
 
 
 
 
 
Net income (loss) attributable to
common stockholders
 $(445)$(1,200)$(1,636)$(1,359)$(627)$12,596
  
 
 
 
 
 
Unaudited pro forma income tax benefit (Note 2)(5)        (441)    (240)  
        
    
   
Unaudited pro forma net loss (Note 2)(5)       $(1,053)   $(387)  
        
    
   
Income (loss) per common share:                  
 Basic $(.05)$(.06)$(.07)$(.06)$(.03)$.39
 Diluted $(.05)$(.06)$(.07)$(.06)$(.03)$.38
Weighted average common shares:                  
 Basic  8,288,710  20,855,385  24,641,935  24,641,935  24,481,760  25,329,984
 Diluted  8,288,710  20,855,385  24,641,935  24,641,935  24,481,760  33,358,633
Pro forma income per common share(6)                  
 Basic       $(.03)   $(.01)$.39
 Diluted       $(.03)   $(.01)$.38
Pro forma weighted average shares outstanding(6)                  
 Basic        32,094,413     31,934,238  32,782,462
 Diluted        32,094,413     31,934,238  33,358,633

Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Pairs ofcrocs footwear sold  1,500  76,000  649,000     393,000  4,309,000


 


 

As of December 31,


 

As of September 30,

 
 2002(1)
 2003
 2004
 2004
 2005
 
 (in thousands)

Consolidated Balance Sheet Data               
Cash and cash equivalents $73 $326 $1,054 $1,245 $4,320
Total assets  454  1,304  16,224  13,239  57,643
Long-term obligations    400  3,660  2,974  5,264
Redeemable common shares    1,800  1,800  1,800  1,800
Redeemable convertible preferred shares      5,500  5,000  5,500
Total stockholders' equity (deficit)  389  (1,642) (3,591)$(129) 13,234

(1)
We were founded in 1999 but did not commence operations until 2002, when we began selling footwear in the United States. As a result, there were no material operations prior to 2002.

(2)
Pro forma to reflect our acquisition of Foam Creations as if it had occurred on January 1, 2004.


(3)
On January 4, 2005, we converted from a limited liability company to a taxable corporation. For the tax years beginning on January 1, 2005 and afterward, we will be subject to corporate-level U.S. federal and state income taxes. Additionally, the statement of operations for the sixnine months ended JuneSeptember 30, 2005 reflects a one-time income tax benefit of $723,000 to record the net deferred tax assets at the date of conversion.

(4)
Dividends accrued in 2004 were paid to holders of our Class C convertible preferred membership units. Our Class C membership units were converted into shares of our Series A preferred stock in connection with our conversion from a limited liability company to a corporation on January 4, 2005.

(5)
The unaudited pro forma data presented gives effect to our conversion into a Colorado corporation as if it occurred at the beginning of the year ended December 31, 2004. The unaudited pro forma income tax benefit represents a combined federal and state effective tax rate of 38.25% and does not consider potential tax loss carrybacks, carryforwards or the realizability of deferred tax assets. The unaudited pro forma net loss represents our net loss for the periods presented as adjusted to give effect to the pro forma income tax benefit.

(6)
Unaudited pro forma income per common share and unaudited pro forma weighted average shares outstanding for the year ended December 31, 2004 and for the sixnine months ended JuneSeptember 30, 2004 and 2005 reflect the conversion of shares of our Series A preferred stock to shares of common stock upon completion of this offering as well as the effect of our conversion into a Colorado corporation as set forth in footnote (5) above.


RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Crocs, Inc.

We have a limited operating history, which makes it difficult to evaluate our business and prospects.

We commenced sales of ourcrocs footwear, which currently constitutes a substantial majority of our sales, in 2002. As an early stage company with a limited operating history, our business is subject to all of the risks inherent in a new business enterprise, including:

Furthermore, we have recently experienced recent rapid growth, which has made our current operations and our expected future operations substantially different from our past operating history. For example, to support our growth we have added additional manufacturing capacity and have expanded our distribution and fulfillment capabilities. New manufacturing capacity that we have recently added may not meet our projections or may suffer from operating difficulties. Similarly, our new outsourced distribution and fulfillment provider may not perform as we expect, and our expanded in-house fulfillment capabilities may prove difficult to manage. Our limited operating history will make it difficult for you to evaluate this growth in our business and our prospects for the future.

We have significantly expanded the nature and scope of our operations over the past two years, and if we fail to manage any future growth effectively we may experience greater difficulty in filling customer orders, declines in product quality, increases in costs or other operating difficulties.

We have significantly expanded the nature and scope of our operations over the past two years, and we anticipate that substantial further expansion will be required to address potential growth in our customer base and new market opportunities. Prior to June 2004, we distributed in the U.S. under ourcrocs brand a limited range of footwear products manufactured and sold to us by Foam Creations. In June 2004, we acquired Foam Creations. Since that acquisition, we have expanded our product line to include nine10 footwear models, and in addition, over the last two years, we expanded from:


The expansion of the scope and nature of our business and the growth in the number of employees, customers and other third parties with whom we have relationships and in the number of facilities we use for manufacturing, distribution, and corporate operations, have placed and will continue to place a significant strain on our management and our information systems and resources. To manage growth in our operations, we will need to increase the number of people we employ, upgrade or replace our existing financial and reporting systems as well as improve our business processes and controls. Failure to effectively manage growth could result in greater difficulty in completely filling customer orders, declines in product quality or increases in costs or other production and distribution difficulties, any of which could adversely impact our business performance and operating results.

The popularity of ourcrocs footwear may not continue to grow as rapidly as it has in the recent past or may decline, which would have a negative impact on our sales and results of operations.

Our recent growth is substantially attributable to sales ofcrocs footwear, which represented approximately 93%92% of our revenues in the sixnine months ended JuneSeptember 30, 2005. We expect that footwear will constitute our principal product line for the foreseeable future. The footwear industry is subject to rapidly changing consumer demands and preferences and fashion trends, and ourcrocs footwear may not remain popular or we may fail to develop additional models that appeal to consumers. If the popularity of ourcrocs footwear declines or does not expand in the future, we may experience, among other things:

Given the limited history of ourcrocs brand, it is especially difficult to evaluate whether our products will hold long-term consumer appeal.

We are dependent on sales of a small number of products and the absence of continued market demand for these products would have a significant adverse effect on our operating results.

We generated approximately 93%92% of our revenues for the six10 months ended JuneSeptember 30, 2005 from sales of ourcrocs footwear, which currently consists of nine models, plus children's versions of two of our models. Sales of our Beach model accounted for approximately 75%63% of our footwear revenues in the sixnine months ended JuneSeptember 30, 2005. Most of ourcrocs footwear models are developed from the same base design as our Beach model, and we expect to continue to derive a substantial portion of our revenues from these models or related products in the foreseeable future. Because we are dependent on a line of footwear models that have substantial similarities, factors such as changes in consumer preferences and general market conditions in the footwear industry may have a disproportionately greater impact on us than on our competitors. In addition, other footwear companies have introduced



have introduced products that are substantially similar to our footwear models, which may reduce sales of our footwear products. In the event that consumer preferences evolve away from our footwear models or from casual lifestyle footwear in general, or our retail customers purchase similar products sold by our competitors, the resulting loss of sales, increase in inventories and discounting of our products are likely to be significant, and this could have a material and adverse impact on our business and operations.

Expanding ourcrocs footwear product line may be difficult and expensive, and if we are unable to successfully continue such expansion, our brand may be adversely affected, and we may not achieve our planned sales growth.

Our growth strategy is founded primarily on the continued growth in sales ofcrocs footwear, and we intend to continue to expand the number of models offered in ourcrocs footwear product line to broaden the appeal of our products to consumers. To successfully expand our footwear product line, we must anticipate, understand and react to the rapidly changing tastes of footwear consumers and provide appealing merchandise in a timely manner. New footwear models that we introduce may not be successful with consumers or our brand may fall out of favor with consumers. If we are unable to anticipate, identify or react appropriately to changes in consumer preferences, we may not grow as fast as we plan or our sales may decline, and our brand image and operating performance may suffer.

Furthermore, achieving market acceptance for new products will likely require us to exert substantial product development and marketing efforts, which could result in a material increase in our selling, general and administrative expense, and there can be no assurance that we will have the resources necessary to undertake such efforts. Material increases in our selling, general and administrative expense could adversely impact our results of operations.

We may also encounter difficulties in producing newcrocs footwear models that we did not anticipate during the development stage. Our development schedules for new products are difficult to predict and are subject to change as a result of shifting priorities in response to consumer preferences and competing footwear products. Once we have begun to design a new model, it can take six to nine months to progress to full production because of the need to fabricate new molds and to implement modified production tooling and revised manufacturing techniques. If we are not able to efficiently manufacture newly-developed products in quantities sufficient to support retail distribution, we may not be able to recoup our investment in the development of new models, and we would continue to be subject to the risks inherent in having a limited product line. Even if we develop and manufacture new footwear products that consumers find appealing, the ultimate success of a new model may depend on our product pricing. We have a limited history of introducing new products, and we may set the prices of new models too high for the market to bear. Failure to gain market acceptance for new footwear products that we introduce could impede our growth, reduce our profits, adversely affect the image of our brands, erode our competitive position and result in long term harm to our business.

Due to limited manufacturing capacity and high demand for our products, we have typically only partially filled orders placed by our customers, which limits sales of our products and may result in a decrease in sales and a deterioration in our customer relationships.

Due to our limited manufacturing capacity and the inability of our third party manufacturers to produce quantities of our products sufficient to meet the rapid growth in demand we have experienced over the past year, we have typically only partially filled orders placed by our customers. If we cannot procure sufficient quantities of our products to meet customer demand in a timely manner, customers may cancel orders, refuse shipments, negotiate for reduced purchase prices or purchase our competitors' products, any of which could have a material adverse effect on our customer relationships



and operating results. In addition, difficulties in filling customer orders could adversely impact future order volume and our customers may purchase similar products from our competitors.



The audit of our financial statements for each of the years ended December 31, 2002, 2003 and 2004, identified material weaknesses in our internal control over financial reporting, and if not corrected, these material weaknesses could result in a material misstatement of our results of operations or financial condition, which could harm our business and reputation and cause the price of our common stock to decline.

In connection with the audit of our financial statements for each of the years ended December 31, 2002, 2003 and 2004, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting with respect to:

A material weakness is a reportable condition in which the design or operation of one or more accounting controls and procedures does not reduce to a relatively low likelihood the risk that a material misstatement of the annual or interim financial statements will not be prevented or detected within a timely period by employees in the normal course of performing their assigned functions.

The material weakness in our financial closing and reporting process resulted from a combination of the following factors:

The material weakness in our inventory tracking and costing methodology related to the method by which we had accounted for certain inventory related costs in each of 2002, 2003 and 2004. In these years, we did not appropriately capitalize these costs in inventory which resulted in adjustments to our financial statements. In addition, we also did not have a formal process for tracking our inventory.

The material weakness with respect to our accounting records related to our lack of supporting documentation that should have been readily available to evidence routine transactions, principally in 2002 and 2003.

The material weakness in the documentation of significant and non-routine transactions related specifically to a lack of contemporaneous documentation for certain of our equity compensation arrangements in 2002 through 2004 and our acquisition of Foam Creations in 2004.



We are in the process of addressing each of these material weaknesses. However, because these material weaknesses exist, there is a heightened risk that a material misstatement of our annual or



interim financial statements will not be prevented or detected. In addition, the remediation steps we have taken, are taking, or plan to take may not effectively remediate the material weaknesses, in which case our accounting controls and procedures in these particular areas will continue to be ineffective. Furthermore, once we become a public company, we will be required to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for the year ended December 31, 20062007 and subsequent periods. See "—We will be required to meet periodic reporting requirements under SEC rules and regulations, and we will incur significant time and expense in documenting, testing and certifying our internal control over financial reporting, and any deficiencies in our internal controls could adversely affect our business." In the event that we do not adequately remedy these material weaknesses, our business, reputation and financial condition may be adversely affected, there may be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the price of our common stock to decline.

We will be required to meet periodic reporting requirements under SEC rules and regulations, and we will incur significant time and expense in documenting, testing and certifying our internal control over financial reporting, and any deficiencies in our financial reporting or internal controls could adversely affect our business and the price of our common stock.

SEC rules require that, as a publicly-traded company following completion of this offering, we file periodic reports containing our financial statements within a specified time following the completion of quarterly and annual periods. Prior to this offering, we have never been required to have our financial statements completed and reviewed or audited within a specified period, and, as such, we may experience difficulty in meeting the SEC's reporting requirements in a timely manner. Any failure by us to timely file our periodic reports with the SEC could harm our reputation and reduce the market price of our common stock.

Furthermore, once we become a public company, SEC rules require that our chief executive officer and chief financial officer periodically certify the existence and effectiveness of our internal control over financial reporting. Our independent auditors will then be required, beginning with our Annual Report on Form 10-K for our fiscal year ending on December 31, 2006,2007, to attest to our officers' assessment of our internal controls. This process generally requires significant documentation of policies, procedures and systems, review of that documentation by our internal accounting staff and our outside auditors, and testing of our internal control over financial reporting by our internal accounting staff and our outside auditors. Documentation and testing of our internal controls, which we have not undertaken in the past, will involve considerable time and expense, and may strain our internal resources and have an adverse impact on our costs.

During the course of our testing, we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by SEC rules for certification of our internal control over financial reporting. As a consequence, we may have to disclose in periodic reports we file with the SEC any significant deficiencies or material weaknesses in our system of internal controls. For example, the audit of our financial statements for the years ended December 31, 2002, 2003 and 2004 identified material weaknesses in our internal control over financial reporting. The existence of such material weaknesses would preclude management from concluding that our internal control over financial reporting is effective and would preclude our independent auditors from issuing an unqualified opinion that internal controls are effective. In addition, disclosures of this type in our SEC reports could cause investors to lose confidence in our financial reporting and may negatively affect the price of our common stock. Moreover, effective internal controls are necessary to produce reliable financial reports



and to prevent fraud. If we have deficiencies in our internal control over financial reporting it may negatively impact our business, results of operations and reputation.



Our current management information systems are insufficient for our business, and planned system improvements may not be successfully implemented on a timely basis or be sufficient for our growing business.

We do not have an integrated management information system. For certain business planning, finance and accounting functions, we rely on manual processes that are difficult to control and are subject to human error. We expect to use approximately $2.0$3.5 million of the net proceeds from this offering to upgrade our financial reporting systems and to implement new information technology systems to better track our business, streamline our financial reporting, and improve our internal controls. We may experience difficulties in transitioning to new or upgraded systems, including loss of data and decreases in productivity as our personnel become familiar with new systems. In addition, our management information systems will require modification and refinement as we grow and our business needs change, which could prolong difficulties we experience with systems transitions, and we may not always employ the most effective systems for our purposes. If we experience difficulties in implementing new or upgraded information systems or experience significant system failures, or if we are unable to successfully modify our management information systems to respond to changes in our business needs, our ability to properly run our business could be adversely affected.

Sales of our products are likely to be subject to seasonal variations, which could increase the volatility of the price of our common stock.

The footwear industry generally is characterized by significant seasonality of sales. Due to the growth in sales of our products in the past two years we cannot assess with certainty the degree to which sales of our footwear products will be subject to seasonal variation, but a majority of our footwear is more suited for fair weather use, so we expect some degree of seasonality in the future. Preliminary results indicate that our revenues for the three months ended December 31, 2005 were lower than our revenues for the three months ended September 30, 2005, and we believe that the decline was primarily attributable to seasonal declines in demand for our products. In addition, extended periods of unusually cold weather during the spring and summer could reduce demand for our footwear. Seasonal variations in consumer demand may result in fluctuations in our results of operations from quarter to quarter, and the effect of favorable or unfavorable weather on sales may be significant enough to materially affect our quarterly results. Wide variations in our quarterly operating results may increase the volatility of the price of our common stock.

Because we depend on third party manufacturers, we face challenges in maintaining a sufficient supply of goods to meet sales demand, and we may experience interruptions in our supply chain. Any shortfall in the supply of our products may decrease our sales and have an adverse impact on our customer relationships.

In the sixnine months ended JuneSeptember 30, 2005, third party manufacturers produced approximately 69%70% of our footwear products as measured by number of units, and one such manufacturer produced approximately 59%55% of our footwear products. Currently, we have footwear manufacturing arrangements with third party manufacturers located in China, Florida Italy and Mexico.Italy. We depend on these manufacturers' ability to finance the production of goods ordered and to maintain adequate manufacturing capacity. We do not exert direct control over the third party manufacturers, so we may be unable to obtain timely delivery of acceptable products.

Due to the rapid growth in popularity of ourcrocs footwear, one or more of our third party manufacturers may not have sufficient capacity to enable it to increase production to meet demand for our products. Moreover, some of our third party manufacturers have manufacturing engagements with companies that are much larger than we are and whose production needs are much greater than ours.



As a result, one or more manufacturers may choose to devote additional resources to the production of products other than ours if capacity is limited.

In addition, we do not have long-term supply contracts with most of these third party manufacturers, including the third party manufacturer that produced the majority of our footwear products in the sixnine months ended JuneSeptember 30, 2005, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. As a result, we are not assured of an uninterrupted supply of products of an acceptable quality and price from our third party manufacturers. We may not be able to offset any interruption or decrease in supply of our products by increasing production in our company-operated manufacturing facilities due to capacity constraints, and we may not be able to substitute suitable alternative third party manufacturers in a timely manner or at acceptable prices. Any disruption in the supply of products from our third party manufacturers may harm our business and could result in a loss of sales and an increase in production costs, which would adversely affect our results of operations.



Our business could suffer if our third party manufacturers violate labor laws or fail to conform to generally accepted ethical standards.

We generally require our third party manufacturers to meet our standards for working conditions and other matters before we are willing to place business with them. As a result, we may not always obtain the lowest cost production. Moreover, we do not control our third party manufacturers or their respective labor practices. If one of our third party manufacturers violates generally accepted labor standards by, for example, using forced or indentured labor or child labor, failing to pay compensation in accordance with local law, failing to operate its factories in compliance with local safety regulations, or diverging from other labor practices generally accepted as ethical, we likely would cease dealing with that manufacturer, and we could suffer an interruption in our product supply. In addition, such a manufacturer's actions could result in negative publicity and may damage our reputation and the value of our brand and discourage retail customers and consumers from buying our products.

We manufacture a portion of ourcrocs products, and any difficulties or disruptions in our manufacturing operations could adversely affect our sales and results of operations.

We produce some of our products at our company-operated manufacturing facilities in Canada and Mexico. In the sixnine months ended JuneSeptember 30, 2005, we produced approximately 31%30% of ourcrocs footwear production at our Canadian facility, and we recently commenced production at our company-operated facility in Mexico. The manufacturing of our products from our proprietary closed-cell resin requires the use of a complex process, and we may experience difficulty in producing footwear that meets our high quality control standards. We will be required to absorb the costs of manufacturing and disposing of products that do not meet our quality standards. These costs are primarily incurred in connection with the initial production of new products, although we may also experience increases in training costs when we initiate production of new products. Additionally, we may incur increased costs as a result of the introduction of new manufacturing equipment such as molds and injection molding machines. Any increases in our manufacturing costs could adversely impact our margins. Furthermore, our manufacturing capabilities are subject to many of the same risks and challenges noted above with respect to our third party manufacturers, including our ability to scale our production capabilities to meet the needs of our customers, and our manufacturing may be disrupted for reasons beyond our control, including work stoppages, fires, earthquakes, floods or other natural disasters. Any disruption to our manufacturing operations will hinder our ability to deliver products to our customers in a timely manner, and could have a material and adverse effect on our business.

We established our own manufacturing facility in Mexico by acquiring the assets of an existing footwear manufacturer in April 2005, and we have leased adjacent facilities and ordered additional equipment to



increase production capacity at this facility. Prior to April 2005, we had never independently established our own manufacturing facility, and this newly-established facility may not be as efficient or as productive as our other company-operated or third party manufacturing operations. Moreover, the expansion of our company-operated manufacturing capabilities will increase our fixed cost base, and could adversely impact our margins and results of operations in the event our sales decline or do not continue to grow.

We depend on a limited number of suppliers for key production materials, and any disruption in the supply of such materials could interrupt product manufacturing and increase product costs.

We depend on a limited number of sources for the primary materials used to make ourcrocs footwear. We source the elastomer resins that constitute the primary raw materials used in our proprietary closed-cell resin that we use to produce our footwear products from one supplier. We do not have any formal purchase agreement with the provider of the elastomer resins, and we purchase these elastomer resins on a purchase order basis. If the supplier we rely on for elastomer resins were to



cease production of these materials, we may not be able to obtain suitable substitute materials in time to avoid interruption of our production cycle, if at all. We may also have to pay materially higher prices in the future for the elastomer resins or any substitute materials we use, which would increase our production costs and could have a materially adverse impact on our margins and results of operations.

Additionally, a single third party processor in Italy compounded all of the proprietary closed-cell resin we used in producingcrocs footwear in 2004, and we expect that this third party processor will continue to provide at least a majority of our requirements for the foreseeable future. Although we have arranged for another third party processor to compound our resin and we began compounding our own proprietary closed-cell resin at Foam Creations's facility in Quebec City, Canada in 2005, the compounding process is complex and difficult to perfect on a large scale, and neither we nor our new third party processor may be able to compound meaningful quantities of our proprietary closed-cell resin suitable for use in our products.

If we are unable to obtain suitable elastomer resins or if we are unable to procure sufficient quantities of our proprietary closed-cell resin, we may not be able to meet our production requirements in a timely manner. Such failure could result in lost potential sales, delays in shipments to customers, strained relationships with customers and diminished brand loyalty.

If we are unable to assimilate our new managers and recruit and retain key personnel necessary to operate our business, our ability to successfully develop and market our products may be harmed.

Several of our executive officers have recently joined us and therefore have limited experience in managing our company. For example, we hired Ronald Snyder, our President and Chief Executive Officer, in June 2004, and Caryn Ellison, our Chief Financial Officer, in November 2004. We may experience difficulty assimilating our recently hired managers, which may adversely impact our business.

To expand our business we will also need to attract, retain and motivate highly skilled design, development, management, accounting, sales, merchandising, marketing and customer service personnel. We plan to hire additional personnel in all areas of our business. Competition for many of these types of personnel is intense. As a result, we may be unable to successfully attract or retain qualified personnel. Additionally, any of our officers or employees can terminate their employment with us at any time, and we do not maintain key person life insurance on any of our employees, including any member of our management team. The loss of any key employee or our inability to attract or retain other qualified employees could harm our business and results of operations.



We rely on a single third party for a significant portion of our warehouse, distribution and fulfillment operations. If this party is unwilling or unable to continue providing services to us, our business could be materially harmed.

We have recently engaged Expeditors International of Washington, Inc. in July 2005 to operate our warehouse, distribution and fulfillment process for a significant portion of our domestic sales. We are dependent on Expeditors to manage inventory, process orders and distribute products to our customers in a timely manner. We do not have a long-term contract with Expeditors and they may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us. Any disruption in our relationship with Expeditors could cause significant delays in the fulfillment of our customers' orders, and we may not be able to locate another distributor that can provide comparable warehouse, distribution and fulfillment services in a timely manner or on acceptable commercial terms.



Additionally, any serious disruption to the services provided to us by Expeditors could harm our ability to supply products to our customers, including:

In the event that the distribution of our products by Expeditors is interrupted for any reason, our business may be materially and adversely affected.

We are in the process of establishing our own warehouse, distribution and fulfillment capabilities, and are also developing relationships with additional third parties to conduct similar services for us. Any additional expenses incurred in connection with, or any disruption in the supply of our products that is caused by, such changes in our logistical infrastructure could adversely affect our business.

We have recently established a company-operated warehouse and order processing and customer order facility in Niwot, Colorado that manages all Internet, apparel and accessories orders and shipments. We have established or are in the process of establishing additional company-operated warehouse and fulfillment operations in Mexico, China, Canada and the Netherlands, and Singapore, and are developing relationships with third parties in Australia, China and MexicoSingapore to provide such services to us. We believe these warehousing, distribution and fulfillment services will enable us to ship our products from the facilities that manufacture our products directly to our customers, rather than remaining dependent on Expeditors's distribution facility in Colorado. The transition from Expeditors to another vendor or to a company-operated warehousing, distribution and fulfillment operation could result in significant delays and disruptions in the supply of our products and could require that we make significant additional expenditures that may adversely impact our operating results.

Moreover, until recently we had never engaged in the warehousing of our products or provided order fulfillment for our retail customers or consumers. As such, we cannot ensure that we will be able to successfully conduct these activities, or that other third parties will be able to conduct these activities for us in a satisfactory manner. Additionally, these warehouse, distribution and fulfillment operations subject us to many of the same risks that our current relationship with Expeditors does, as noted above. In the event that we or a third party are unable to conduct warehousing, distribution and fulfillment activities in a cost effective, timely, and accurate manner, the distribution of our products may be



adversely affected, which could result in harm to our relationships with our retail customers and consumers, a reduction in demand for our products, and additional expenses to us.

We face significant competition and if we are unable to compete effectively, sales of our products may decline and our business could be harmed.

The footwear industry is highly competitive. Recent growth in the market for casual footwear has encouraged the entry of new competitors into the marketplace and has increased competition from established companies. Some of our competitors are offering products that are substantially similar, in design and materials, to ourcrocs-branded footwear. In addition, access to offshore manufacturing is also making it easier for new companies to enter the markets in which we compete.

Our competitors include most major athletic and footwear companies, branded apparel companies and retailers with their own private labels. A number of our competitors:


Our competitors' greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products. If we fail to compete successfully in the future, our sales and profits may decline, our financial condition may deteriorate and the market price of our common stock is likely to fall.

If we are unable to establish and protect our trademarks and other intellectual property rights, competitors may sell products that are substantially similar to ourcrocs footwear, or may produce counterfeit versions of our products, and such competing or counterfeit products could divert sales and may damage our brand image.

We believe our trademarks, trade names, copyrights, trade secrets, pending patents, trade dress and designs are valuable and integral to our success and competitive position. From time to time, we have identified competitors selling products that are very similar in design to certain of ourcrocs footwear models, and that are manufactured from what may be comparable materials to our products. We believe that some of these products may infringe our intellectual property rights. Given the increased popularity of ourcrocs brand, we believe there is a high likelihood that counterfeit products or other products infringing on our intellectual property rights will continue to emerge, seeking to benefit from the consumer demand forcrocs footwear. In order to protect our brand, we may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and may lose our competitive position in the market before we are able to do



so. In addition, enforcing rights to our intellectual property may be difficult and expensive, and we may not be successful in combating counterfeit products and stopping infringement of our intellectual property rights, particularly in some foreign countries, which could make it easier for competitors to capture market share. Intellectual property rights may also be unavailable or limited in some foreign countries. Furthermore, our efforts to enforce our trademark and other intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our trademark and other intellectual property rights. If we are unsuccessful in protecting and enforcing our intellectual property rights, continued sales of such competing products by third parties could harm our brand and adversely impact our business, financial condition and results of operations.

We have registeredcrocs as a trademark for footwear in Australia, the European Union, Japan, Mexico, New Zealand and Panama. We have also applied to registercrocs and thecrocs logo as a trademarktrademarks in 36 jurisdictions around the world, including the U.S., Brazil, China, Israel, and South Africa, but such applications have not been approved.approved and are currently pending. In manyaddition, we have recently extended the scope of our trademark registrations and applications for both the countriescrocs mark and logo to cover non-footwear products such as sunglasses, goggles, knee pads, watches, luggage, and some of our Internet sales activities. Although we believe that we have applied for trademark registrations in whichall jurisdictions where we are doing or intend to do business, however,there is a possibility that we have not yet applied to register as trademarksthecrocs, our mark, the company logos, the individual brand names for our products or our marketing slogans. In addition,slogans in countries where we will do business in the future, and we have elected not extended the scope of all of ourto apply for trademark registrations and applications to cover non-footwear products.for some marks in some jurisdictions. Furthermore, we may not obtain trademark registrations in connection with any applications that we do file and trademark protection, whether



registered or common law, may not be available in every country in which we offer or intend to offer our products. Failure to adequately protect our trademark rights could damage or even destroy ourcrocs brand, expose us to trademark liability and impair our ability to compete effectively. In addition, defending or enforcing our trademark rights could result in the expenditure of significant financial and managerial resources.

We believe our success also depends in part onmay be enhanced by our ability to obtain and enforce patent protection for our products, bothand therefore have elected to pursue patent protection for our products in the U.S. and other countries, to prevent our competitors from developing, manufacturing and marketing similar products.countries. Currently, we have only been issued fourone Community Design RegistrationsRegistration and onethree Community Multiple Design RegistrationRegistrations in the European Union covering a total of ten shoe designs. Three of our shoe designs have also received registrations in South Korea and India, but we have not been issuedgranted any utility patents or design patents in the U.S. or any utility patents or additional design registrations in other countries. We do not know whether any of our pending or future patent applications will result in the issuance of patents, and competitors may challenge the validity or scope of theseour registered designs or patent applications. The scope and extent ofapplications that proceed to issuance. If patents issue from such pending or future patent protection for our products is uncertain and we cannot predict the breadth of claims that will be allowed and issued in patents. If such patents are issued,applications, we cannot predict how the patent claims will be construed, or enforced, and such patents may not provide us with any competitive advantages,the ability to prevent the development, manufacturing, and/or marketing of competing products, or may be challenged by third parties.parties on the basis of validity and enforceability.

We also rely upon trade secrets, confidential information and other unpatented proprietary information, related to, among other things, the formulation of our proprietary closed-cell resin and product development, especially where we do not believe patent protection is appropriate or obtainable. Using third party manufacturers may increase risk of misappropriation of our trade secrets, confidential information and other unpatented proprietary information. The agreements we use to try to protect our intellectual property, confidential information and other unpatented proprietary information may not effectively protect such intellectual property and information and may not be sufficient to prevent unauthorized use or disclosure of such trade secrets and information. A party to one of these agreements may breach the agreement and we may not have adequate remedies for such breach. As a result, our trade secrets, confidential information and other unpatented proprietary information may become known to others, including our competitors. Furthermore, as with any trade secret, confidential information or other proprietary information, others, including our competitors, may independently develop or discover such trade secrets and information, which would render them less valuable to us.


Third parties may claim that we are infringing their intellectual property rights, and such claims may be costly to defend, may require us to pay licensing fees, damages, or other amounts, and may prevent, or otherwise impose limitations on, the manufacture, distribution or sale of our products.

From time to time, third parties may claim that we are infringing upon their intellectual property rights, and we may be found to infringe those intellectual property rights. While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of the intellectual property rights of others that may cover some of our technology or products. If we are forced to defend against such third party claims, whether or not such claims are resolved in our favor, we could encounter expensive and time consuming litigation which could divert our management and key personnel from business operations. Further, if we are found to be infringing on the intellectual property rights of others, we may be required to pay damages or ongoing royalty payments, or comply with other unfavorable terms. Additionally, if we are found to be infringing on the intellectual property rights of others, we may not be able to obtain license agreements on terms acceptable to us, and this may prevent us from manufacturing, marketing or selling our products. Thus, such third party claims may significantly reduce the sales of our products or increase our cost of goods sold. Any such reductions in sales or cost increases could be significant, and could have a material and adverse affect on our business.



Our financial success may be limited to the strength of our relationships with our retail customers and to the success of such retail customers.

Our financial success is significantly related to the willingness of our retail customers to continue to carry our products and to the success of such customers. We do not have long term contracts with any of our retail customers, and sales to our retail customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by the customer. If we cannot fill our retail customers' orders in a timely manner, the sales of our products and our relationships with those customers may suffer, and this could have a material adverse effect on our product sales and ability to grow our product line.

In the sixnine months ended JuneSeptember 30, 2005, our ten largest retail customers accounted for approximately 41%36% of our revenues, with Dillard's, our largest customer for the period, accounting for approximately 14% of our revenues. If any of our major retail customers experiences a significant downturn in their business or fails to remain committed to our products or brand, then these customers may reduce or discontinue purchases from us. In addition, we extend credit to our customers based on an evaluation of each customer's financial condition. If a significant customer to whom we have extended credit experiences financial difficulties, our bad debt expense may increase relative to revenues in the future. Any significant increase in our bad debt expense relative to revenues would adversely impact our net income and cash flow and could affect our ability to pay our own obligations as they become due.

Furthermore, many of our retail customers compete with each other, and if they perceive that we are offering their competitors better pricing and support, they may reduce purchases of our products. In addition, we compete directly with our retail customers by selling our products to consumers via the Internet and through our company-operated kiosks. If our retail customers believe that our direct sales to consumers divert sales from their stores, this may weaken our relationships with such customers and cause them to reduce purchases of our products.



If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have greater difficulty filling our customers' orders, either of which could adversely affect our business.

The footwear industry is subject to cyclical variations and declines in performance, as well as fashion risks and rapid changes in consumer preferences, the effects of weather, general economic conditions and other factors affecting demand. These factors make it difficult to forecast consumer demand, and if we overestimate demand for our products, we may be forced to liquidate excess inventories at a discount to customers, resulting in markdowns and lower gross margins. Conversely, if we underestimate consumer demand, we could have inventory shortages, which can result in lost potential sales, delays in shipments to customers, strains on our relationships with customers and diminished brand loyalty. Moreover, because our product line is limited, we may be disproportionately affected by cyclical downturns in the footwear industry, changes in consumer preferences and other factors affecting demand, which may make it more difficult for us to accurately forecast our production needs, exacerbating these risks. A decline in demand for our products, or any failure on our part to satisfy increased demand for our products, could adversely affect our business and results of operations.



We may fail to successfully expand our distribution network or introduce our products internationally, and this may cause our results of operations to fall short of expectations.

As part of our growth strategy, we plan to expand our distribution network and expand the sales of our products into new locations internationally. Successfully executing this strategy will depend on many factors, including:

If we are unable to successfully expand our distribution channels and sell ourcrocs-branded products internationally, our business may fail to grow, our brand may suffer and our results of operations may be adversely impacted.

We conduct, and in the future expect to conduct, a significant portion of our activities outside the U.S., and therefore we are subject to the risks of international commerce.

We use third party manufacturers located in foreign countries, we operate manufacturing facilities located in Canada and Mexico, and we sell our products to retailers outside of the U.S. Foreign manufacturing and sales activities are subject to numerous risks, including the following:





Furthermore, our manufacturing activity outside of the U.S., including the production of our products by third party manufacturers, is subject to risks of poor infrastructure, shortages of equipment, and labor unrest, in addition to those risks noted above. Once our products are manufactured, we may also suffer delays in distributing our products due to work stoppages, strikes or lockouts at the ports where our products arrive. Such labor disruptions could result in product shortages and delays in distributing our products to retailers. These factors and the failure to properly respond to them could make it difficult to obtain adequate supplies of quality products when we need them, resulting in reduced sales and harm to our business.

Additionally, although sales outside of the U.S. did not constitute a significant portion of our revenues in 2004, we expect to expand our international sales and marketing operations in the future. Our ability to capitalize on growth in new international markets and to maintain the current level of operations in our existing international markets is subject to risks associated with international sales operations, as noted above, as well as the difficulties associated with promoting products in unfamiliar cultures.

Sales of our products may be subject to seasonal variations, which could increase the volatility of the price of our common stock.

The footwear industry generally is characterized by significant seasonality of sales. Due to the growth in sales of our products in the past two years, we cannot assess with any certainty the degree to which sales of our footwear products will be subject to seasonal variation, but we expect some degree of seasonality in the future. For example, extended periods of unusually cold weather during the spring and summer could reduce demand for our footwear. Seasonal variations in consumer demand may result in fluctuations in our results of operations from quarter to quarter, and the effect of favorable or unfavorable weather on sales may be significant enough to materially affect our quarterly results. Wide variations in our quarterly operating results may increase the volatility of the price of our common stock.

Any acquisitions may be difficult to identify and successfully integrate into our business and could have other adverse consequences.

We have made, and may in the future make, acquisitions of, or investments in, other companies. For example, in June 2004, we acquired Foam Creations, and in April 2005, we acquired the manufacturing operations of a footwear producer in Mexico. We expect to consider other opportunities to acquire or make investments in other businesses and products that could enhance our manufacturing capabilities, complement our current products or expand the breadth of our markets or customer base. The pursuit of acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not they are consummated. In the event we finance acquisitions by issuing equity or convertible debt securities, our stockholders may be diluted.



In addition, we have limited experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired operations successfully with our business or


effectively manage the combined business following completion of the acquisition. We may also not achieve the anticipated benefits from the acquired business due to any of the following factors:

If we are unable to integrate any new business successfully, we could be required either to dispose of the acquired operations or to undertake changes to the acquired operations in an effort to integrate them with our business. If we experience any of the difficulties noted above, our business and financial condition could be materially and adversely affected.

We intend to make substantial expenditures to expand our operations and remain competitive in the rapidly changing footwear industry, and we may not be able to secure adequate financing to meet the needs of our business.

Our future success may depend on our ability to obtain additional financing and capital to support our continued growth and operations, including our working capital needs. We may seek to raise capital by:

We may not be able to obtain additional capital when we want or need it, and capital may not be available to us on satisfactory terms. If we issue additional equity or convertible debt securities to raise capital, it may be dilutive to your ownership interest. Furthermore, any additional financing and capital may have terms and conditions that adversely affect our business, such as restrictive financial or operating covenants. If we fail to secure adequate financing on acceptable terms for our maintenance or growth, our business could be materially harmed.

We can issue shares of preferred stock without stockholder approval, which could adversely affect the rights of common stockholders.

Our certificate of incorporation permits us to establish the rights, privileges, preferences and restrictions, including voting rights, of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders of our common stock may suffer as a result of the rights granted to holders of preferred stock that we may issue in the future. In addition, we could issue preferred stock to prevent a change in control of our company, depriving common stockholders of an opportunity to sell their stock at a price in excess of the prevailing market price.



Our certificate of incorporation, bylaws and Delaware law contain provisions that could discourage a third party from acquiring us and consequently decrease the market value of an investment in our stock.

Our certificate of incorporation, bylaws and Delaware corporate law each contain provisions that could delay, defer or prevent a change in control of our company or changes in our management. Among other things, these provisions:


These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control or changes in our management that a stockholder might consider favorable. In addition, Section 203 of the Delaware General Corporation Law may discourage, delay, or prevent a change in control of us. Any delay or prevention of a change of control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline.

Risks Related to this Offering

Our common stock has no prior market, and the price of our common stock may be volatile.

Prior to the offering, there has been no public market for our common stock, and a regular trading market may not develop after the offering. The initial public offering price of our common stock will be determined through negotiations between the underwriters, the selling stockholders and us, but the market price of our common stock may decline below the initial public offering price in the future. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:


In addition, the timing of orders by our customers may cause quarterly fluctuations of our results of operations that may, in turn, affect the market price of the common stock.

Future sales of our common stock could depress our stock price.

We expect that all of our stockholders and optionholders, including all of our executive officers and directors, will agree not to sell shares of our common stock for a period of 180 days following this offering, subject to extension for up to 35 days under specified circumstances at the option of Piper Jaffray and Thomas Weisel Partners. However, Piper Jaffray and Thomas Weisel Partners may waive this restriction and allow any such stockholders to sell shares at any time. See "Underwriting." Shares of common stock subject to these lockup agreements will become eligible for sale in the public market upon expiration of these lock-up agreements, subject to limitations imposed by Rule 144 under the Securities Act of 1933. Of the shares subject to lock-up agreements,            shares will be "restricted securities" under Rule 144, and            of such shares will be eligible for resale immediately upon expiration of the lock-up agreements. See "Shares Eligible for Future Sale." Sale of shares of our common stock by our stockholders, or the perception that such stockholders may sell shares of our common stock, could have an adverse impact on the market price for our common stock.

We will incur increased costs as a public company, which could adversely affect our financial condition and results of operations.

As a public company, we will incur significant legal, accounting and other expenses that we do not incur as a privately-owned company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC and Nasdaq, have required changes in the corporate governance practices of public companies. We expect these new rules and regulations will increase our legal and financial compliance costs and make some activities more time-consuming and costly. In addition, we will incur additional costs associated with our public company reporting requirements. We also expect these new rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Any of these circumstances could adversely affect our business, financial condition or results of operations.



If you purchase shares of common stock sold in this offering, you will experience immediate dilution.

If you purchase shares of our common stock in this offering, you will experience dilution of $            per share, based on an assumed offering price of $             per share, because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. You will experience additional dilution upon the exercise of stock options, including those stock options currently outstanding and those granted in the future and any issuance of restricted stock or other equity awards under our equity incentive plan. See "Dilution."

We will have broad discretion in the use of proceeds from this offering and may not obtain a significant return on the use of these proceeds.

We plan to use the net proceeds from this offering to repay the outstanding balance on our revolving credit facility and for working capital and other general corporate purposes. However, we will have broad discretion in determining how we apply much of the net proceeds from this offering and you may not agree with such uses. Also, we may not be successful in investing the net proceeds from this offering to yield a favorable return. See "Use of Proceeds."



A SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled "Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the following:

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this prospectus. You should read this prospectus and the documents that we reference in this prospectus, or that we have filed as exhibits to the registration statement of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.



USE OF PROCEEDS

We estimate that the net proceeds from the sale of common stock offered by us will be approximately $        million, assuming a public offering price of $         per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering. All shares of our common stock that are subject to the underwriters' over-allotment option will be sold to the underwriters by the selling stockholders. We will not receive any proceeds from the sale of shares to be sold by the selling stockholders.

We will use approximately $5.5$6.5 million of the net proceeds we receive from the sale of our common stock in this offering to repay all amounts outstanding under our bankamended and restated credit facility. The amount payableoutstanding under the credit facility at September 30, 2005 was $5.5$5.0 million, and the amount outstanding as of December 31, 2005 was $5.9 million. Interest on this credit facility accrues at the higher offloating rates we select on each borrowing, equal to either the Bank of America prime rate, or a calculated Eurodollar rate equal to an adjusted LIBOR rate plus 1.0% ora margin ranging from 1.75% to 2.50% depending on our EBITDA for the Federal Funds Rate plus 1.5%.most recently completed four fiscal quarters. The effective interest rate as of June 30,December 31, 2005 was 7.28%7.25% per annum. Interest accrues on the credit facility monthly and is paid at the end of each month. The credit facility matures on April 8, 2006. We are required to repay the credit facility in full in the event we complete a public offering of our common stock, including this offering. Upon repayment of the credit facility with a portion of the proceeds of this offering, the facility will terminate.October 26, 2008. We used a portion of the proceeds of borrowings under the credit facility to fund a cash distribution of $3.0 million which was declared to members as of December 31, 2004 of our predecessor limited liability company pursuant to the operating agreement for that entity. In addition, we used $1.3 million for the purchase of our manufacturing operation in Mexico and associated operating assets in April 2005 and $1.2$1.6 million to purchase inventory and for working capital purposes.

We will use an additional $2.6$2.0 million of the net proceeds to repay all amounts outstanding under Foam Creations's credit facility. Interest on this facility accrues at one-month LIBORthe current Canadian prime rate plus 3.50%, less 0.2% per year,0.50% and matures in August 2011.2006. We will also use $0.5 million$534,000 of the proceeds to repay a loan made to Foam Creations by National Bank of Canada, which accrues interest at the current Canadian prime rate plus 0.75% and matures on March 1, 2006, $0.6 million$607,000 to repay a loan made to Foam Creations by National Bank of Canada, which accrues interest at the current Canadian prime rate plus 0.75% and matures in October 2012, and $1.3$2.5 million of the proceeds to repay a loan made to Foam Creations by NationalDevelopment Bank of Canada, which includes interest at a rate of 4.75% (as of June 30, 2005)LIBOR plus 3.3% and matures in April 2006.2011.

We expect that all of our outstanding Series A preferred stock will automatically convert into shares of our common stock in connection with the closing of this offering, and we will pay all accrued and unpaid dividends on the preferred stock in connection with the conversion. As of September 30, 2005, there was $0.1 million$92,000 in unpaid dividends accrued on the Series A preferred stock.

We expect to use approximately $7.0 million of the net proceeds we receive from this offering for capital expenditures related to increasing our manufacturing capacity and improving our infrastructure, including approximately $2.0$3.5 million to expand and upgrade our existing information technology systems. We also intend to use a portion of the net proceeds to further develop our international operations and to increase our marketing activities, although we have not yet allocated specific amounts for these purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain additional manufacturing facilities. We have no commitments with respect to any acquisition or investment, and we are not involved in negotiations with respect to any similar transaction. We intend to use the remainder of the net proceeds we receive from this offering for working capital and general corporate purposes.



The principal purposes of this offering are as follows:

We will have broad discretion in the application of the balance of the net proceeds. You will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds. Pending application of the net proceeds we receive from this offering, we will invest the proceeds in government securities and other short-term, investment-grade interest bearing securities.


DIVIDEND POLICY

We currently intend to retain all future earnings for the operation and expansion of our business and do not anticipate paying cash dividends on our shares of common stock in the foreseeable future. Any payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon our results of operations, earnings, capital requirements, contractual restrictions, outstanding indebtedness and other factors that our board of directors deems relevant.



CAPITALIZATION

The following table sets forth our capitalization as of JuneSeptember 30, 2005:


You should read the information below in conjunction with our consolidated financial statements and their notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Use of Proceeds" included elsewhere in this prospectus.



 As of June 30, 2005

 As of September 30, 2005


 Actual
 Pro Forma
As Adjusted


 Actual
 Pro Forma
As Adjusted



 (dollars in thousands)


 (dollars in thousands)



 (unaudited)


 (unaudited)

Long-term debt (including current portion)Long-term debt (including current portion) $8,511 $ Long-term debt (including current portion) $10,298 $ 
Redeemable common shares, 36,000 shares issued and outstanding(1) 1,800  
Redeemable convertible preferred shares, par value $0.001 per share, 7,000,000 shares authorized:(2)    
Redeemable common shares, 8,410,320 shares issued and outstanding(1)(3)Redeemable common shares, 8,410,320 shares issued and outstanding(1)(3) 1,800  
Redeemable convertible preferred shares, par value $0.001 per share, 7,000,000 shares authorized:(2)(3)Redeemable convertible preferred shares, par value $0.001 per share, 7,000,000 shares authorized:(2)(3)    
Series A:
31,900 shares issued and outstanding, actual; and 0 shares pro forma as adjusted
 5,500  Series A:
7,452,478 shares issued and outstanding, actual; and 0 shares pro forma as adjusted
 5,500  
Stockholders' equity:Stockholders' equity:    Stockholders' equity:    
Common Stock, par value $0.001 per share; 25,000,000 shares authorized; 72,432 shares issued and outstanding, actual; and                shares issued and outstanding, pro forma as adjusted 1  Common Stock, par value $0.001 per share; 25,000,000 shares authorized(3); 17,302,831 shares issued and outstanding, actual; and                shares issued and outstanding, pro forma as adjusted 17  
Additional paid-in capital 5,271  Additional paid-in capital 13,275  
Deferred compensation (4,449)  Deferred compensation (13,404)  
Retained earnings 2,410  Retained earnings 12,596  
Accumulated other comprehensive income 420  Accumulated other comprehensive income 750  
 
 
 
 
Total stockholders' equity 3,653  Total stockholders' equity 13,234  
 
 
 
 
Total capitalization $19,464 $ Total capitalization $30,832 $ 
 
 
 
 

(1)
In connection with the completion of this offering, the redemption feature associated with these shares will expire and these shares will be reclassified to stockholders' equity.

(2)
All of our outstanding redeemable convertible preferred stock will be converted into 31,9007,452,462 shares of our common stock upon completion of this offering.

(3)
In connection with the completion of this offering, the number of authorized shares will be increased to 125,000,000 shares of common stock and 5,000,000 shares of preferred stock.


DILUTION

If you invest in our common stock in this offering, upon the completion of this offering your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock. Our pro forma net tangible book value as of JuneSeptember 30, 2005 was approximately $        million, or approximately $        per share. Pro forma net tangible book value per share is determined by dividing the excess of our pro forma total tangible assets over our pro forma total liabilities by the pro forma total number of shares of common stock outstanding. The pro forma total number of shares of common stock outstanding includes the effect of the conversion of all shares of our outstanding Series A preferred stock into common stock and the termination of the put option on redeemable shares of our common stock in connection with this offering.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to our sale and issuance of common stock in this offering at the initial public offering price of $        per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of JuneSeptember 30, 2005 would have been approximately $        million, or $        per share of common stock. This represents an immediate increase in net tangible book value of $        per share to existing stockholders and an immediate dilution of $        per share to new investors purchasing shares of common stock in this offering at the initial offering price. The following table illustrates this dilution on a per share basis:

Assumed initial public offering price per share    $ 
     
 Pro forma net tangible book value per share at JuneSeptember 30, 2005 $    
  
   
 Increase in pro forma net tangible book value per share attributable to this offering $    
  
   
Pro forma net tangible book value per share after this offering    $ 
     
Dilution per share to new investors    $ 
     

The following table sets forth on a pro forma basis as of JuneSeptember 30, 2005, the total number of shares of common stock purchased from us, the total consideration paid to us for these shares and the average price per share paid to us by our existing stockholders and by new investors, before deducting underwriting discounts and commissions and estimated offering expenses payable by us at an assumed initial public offering price of $        per share.

 
 Shares Purchased
 Total Consideration
  
 
 Average
Price Per
Share

 
 Number
 Percent
 Amount
 Percent
Existing stockholders    %$   %$ 
New investors    %$   %$ 
  
 
 
 
 
 Total   100%$  100%$ 
  
 
 
 
 

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to                , or         % of the total number of shares of our common stock outstanding after this offering, and will increase the total number of shares held by new investors to                , or         % of the total number of shares of our common stock outstanding after this offering. If the underwriters' over-allotment option is exercised in full, the number of shares held by existing stockholders after this offering, including the effect of sales by the selling stockholders, would be reduced to                , or        % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to                , or        % of the total number of shares of our common stock outstanding after this offering.

To the extent options are exercised or shares of common stock are issued pursuant to restricted stock award agreements or other awards under our 2005 Equity Incentive Plan, there will be further dilution to investors in this offering.



SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected consolidated financial data presented below in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

The selected financial data presented below under the heading "Consolidated Statement of Operations Data" for the years ended December 31, 2002, 2003 and 2004 and the selected financial data presented below under the heading "Consolidated Balance Sheet Data" as of December 31, 2003 and 2004 have been derived from, and are qualified by reference to, the consolidated financial statements included elsewhere in this prospectus. The selected financial data presented below under the headings "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" for the sixnine months ended and as of JuneSeptember 30, 2004 and 2005 are unaudited, have been derived from unaudited consolidated financial statements that are included elsewhere in this prospectus and have been prepared on the same basis as the annual consolidated financial statements. The selected consolidated financial data presented below under the heading "Consolidated Balance Sheet Data" as of and for the year ended December 31, 2002 are derived from our unaudited financial statements. The selected financial data presented below also includes unaudited pro forma financial information under the heading "Pro Forma for acquisition of Foam Creations Year Ended December 31, 2004" to reflect the acquisition of Foam Creations as if it had occurred on January 1, 2004. Such unaudited pro forma financial information does not necessarily reflect the results of operations that may have actually resulted had the acquisition occurred on January 1, 2004, and should not be taken as necessarily indicative of our future results of operations. The unaudited pro forma financial information has been derived from, and is qualified by reference to, the "Unaudited Pro Forma Condensed Combined Consolidated Statement of Operations" included in this prospectus. In the opinion of management, the unaudited selected financial data presented below under the headings "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" reflect all adjustments, which include only normal and recurring adjustments, necessary to present fairly our results of operations for and as of the periods presented. Historical results are not necessarily indicative of the results of operations to be expected for future periods.


 
  
  
  
 Pro Forma for
acquisition of
Foam Creations
Year Ended
December 31, 2004(2)

 Six Months
Ended June 30,

 
 Year Ended December 31,
 
 2002(1)
 2003
 2004
 2004
 2005(3)
 
 (dollars in thousands, except per share data)

Consolidated Statement of Operations Data                  
Revenues $24 $1,165 $13,520 $16,921 $3,020 $36,727
Cost of sales (including stock-based compensation expense of $—, $—, $—, $—, $— and $29, respectively)  16  891  7,162  8,529  1,706  15,919
  
 
 
 
 
 
Gross profit  8  274  6,358  8,392  1,314  20,808
Selling, general and administrative expense (including stock-based compensation expense of $240, $356, $1,792, $1,792, $1,008 and $1,231, respectively)  453  1,471  7,929  9,325  2,217  12,104
  
 
 
 
 
 
Income (loss) from operations  (445) (1,197) (1,571) (933) (903) 8,704
Interest expense    3  47  101  1  202
Other expense—net      19  19    23
  
 
 
 
 
 
Income (loss) before income taxes  (445) (1,200) (1,637) (1,053) (904) 8,479
Income tax expense (benefit)(3)      (143) 31    2,397
  
 
 
 
 
 
Net income (loss)  (445) (1,200) (1,494) (1,084) (904) 6,082
Dividends on redeemable convertible
preferred shares(4)
      142  275    136
  
 
 
 
 
 
Net income (loss) attributable to
common stockholders
 $(445)$(1,200)$(1,636)$(1,359)$(904)$5,946
  
 
 
 
 
 
Unaudited pro forma income tax benefit (Note 2)(5)        (441)    (346)  
        
    
   
Unaudited pro forma net loss (Note 2)(5)       $(1,053)   $(558)  
        
    
   
Income (loss) per common share:                  
 Basic $(12.54)$(13.44)$(15.51)$(12.88)$(8.73)$42.55
 Diluted $(12.54)$(13.44)$(15.51)$(12.88)$(8.73)$40.42
Weighted average common shares:                  
 Basic  35,479  89,271  105,479  105,479  103,546  107,855
 Diluted  35,479  89,271  105,479  105,479  103,546  150,487
Pro forma income per common share(6)                  
 Basic       $(7.67)   $(4.12)$43.51
 Diluted       $(7.67)   $(4.12)$40.42
Pro forma weighted average shares outstanding(6)                  
 Basic        137,379     135,446  139,755
 Diluted        137,379     135,446  150,487

Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Pairs ofcrocs footwear sold  1,500  76,000  649,000     181,000  2,178,000

 


 

As of December 31,


 

As of June 30,

 
 2002(1)
 2003
 2004
 2004
 2005
 
 (in thousands)

Consolidated Balance Sheet Data               
Cash and cash equivalents $73 $326 $1,054 $345 $3,165
Total assets  454  1,304  16,224  11,923  39,938
Long-term obligations    400  3,660  2,919  3,995
Redeemable common shares    1,800  1,800  1,800  1,800
Redeemable convertible preferred shares      5,500  5,000  5,500
Total stockholders' equity (deficit)  389  (1,642) (3,591) (1,263) 3,517
 
  
  
  
 Pro Forma for
acquisition of
Foam Creations
Year Ended
December 31, 2004(2)

 Nine Months
Ended September 30,

 
 Year Ended December 31,
 
 2002(1)
 2003
 2004
 2004
 2005(3)
 
 (dollars in thousands, except per share data)

Consolidated Statement of Operations Data                  
Revenues $24 $1,165 $13,520 $16,921 $8,137 $75,022
Cost of sales (including stock-based compensation expense of $—, $—, $—, $—, $— and $56, respectively)  16  891  7,162  8,529  4,188  32,032
  
 
 
 
 
 
Gross profit  8  274  6,358  8,392  3,949  42,990
Selling, general and administrative expense (including stock-based compensation expense of $240, $356, $1,792, $1,792, $1,435 and $3,399, respectively)  453  1,471  7,929  9,325  4,430  23,059
  
 
 
 
 
 
Income (loss) from operations  (445) (1,197) (1,571) (933) (481) 19,931
Interest expense    3  47  101  19  380
Other expense—net      19  19  14  25
  
 
 
 
 
 
Income (loss) before income taxes  (445) (1,200) (1,637) (1,053) (514) 19,526
Income tax expense (benefit)(3)      (143) 31  44  6,724
  
 
 
 
 
 
Net income (loss)  (445) (1,200) (1,494) (1,084) (558) 12,802
Dividends on redeemable convertible
preferred shares(4)
      142  275  69  206
  
 
 
 
 
 
Net income (loss) attributable to
common stockholders
 $(445)$(1,200)$(1,636)$(1,359)$(627)$12,596
  
 
 
 
 
 
Unaudited pro forma income tax benefit (Note 2)(5)        (441)    (240)  
        
    
   
Unaudited pro forma net loss (Note 2)(5)       $(1,053)   $(387)  
        
    
   
Income (loss) per common share:                  
 Basic $(.05)$(.06)$(.07)$(.06)$(.03)$.39
 Diluted $(.05)$(.06)$(.07)$(.06)$(.03)$.38
Weighted average common shares:                  
 Basic  8,288,710  20,855,385  24,641,935  24,641,935  24,481,760  25,329,984
 Diluted  8,288,710  20,855,385  24,641,935  24,641,935  24,481,760  33,358,633
Pro forma income per common share(6)                  
 Basic       $(.03)   $(.01)$.39
 Diluted       $(.03)   $(.01)$.38
Pro forma weighted average shares outstanding(6)                  
 Basic        32,094,413     31,934,238  32,782,462
 Diluted        32,094,413     31,934,238  35,358,633

Operating Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Pairs ofcrocs footwear sold  1,500  76,000  649,000     393,000  4,309,000


 


 

As of December 31,


 

As of
September 30,

 
 2002(1)
 2003
 2004
 2004
 2005
 
 (in thousands)

Consolidated Balance Sheet Data               
Cash and cash equivalents $73 $326 $1,054 $1,245 $4,320
Total assets  454  1,304  16,224  13,239  57,643
Long-term obligations    400  3,660  2,974  5,264
Redeemable common shares    1,800  1,800  1,800  1,800
Redeemable convertible preferred shares      5,500  5,000  5,500
Total stockholders' equity (deficit)  389  (1,642) (3,591)$(129) 13,234

(1)
We were founded in 1999 but did not commence operations until 2002, when we began selling footwear in the United States. As a result, there were no material operations prior to 2002.

(2)
Pro forma to reflect our acquisition of Foam Creations as if it had occurred on January 1, 2004.


(3)
On January 4, 2005, we converted from a limited liability company to a taxable corporation. For the tax years beginning on January 1, 2005 and afterward, we will be subject to corporate-level U.S. federal and state income taxes. Additionally, the statement of operations for the sixnine months ended JuneSeptember 30, 2005 reflects a one-time income tax benefit of $723,000 to record the net deferred tax assets at the date of conversion.

(4)
Dividends accrued in 2004 were paid to holders of our Class C convertible preferred membership units. Our Class C membership units were converted into shares of our Series A preferred stock in connection with our conversion from a limited liability company to a corporation on January 4, 2005.

(5)
The unaudited pro forma data presented gives effect to our conversion into a Colorado corporation as if it occurred at the beginning of the year ended December 31, 2004. The unaudited pro forma income tax benefit represents a combined federal and state effective tax rate of 38.25% and does not consider potential tax loss carrybacks, carryforwards or the realizability of deferred tax assets. The unaudited pro forma net loss represents our net loss for the periods presented as adjusted to give effect to the pro forma income tax benefit.

(6)
Unaudited pro forma income per common share and unaudited pro forma weighted average shares outstanding for the year ended December 31, 2004 and for the sixnine months ended JuneSeptember 30, 2004 and 2005 reflect the conversion of shares of our Series A preferred stock to shares of common stock upon completion of this offering as well as the effect of our conversion into a Colorado corporation as set forth in footnote (5) above.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements based on our current expectations, assumptions, estimates and projections. These forward-looking statements involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements." Our actual results could differ materially from those indicated in these forward-looking statements as a result of various factors, as more fully discussed below and elsewhere in this prospectus, particularly in the section entitled "Risk Factors."

Overview

We are a rapidly growing designer, manufacturer and marketer of footwear for men, women and children under thecrocs brand. We have been marketing and distributing footwear products since November 2002, shortly after completing the modification and improvement of a shoe produced by Foam Creations. In June 2004, we acquired Foam Creations, including its manufacturing operations, product lines and rights to the proprietary closed-cell resin. All of our footwear products incorporate our proprietary closed-cell resin, which enables us to produce a soft and lightweight, non-marking, slip- and odor-resistant shoe that retails at attractive price points ranging from $29.99 to $59.99. In addition to our footwear products, we recently introduced a line ofcrocs-branded apparel and accessory items. We also use our proprietary closed-cell resin to manufacture non-branded products that we sell to original equipment manufacturers.

We currently sell ourcrocs-branded products throughout the U.S. and in over 3040 countries worldwide. Outside the U.S., we sell our products directly to retailers, or through distributors where we believe they offer a preferable alternative to direct sales. We also sell directly to consumers through our website and our company-operated kiosks. The broad appeal of our footwear has allowed us to market our products to a wide range of distribution channels in the U.S., including traditional footwear retailers as well as a variety of specialty channels. As of September 30, 2005, our retail customer base included over 2,8003,100 accounts that represented over 5,7006,000 retail store locations selling our products.

We have achieved significant growth since our inception, driven largely by the popularity of our footwear products and our ability to significantly expand the breadth and depth of our distribution network. Since we started marketing our first footwear model in November 2002, we have increased our unit volumes from 76,000 pairs of footwear sold in 2003 to 649,000 pairs of footwear sold in 2004. We sold 2.24.4 million pairs of footwear in the sixnine months ended JuneSeptember 30, 2005. As a result, our revenues have increased from $1.2 million in 2003 to $13.5 million in 2004, and we recorded $36.7$75.0 million of revenues in the sixnine months ended JuneSeptember 30, 2005. Sales of non-branded products by Foam Creations, which we acquired in June 2004, accounted for $2.5$3.9 million of our revenues for the sixnine months ended JuneSeptember 30, 2005, and $2.7$2.6 million of our revenues in 2004. Our net income for the sixnine months ended JuneSeptember 30, 2005 was $6.1$12.8 million, compared to a loss of $904,000$558,000 for the sixnine months ended JuneSeptember 30, 2004. Continued growth of our revenues and profitability will depend substantially on the continued popularity of our existing footwear products, our ability to continue to introduce new models of footwear that meet the evolving demands of our retail customers and end consumers, our ability to effectively manage our sales and distribution network, and our ability to maintain sufficient product supply to meet expected growth in demand.

We have achieved strong gross profit margins since commencing sales of ourcrocs footwear. For the sixnine months ended JuneSeptember 30, 2005, our gross profit was $20.8$43.0 million, or 56.7%57.3% of revenues, compared to $1.3$3.9 million, or 43.5%48.5% of revenues, for the sixnine months ended JuneSeptember 30, 2004. We believe a number of factors have contributed to our ability to achieve gross profit margins at these levels. Generally, we



levels. Generally, we have not discounted the purchase price of ourcrocs footwear due to high levels of demand for our products. In addition, the strong demand for our products has resulted in limited returns from our customers. Additionally, our use of third party manufacturers as well as company-operated manufacturing facilities has allowed us to maintain a relatively low cost structure while enabling us to achieve significant production flexibility. We continue to refine our supply, manufacturing and distribution strategies to improve our operating efficiencies and reduce our costs. However, gross profit margins will be affected by our ability to accurately forecast demand and avoid excess inventory, our ability to control our supply, manufacturing and distribution costs, and by changes in the mix of products we sell.

We currently manufacture our footwear products and accessories, and all of our non-branded products for original equipment manufacturers, at Foam Creations's facility in Quebec City, Canada. We also manufacture our footwear products at our company-operated facility located in Mexico. In addition, we contract with third party manufacturers in China, Florida Italy and MexicoItaly for the production of our footwear products.products, and we expect to initiate production in the first quarter of 2006 at a facility in Romania operated by one of our existing third party manufacturers. For the sixnine months ended JuneSeptember 30, 2005, one of our third party manufacturers located in China produced approximately 59%55% of our footwear unit volume. We believe our in-house production capabilities enable us to make rapid changes to manufacturing schedules, providing us the flexibility to quickly ship in-demand models and colors, while outsourcing allows us to lower our capital investment and retain the cost-effectiveness of using third party manufacturing.

The popularity of our footwear has often resulted in our inability to produce shoes in sufficient volumes to satisfy the demands of our retail customers and consumers. We have been attempting to meet this demand by actively expanding our company-operated manufacturing capacity, as well as increasing the number of shoes produced for us by third party manufacturers. We are in the process of expandingDuring 2006 we intend to expand our manufacturing capacity at the facility we operate in Mexico, and we have also recently addedin addition to adding third party manufacturing capacity in Mexico. In addition, we are in the process of expandingRomania. We also recently expanded production capacity at our third party manufacturers located in China. We expect the additional production capacity at these facilities in Mexico and China will be fully available before the end of 2005. In the event we are successful in further growing our brand and increasing sales of our products, we will need to continue to increase our supply of raw materials and our manufacturing capacity in our company-operated and third party facilities, as well as handle increased shipments through our distribution facilities.

We intend to continue to diversify our product line with new footwear models in order to capitalize on a growing market for casual lifestyle footwear. Successful introduction of new products will require us to identify and address changing consumer preferences and will also require us to devote additional resources to product development and marketing. In addition, in order to capitalize on what we believe to be a growing market for our products, we intend to expand our distribution network and increase sales to our existing retail customers, which will require us to expand our sales and marketing activities.

Revenues represent sales booked upon shipment of products and freight income from customers, less an estimated reserve for sales returns and allowances. Because we use internal manufacturing as well as contract with third parties to manufacture our products, our cost of sales represents our costs to manufacture products in our own facilities, including raw materials costs and all overhead expenses related to production, as well as the cost to purchase finished products from our third party manufacturers. Cost of sales also includes the cost to transport these products to our facilities and all warehouse and outbound freight expenses. Our selling, general and administrative expense consists primarily of selling, marketing, wages and related payroll and employee benefit costs, travel and insurance expenses, research and development costs, depreciation, amortization, professional fees, facility expenses, bank charges and non-cash charges for stock based compensation.



We were organized as a limited liability company and until January 4, 2005 were treated as a partnership for U.S. federal and state income tax purposes for each of the tax years ended December 31, 2002, 2003 and 2004. Under U.S. tax law, partnerships are treated as pass-through entities and are not subject to direct taxation. However, partners are subject to income tax on their allocable share of the partnership's income. On January 4, 2005, we converted from a limited liability company to a taxable corporation. For tax years beginning on January 1, 2005 and afterward, we will be subject to corporate-level U.S. federal and state income taxes. In addition, our foreign operations will be subject to foreign taxes.

From 2002 through 2004, we issued three classes of equity interests in our predecessor limited liability company, designated as Class A and Class B membership interests or units and Class C convertible preferred membership units. Upon our conversion to a corporation on January 4, 2005, Class A and B membership units were converted into shares of our common stock, and Class C membership units were converted into shares of our Series A preferred stock, which will convert into shares of our common stock on a one-for-one basis in connection with the completion of this offering.

In connection with the audit of our financial statements for each of the years ended December 31, 2002, 2003 and 2004, our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting with respect to:

A material weakness is a reportable condition in which the design or operation of one or more accounting controls and procedures does not reduce to a relatively low likelihood the risk that a material misstatement of the annual or interim financial statements will not be prevented or detected within a timely period by employees in the normal course of performing their assigned functions.

The material weakness in our financial closing and reporting process resulted from a combination of the following factors:

The material weakness in our inventory tracking and costing methodology related to the method by which we had accounted for certain inventory related costs in each of 2002, 2003 and 2004. In these years, we did not appropriately capitalize these costs in inventory which resulted in adjustments to our financial statements. In addition, we also did not have a formal process for tracking our inventory.



The material weakness with respect to our accounting records related to our lack of supporting documentation that should have been readily available to evidence routine transactions, principally in 2002 and 2003.

The material weakness in the documentation of significant and non-routine transactions related specifically to a lack of contemporaneous documentation for certain of our equity compensation arrangements in 2002 through 2004 and our acquisition of Foam Creations in 2004.

As a result of these weaknesses, we are in the process of implementing detailed procedures for documenting transactions, consolidating financial information, reconciling accounts and preparing financial statements, including additional levels of review by our existing corporate accounting staff, as part of our quarter- and year-end close process beginning in the second quarter of 2005. In addition, we have revised the methodology by which we track and cost inventory.

We recently hired our Chief Financial Officer, a corporate controller responsible primarily for external financial reporting and technical accounting matters, including consolidations, an assistant controller with responsibility for accounts payable, general ledger and payroll, an experienced accountant with responsibility for inventory tracking and costing methodology, a tax and treasury manager and approximately nine other employees with accounting or financial reporting expertise. We plan to hire additional employees with technical accounting and external financial reporting expertise to further strengthen our corporate accounting staff.

Additionally, we are in the process of implementing procedures as part of our quarter- and year-end close process beginning in the second quarter of 2005, and are using the additional financial reporting resources identified above to strengthen our review process of significant and complex financial reporting areas and financial statement preparation processes. Furthermore, we intend to use a portion of the proceeds of this offering to upgrade our existing information technology systems to, among other matters, strengthen our accounting and financial reporting and consolidation capabilities. We expect these systems to be in place during 2006. See "Risk Factors—Risks Related to Crocs, Inc.—The audit of our financial statements for each of the years ended December 31, 2002, 2003 and 2004, identified material weaknesses in our internal control over financial reporting, and if not corrected, these material weaknesses could result in a material misstatement of our results of operations of financial condition, which could harm our business and reputation and cause the price of our common stock to decline" and "—We will incur significant time and expense in documenting, testing and certifying our internal control over financial reporting, and any deficiencies in our internal controls could adversely affect our business."

Restatement of Prior 2005 Interim Financial Statements

Subsequent to the issuance of the Company's consolidated financial statements for the three months ended March 31, 2005 and the six months ended June 30, 2005, management of the Company determined that the fair value of common stock used for certain equity grants during 2005 was understated. Additionally, management determined that the accumulated deficit as of January 4, 2005, the date of the conversion from an LLC to a corporation, should have been reclassified to additional paid-in capital in accordance with SEC Staff Accounting Bulletin Topic 4:B "S Corporations".

The consolidated financial statements as of and for the nine months ended September 30, 2005 included elsewhere in this prospectus include the impact of these adjustments. The consolidated financial statements for the three months ended March 31, 2005 and the six months ended June 30,



2005 will be restated at the time those financial statements are refiled with the Company's 2006 quarterly financial statements. A summary of the effect of these adjustments is shown below:

As of and for the three months ended March 31, 2005 (In thousands)
Consolidated balance sheet impact

 
 Previously Reported
 Adjustment
 As Adjusted
 
Current liabilities:          
 Accounts payable  5,070    5,070 
 Members' distribution payable  3,000    3,000 
 Accrued expenses and other liabilities  3,756  (221)(4) 3,535 
 Noted payable and current installments of long-term debt  1,344    1,344 
  
 
 
 
   13,170  (221) 12,949 
Total liabilites  16,959  (221)(4) 16,738 
Redeemable common shares  1,800    1,800 
Redeemable convertible preferred shares  5,500    5,500 
Stockholders' deficit:          
 Common shares  1    1 
 Addition paid-in capital  4,467  (3,672
74
3,480
)(1)
  (2)
  (3)
 4,348 
 Deferred compensation  (4,208) 503
(3,480
  (2)
)(3)
 (7,185)
 Accumulated deficit  (1,344) 3,672
(356
  (1)
)(2)
 1,973 
 Accumulated other comprehensive income  529    529 
  
 
 
 
  Total stockholders' deficit  (555) 221  (334)
  
 
 
 
Total liabilities and stockholders' deficit $23,704 $ $23,704 
  
    
 
Consolidated statement of operations impact          
 Revenues $10,958 $ $10,958 
 Cost of sales  4,119    4,119 
  
 
 
 
 Gross profit  6,839    6,839 
 Selling, general and administrative expense (including stock based compensation of $699 (previously reported) and $1,276 (as adjusted))  4,096  577  (2) 4,673 
  
 
 
 
 Income from operations  2,743  (577) 2,166 
 Other expenses, net  54    54 
  
 
 
 
 Income before income taxes  2,689  (577) 2,112 
 Income tax expense  293  (221)(4) 72 
  
 
 
 
 Net income $2,396 $(356)$2,040 
  
    
 
Income per common share(5)          
 Basic $0.09 $(0.01)$0.08 
  
    
 
 Diluted $0.07 $(0.01)$0.06 
  
    
 

As of and for the six months ended June 30, 2005 (In thousands)
Consolidated balance sheet impact

 
 Previously Reported
 Adjustment
 As Adjusted
 
Current liabilities:          
 Accounts payable  10,393    10,393 
 Members' distribution payable       
 Accrued expenses and other liabilities  8,128  (429)(4) 7,699 
 Noted payable and current installments of long-term debt  6,605    6,605 
  
 
 
 
   25,126  (429) 24,697 
Total liabilites  29,121  (429)(4) 28,692 
Redeemable common shares  1,800    1,800 
Redeemable convertible preferred shares  5,500    5,500 
Stockholders' deficit:          
 Common shares  1    1 
 Addition paid-in capital  5,271  (3,672
89
5,921
)(1)
  (2)
  (3)
 7,608 
 Deferred compensation  (4,449) 1,032
(5,921
  (2)
)(3)
 (9,338)
 Accumulated deficit  2,274  3,672
(692
  (1)
)(2)
 5,255 
 Accumulated other comprehensive income  420    420 
  
 
 
 
  Total stockholders' deficit  3,517  429  3,946 
  
 
 
 
Total liabilities and stockholders' deficit $39,938 $ $39,938 
  
    
 
Consolidated statement of operations impact          
 Revenues $36,727 $ $36,727 
 Cost of sales (including stock based compensation of $29 (previously reported) and $29 (as adjusted))  15,919    15,919 
  
 
 
 
 Gross profit  20,808    20,808 
 Selling, general and administrative expense (including stock based compensation of $1,231 (previously reported) and $2,352 (as adjusted))  12,104  1,121  (2) 13,225 
  
 
 
 
 Income from operations  8,704  (1,121) 7,583 
 Other expenses, net  225    225 
  
 
 
 
 Income before income taxes  8,479  (1,121) 7,358 
 Income tax expense  2,397  (429)(4) 1,968 
  
 
 
 
 Net income $6,082 $(692)$5,390 
  
    
 
Income per common share(5)          
 Basic $0.18 $(0.01)$0.17 
  
    
 
 Diluted $0.17 $(0.01)$0.16 
  
    
 

(1)
Restatement for reclassification in accordance with SAB Topic 4:B.
(2)
Restatement for stock compensation for employee and non-employees.
(3)
Impact on deferred compensation from restatement of stock compensation.
(4)
Income tax provision impact for restatement of stock compensation.

(5)
As adjusted for the stock split of 233.62 to 1.

Acquisition of Foam Creations

Foam Creations has developed and manufactured consumer products from specialty resins since 1995. In November 2002, we began marketing and distributing in the U.S., under thecrocs brand, a footwear model that was manufactured by Foam Creations. Due to the popularity of this shoe and our successful launch in the U.S., we expanded our sales infrastructure, strengthened our senior management team and developed relationships with a range of retailers in the U.S. In June 2004, we acquired Foam Creations, including its manufacturing operations, product lines and rights to the trade secrets for the proprietary closed-cell resin for a total cash purchase price of $5.2 million and the assumption of $1.7 million of long-term debt. To fund our purchase of Foam Creations, we issued $5.5 million of preferred securities in connection with the acquisition. The consolidated financial statements referred to in this prospectus reflect the acquisition of Foam Creations as of June 29, 2004, the date of acquisition. Pro forma financial information presented in this prospectus for the year ended



December 31, 2004 reflects our results of operations and financial condition as if our acquisition of Foam Creations had occurred on January 1, 2004.

As a result of the acquisition, our consolidated statements of operations included amortization of intangible assets related to the acquisition. In addition, as a result of purchase accounting, the fair values of Foam Creations's assets, including inventory, on the date of the acquisition became their new "cost" basis. As a result, cost of sales for the six months following the acquisition include $195,000 of additional cost due to the purchase accounting adjustment related to the on-hand inventory that was then sold during the following six months. Expenses attributable to amortization of intangible assets resulting from the acquisition will continue to adversely affect our results of operations in the future. As set forth in note 6Note 7 to the consolidated financial statements included elsewhere in this prospectus, the estimated expense of amortizing these intangible assets is approximately $1.0 million annually in 2005 through 2008, $600,000 in 2009 and $400,000 thereafter.

Seasonality

Due to our short operating history and significant sales growth since our inception, we cannot assess with any certainty the degree to which sales of our footwear products will be subject to seasonality. However, we expect that our business, similar to other vendors of footwear and related merchandise, will be subject to seasonal variation. We believe many vendors that market footwear products suited for warm weather normally experience their highest sales activity during the second and third quarters of the calendar year. Preliminary results indicate that our revenues for the three months ended December 31, 2005 were lower than our revenues for the three months ended September 30, 2005, and we believe that the decline was primarily attributable to seasonal declines in demand for our products. While we have introduced footwear models that are more suitable for cold weather uses, such as the Aspen, Highland and the Georgie, we expect that demand for our products, and therefore our sales, may continue to be subject to seasonal variations and significantly impacted by weather conditions. In addition, our quarterly results of operations may fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions or general economic or consumer conditions. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year, and revenues for any particular period may decrease. See "Risk Factors—Risks Related to Our Business—Sales of our products mayare likely to be subject to seasonal variations, which could increase the volatility of the price of our common stock."



Results of Operations

Comparison of the SixNine Months Ended JuneSeptember 30, 2005 and 2004

Revenues.    Revenues increased $33.7$66.9 million, to $36.7$75.0 million, in the sixnine months ended JuneSeptember 30, 2005, from $3.0$8.1 million in the sixnine months ended JuneSeptember 30, 2004. This increase was primarily a result of significantly higher unit sales of our footwear products, which increased to 2.24.3 million pairs for the sixnine months ended JuneSeptember 30, 2005, from 181,000393,000 pairs for the sixnine months ended JuneSeptember 30, 2004. The higher unit sales resulted from an increase of overnearly 1,800 retail stores selling our products and stronger sales to our existing customers. During the sixnine months ended JuneSeptember 30, 2005, our results included revenues of $3.3$6.1 million from sales by Foam Creations. Sales by Foam Creations which were not included in our results of operations during the six months endedprior to our acquisition of Foam Creations on June 30,29, 2004. We expect our sales to continue to grow and our revenues to increase as we enter new markets and introduce new products. In addition, our revenues from sales outside of North America were $656,000$2.1 million in the sixnine months ended JuneSeptember 30, 2005 and we expect our international revenues to increase in the future.

Gross profit.    Gross profit increased $19.4$39.1 million, to $20.8$43.0 million, in the sixnine months ended JuneSeptember 30, 2005, from $1.3$3.9 million in the sixnine months ended JuneSeptember 30, 2004. Our gross profit margin improved to 56.7%57.3% in the sixnine months ended JuneSeptember 30, 2005, from 43.5%48.5% in the sixnine months ended JuneSeptember 30, 2004. The increase in gross profit margin was due primarily to lower unit costs resulting from the addition of a third party manufacturer located in China, from which we did not obtain footwear products in the six



nine months ended JuneSeptember 30, 2004. In the sixnine months ended JuneSeptember 30, 2005, this manufacturer produced 59%55% of our footwear products.

Selling, general and administrative expense.    Selling, general and administrative expense increased $9.9$18.7 million, to $12.1$23.1 million in the sixnine months ended JuneSeptember 30, 2005, from $2.2$4.4 million in the sixnine months ended JuneSeptember 30, 2004. This increase was primarily a result of higher costs associated with increased sales volumes, including an increase in selling and marketing expenses of $3.0$6.6 million, increases in personnel expenses of $2.3$4.0 million and the associated facility expansion costs of $234,000$863,000 required to support our growth. The absorption of Foam Creations's selling, generalgrowth both domestically and administrative expense contributed an additional $1.7 million to this increase, of which $498,000 relates to the amortization of intangibles associated with this acquisition. The establishment of our new sales officesinternationally in Asia, Europe and AsiaMexico. In addition, professional and our new manufacturing operations in Mexico added $544,000 in expense.consulting fees increased approximately $2.6 million, primarily as a result of increased legal fees, as well as settlement costs with consultants. In addition, stock-based compensation expense was $1.3$3.5 million for the sixnine months ended JuneSeptember 30, 2005, compared to $1.0$1.4 million for the sixnine months ended JuneSeptember 30, 2004. As a percentage of revenues, selling, general and administrative expense decreased to 32.4%30.7% in the sixnine months ended JuneSeptember 30, 2005, from 74.3%54.4% in the sixnine months ended JuneSeptember 30, 2004, primarily due to substantially higher revenues in 2005, with comparatively lower increases in headcount, overhead and administrative expenses. We expect our selling, general and administrative expense will increase as we hire additional personnel and incur increased costs related to our growth. In addition, we expect to recognize increased legal, accounting and personnel costs associated with operating as a public company.

Interest expense.    Interest expense was $202,000$380,000 in the sixnine months ended JuneSeptember 30, 2005, compared to $1,000$19,000 in the sixnine months ended JuneSeptember 30, 2004. The increase is related to the interest expense associated with the $5.0 million of indebtedness incurred under our line of credit during the second quarter of 2005 and the long term debt at our subsidiary Foam Creations, which we acquired in June 2004.

Other expense, net.    Other expense was $23,000$25,000 in the sixnine months ended JuneSeptember 30, 2005, compared to $14,000 in the nine months ended September 30, 2004, which primarily related to a minority interest associated with Foam Creations, which was acquired in June 2004.



Income tax expense (benefit).    In the sixnine months ended JuneSeptember 30, 2005, income tax expense was $2.4$6.7 million, representing an effective income tax rate of 28.3%.34.4%, compared to $44,000 in the nine months ended September 30, 2004. In the sixnine months ended JuneSeptember 30, 2004, we were not a tax-paying entity for U.S. income tax purposes and therefore did not record any income tax expense.expense for this period. We recognized a tax benefit of $723,000 in the sixnine months ended JuneSeptember 30, 2005 to record deferred tax assets in connection with our conversion from a limited liability company to a taxable corporation.

Dividends on redeemable convertible preferred stock.    Dividends on our outstanding redeemable convertible preferred stock were $136,000$206,000 for the period ended JuneSeptember 30, 2005 compared to no recorded dividends$69,000 for the period ended JuneSeptember 30, 2004. We first issued equity with preferred liquidation and dividend provisions in June 2004, when we sold our Class C membership units. In connection with our conversion from a limited liability company to a corporation, our Class C membership units converted into shares of our Series A preferred stock. Our Series A preferred stock provides for a dividend at the rate of five percent per annum on the initial investment amount per share. The Series A preferred stock will convert into shares of our common stock in connection with the completion of this offering.

Comparison of the Years Ended December 31, 2004 and 2003

Revenues.    Revenues increased $12.3 million, to $13.5 million, in 2004 from $1.2 million in 2003, primarily as a result of higher unit sales. Sales of our footwear products increased to 649,000 pairs in 2004 from 76,000 pairs in 2003. The higher sales volume in 2004 was primarily a result of the popularity of our Beach model and a significantan increase in the number of 1,118 retail stores of


approximately 1,118 selling our products. Our results in 2004 include $2.7 million of revenues from sales by Foam Creations of our non-branded products.

Gross profit.    Gross profit increased by $6.1 million, to $6.4 million, in 2004, from $274,000 in 2003. Gross profit margin improved to 47.0% in 2004 from 23.5% in 2003. The increase in gross profit margin was due primarily to lower unit costs associated with production efficiencies resulting from higher sales volumes. In addition, gross profit in 2004 included approximately $1.0 million from sales by Foam Creations of our non-branded products. Gross profit margin for our non-branded products was approximately 40.0% for the six months ended December 31, 2004.

Selling, general and administrative expense.    Selling, general and administrative expense increased $6.4 million, to $7.9 million, in 2004, from $1.5 million in 2003. This increase was primarily a result of higher costs associated with increased sales volumes, including an increase in selling and marketing expenses of $2.3 million, personnel expenses of $1.6 million, a portion of which was included in selling and marketing expenses, and the associated facility expansion costs of $125,000 required to support our growth. The absorption of Foam Creations's selling, general and administrative expense contributed an additional $1.5 million to this increase of which $487,000 relates to the amortization of intangibles associated with this acquisition. Depreciation and amortization expense increased to $586,000 in 2004 from $18,000 in 2003, primarily as a result of amortization of intangibles associated with our acquisition of Foam Creations. Stock-based compensation expense was $1.8 million in 2004 compared to $356,000 in 2003. This increase was due to a greater number of awards granted to employees, directors and consultants, along with higher equity values for such awards. Additionally, a number of awards were granted in 2004 with immediate vesting, and as a result, we recognized the entire expense associated with those grants at the time of the grant. As a percentage of revenues, selling, general and administrative expense decreased to 58.6% in 2004 from 126.3% in 2003, largely due to substantially higher revenues generated in 2004, with comparatively lower increases in headcount and administrative expenses.



Interest expense.    Interest expense was $47,000 in 2004, compared to $3,000 in 2003. The increase in interest expense was primarily the result of an increase in long term debt that was assumed as part of our acquisition of Foam Creations in June 2004.

Other expense, net.    Other expense was $19,000 in 2004, and we did not recognize any other income or expenses, net, in 2003. The increase in other income was primarily related to a minority interest that arose after our acquisition of Foam Creations in June 2004.

Income tax expense (benefit).    We recorded a tax benefit of $143,000$142,000 in 2004, compared to no recorded tax benefit or expense in 2003. Prior to our conversion from a limited liability company to a corporation on January 4, 2005, we were not a taxpaying entity for U.S. federal and state income tax purposes. However, we acquired Foam Creations, a Canadian corporation, in June 2004. During the period subsequent to the acquisition, Foam Creations recorded a tax benefit of $143,000.

Dividends on redeemable convertible preferred stock.    Dividends on our Class C membership units were $142,000 in 2004. No dividends were recorded in 2003. We sold Class C membership units in June and July 2004 that provided for a dividend at the rate of five percent per annum on the initial investment amount per share.



Comparison of the Years Ended December 31, 2003 and 2002

We commenced operations in July 2002 and began marketing and distributing our products in November 2002 with the introduction of our Beach model at a regional trade show. Sales of our products at the trade show represented our only sales for 2002.

Revenues.    Revenues increased $1.2 million, to $1.2 million, in 2003, from $24,000 in 2002, as a result of higher unit volumes associated with a full year of operations. Sales of our footwear products increased to 76,000 pairs in 2003 from 1,500 pairs in 2002.

Gross profit.    Gross profit increased by $266,000, to $274,000, in 2003, from $8,000 in 2002. Our gross profit margin decreased to 23.5% in 2003 from 33.3% in 2002 due to higher costs associated with hiring a third party for warehousing, fulfillment and logistics services, and an increase in shipping costs associated with expanding our retail customer base nationwide.

Selling, general and administrative expense.    Selling, general and administrative expense increased by $1.0 million, to $1.5 million, in 2003, from $453,000 in 2002. This increase was related to costs associated with our significant growth, and a full year of operations in 2003 compared to operations for only a portion of 2002. Stock-based compensation expense was $356,000 in 2003 compared to $240,000 in 2002.

Interest expense.    Interest expense was $3,000 in 2003 compared to no recorded expense in 2002.

Income tax expense (benefit).    We operated as a limited liability company in 2003 and 2002. As a result, we did not record a tax liability for either of those years.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than operating leases. See "Contractual Obligations and Commercial Commitments" below. We do not believe these operating leases are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.



Liquidity and Capital Resources

Our principal sources of liquidity have been sales of our securities, borrowings under our credit facility and cash provided by operating activities. We raised a total of $7.1 million, which is net of repurchases of $162,000, from the sale of equity interests and units from 2002 through 2004. In the second quarterAs of September 30, 2005, we borrowed a total of $5.0there were $5.5 million in outstanding borrowings on our secured revolving credit facility, as discussed below. Foam Creation also borrowed $2.7 million in 2005. The remainder of our liquidity needs have been met from cash provided by operating activities of $3.9$5.4 million through JuneSeptember 30, 2005.

Our principal uses of cash have been for our acquisition of Foam Creations in June 2004 for $5.2 million, for the distribution in April 2005 of $3.0 million in cash to the members of our predecessor limited liability company pursuant to the operating agreement for that entity, for the purchase of our manufacturing operation in Mexico and associated operating assets in April 2005 for approximately $1.3 million, and for capital expenditures of $6.0$6.2 million through JuneSeptember 30, 2005. We expect our principal uses of cash in the future to be for working capital purposes to support our planned growth and for capital expenditures of approximately $7.0$11.2 million related to increasing our manufacturing capacity and improving our infrastructure, including approximately $2.0$3.5 million for expanding and upgrading our information technology systems. We also plan to repay amounts



outstanding under our credit facilities upon completion of this offering, as described in "Use of Proceeds."

The significant components of our working capital are cash, accounts receivable and inventory, reduced by accounts payable and accrued expenses. Capital requirements related to manufacturing include compounding and injection molding equipment for facilities we operate, as well as footwear molds used in our company-operated facilities or purchased for our third party manufacturers. We expect cash flows from operations and the proceeds from this offering to be sufficient to meet our foreseeable cash requirements for at least the next twelve months.

Cash provided by, or used in, operating activities consists primarily of net income or net loss adjusted for certain non-cash items including depreciation, amortization, deferred income taxes, provision for bad debts, stock compensation expense and for the effect of changes in working capital and other activities. Cash provided by operating activities in the sixnine months ended JuneSeptember 30, 2005 was $4.0$5.4 million and was primarily related to net income of $6.1$12.8 million plus non-cash items of depreciation and amortization of $2.0 million and equity-based compensation expense of $3.5 million, partially offset by increases in working capital resulting from significant increases in prepaid expenses and other assets of $2.1 million, inventory of $6.3$12.1 million and accounts receivables of $10.6$17.8 million offset by increases in accounts payable of $8.4 million and accrued and other liabilities of $11.5 million, all related to our sales growth.growth and expanded operations. Cash used inprovided by operating activities for the sixnine months ended JuneSeptember 30, 2004 was $65,000,$183,000, reflecting a loss from operations of $904,000$558,000 and an increasechanges in our working capital components, including an increase in accounts receivable of $537,000 and inventory of $173,000,$910,000 in connection with the growth of our business. Cash provided by operating activities in 2004 was $777,000, primarily related to non-cash expenses for stock-based compensation of $1.8 million and depreciation and amortization of $700,000 that offset our net loss of $1.5 million. Cash used in operating activities was $439,000 in 2003 and $443,000 in 2002, primarily related to a loss from operations in each of these years offset by working capital changes.

Cash used in investing activities for the sixnine months ended JuneSeptember 30, 2005 was $4.7$6.8 million, which was related to capital expenditures for molds, machinery and equipment. Capital expenditures for the six months ended June 30, 2004 was $26,000. Cash used in investing activities infor the nine months ended September 30, 2004 was $6.7$5.4 million primarily related to the acquisition of our wholly owned subsidiary, Foam Creations, for $5.2 million. Cash used in investing



activities in 2004 was $6.7 million, primarily related to the acquisition of Foam Creations and capital expenditures of $1.6 million related to an increase in our manufacturing capacity. Cash used in investing activities was $321,000 in 2003 and $78,000 in 2002, related to capital expenditures.

Cash provided by financing activities was $2.9$4.7 million for the sixnine months ended JuneSeptember 30, 2005, primarily as a result of $5.0 million borrowed against our secured revolving credit facility and $2.7 million in borrowings at Foam Creations offset by a $3.0 million cash distribution to our members. Cash provided by financing activities was $6.6 million in 2004, consisting primarily of $6.0 million in equity financing, and the remainder from indebtedness incurred in connection with purchases of capital equipment. Cash provided by financing activities was $1.0 million in 2003 and $594,000 in 2002 related to $1.2 million in equity financing and $400,000 of member loan proceeds in those years.

On April 8, 2005 we entered into a $5.0 million secured revolving credit facility.facility, and on October 26, 2005 we entered into an amended and restated credit facility increasing the amount available under the original facility to $20.0 million. The total amount available at any time is subject to a borrowing base calculation based on various percentages of accounts receivable, inventory and fixed assets. As of JuneSeptember 30, 2005, we had $5.0$5.5 million in borrowings outstanding under the revolving credit facility, including $0.5 million advanced under a letter of credit under the facility. As of December 31, 2005, we had $5.9 million in borrowings outstanding under the amended and restated credit facility. We used a portion of the proceeds of borrowings under the credit facility to fund a cash distribution of $3.0 million which was declared to members as of December 31, 2004 of our predecessor limited liability company pursuant to the operating agreement for that entity, and of the remaining $2.0 million, we used $1.3 million for the purchase of our manufacturing operation in Mexico and associated operating assets in April 2005 and $700,000 for working capital purposes. The revolving credit facility as amended and restated bears interest at floating rates basedwe select on the higher ofeach borrowing, equal to either the Bank of America prime rate, or a calculated Eurodollar rate equal to an adjusted LIBOR rate plus 1.0% ora margin ranging from 1.75% to 2.50% depending on our EBITDA for the Federal Funds Rate plus 1.5%.most recently completed four fiscal quarters. The effective annual interest rate was 7.28% per annum7.25% as of June 30,December 31, 2005. Our obligations under the revolving



credit facility are secured by substantially all of our property, including, among other things, our accounts receivable, inventory, equipment and fixtures. We pay an annual fee of 0.35%0.25% of any unused amount under our revolving credit facility.facility, or 0.50% for any period in which the outstanding amount under the facility is less than $5.0 million. The credit facility also contains financial covenants that require us to meet certaina specified financial ratios and thresholds, including a consolidated fixed charge coverage ratio and specified levels of consolidated leverage ratio, and consolidated earnings before interest, income taxes, depreciation and amortization.EBITDA. We were in compliance with all covenants as of JuneSeptember 30, 2005. The revolving credit facility will expire on April 8, 2006.October 26, 2008. The credit facility requires thatis subject to an early termination fee of 1% if we repayterminate the credit facility in full inon or prior to October 26, 2006, or 0.5% if we terminate the event we complete a public offering of our common stock, including this offering. See "Use of Proceeds." The credit facility will terminate upon repayment.on or prior to October 26, 2007.



Contractual Obligations and Commercial Commitments

The following table describes our commitments to settle contractual obligations as of December 31, 2004:


 Payments due by period
 Payments due by period

 Total
 Less than
1 year

 1-3 years
 3-5 years
 More than
5 years

 Total
 Less than
1 year

 1-3 years
 3-5 years
 More than
5 years


 (dollars in thousands)

 (dollars in thousands)

Long-term debt(1) $2,245 $461 $1,632 $152 $ $2,245 $461 $1,632 $152 $
Notes payable(2) 658 658    658 658   
Operating leases(3) 1,003 411 591 1  1,003 411 591 1 
Redeemable common shares(5)(4) 808  808   808  808  
Redeemable convertible preferred shares(4)(5) 5,500   5,500  5,500   5,500 
Purchase obligations 2,325 900 1,425   2,325 900 1,425  
Members' distribution 3,000 3,000    3,000 3,000   
Contractual severance commitment 672 168 336 168  672 168 336 168 
 
 
 
 
 
 
 
 
 
 
Total contractual obligations $16,211 $5,598 $4,792 $5,820 $ $16,211 $5,598 $4,792 $5,821 $
 
 
 
 
 
 
 
 
 
 

(1)
Loan with Development Bank of Canada including estimated interest based on current London InterBank Offered Rate ("LIBOR") plus 3.3%.

(2)
Bank demand note in Canada including estimated interest based on the Canadian prime rate plus 0.75%.

(3)
Operating leases for real property, vehicles, and equipment, excluding operating leases entered into after December 31, 2004 totaling $714,000 of future cash commitments.

(4)
Excluding dividends payable of $275,000 per year on shares of our Series A preferred stock, which is redeemable commencing on July 1, 2009 at the option of a majority the holders, to the extent not previously converted. All outstanding Series A preferred stock will convert to common stock in connection with the completion of this offering.

(5)
The redeemable common shares are redeemable commencing in the second quarter of 2006 at the option of the holder. Under the terms of the agreements, the purchase price is the greater of the holder's original investment or the holder's then current percentage ownership in Crocs, Inc. multiplied by the aggregate of the prior three fiscal years' net income. The amount in this table represents the original investment which is our current contractual obligation. The redemption option associated with these shares will terminate in connection with the completion of this offering.

(5)
Excluding dividends payable of $275,000 per year on shares of our Series A preferred stock, which is redeemable commencing on July 1, 2009 at the option of a majority the holders, to the extent not previously converted. All outstanding Series A preferred stock will convert to common stock in connection with the completion of this offering.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the U.S., which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure at the date of our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue, intangible assets, and stock compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results or changes in the estimates or other judgments of matters inherently uncertain that are included within these accounting policies could



result in a significant change to the information presented in the consolidated financial statements. We believe that the estimates and assumptions below are among those most important to an understanding of our consolidated financial statements contained in this prospectus.

We consider certain accounting policies related to revenue recognition, allocation of the purchase price we paid for Foam Creations, valuation of intangible assets and goodwill, and stock-based compensation to be critical policies due to the estimates and judgments involved in each.



Revenue Recognition.    Our revenues are derived principally from wholesale sales to retailers. Our standard arrangement for our customers includes a valid purchase order or contract with no customer acceptance provisions. We recognize revenues from sales of products when:

Title passes generally upon shipment or upon receipt by the customer depending on the country of the sale and the arrangement with the customer. Allowances for estimated returns and claims are provided for when related revenue is recorded. We base our estimates on historical rates of product returns and claims, and specific identification of outstanding claims and outstanding returns not yet received from customers. Since inception, actual returns and claims have not exceeded our reserves. However, actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates. If actual returns and claims exceed reserves, we would need to reduce our revenues at the time of such determination.

Allocation of Purchase Price for Foam Creations Pursuant to Purchase Accounting.    Our purchase of substantially all of the issued and outstanding shares of capital stock of Foam Creations constituted a purchase transaction. Under the purchase accounting rules set forth in Statement of Financial Accounting Standards (SFAS) No. 141,Business Combinations, we have allocated the net purchase price to the acquired assets and liabilities of Foam Creations based on the estimated fair values as of the date of the transaction. In accordance with SFAS No. 141, our financial statements as of and for all periods after June 29, 2004 reflect the new basis of the assets and liabilities acquired from Foam Creations at that date. We engaged a third party appraisal firm to assist us in determining the fair values of the assets acquired and the liabilities assumed. Our management was responsible for determining the key assumptions used in determining the fair values of the assets acquired and the liabilities assumed. These valuations required us to make significant estimates and assumptions, especially with respect to intangible assets.

The critical estimates we used in allocating the purchase price and valuing specific intangible assets include the discount rate used, future expected cash flows from customers, customer lists, useful lives of long-lived assets, and brand awareness and market position of acquired products. Our estimates of fair value at the time when they were made were based upon assumptions that we believed to be reasonable, but which are inherently uncertain and unpredictable. If we were to make different assumptions, the estimated fair value of our intangible assets could differ materially from our estimates.



Goodwill and Intangible Assets.    We periodically evaluate intangible assets and goodwill in accordance with Statement of Financial Accounting Standards SFAS No. 142,Goodwill and Other Intangible Assets, for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets include goodwill, patents and trademarks, customer relationships, and core technology.

Factors we consider important that could result in an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner in which we use the acquired assets or the strategy for our overall business, or significant



negative industry or economic trends. SFAS No. 142 also requires an annual impairment test for goodwill. In testing for a potential impairment of goodwill, SFAS No. 142 requires the application of a fair value based test at the reporting unit level. Our impairment test of goodwill compares the fair value of the applicable reporting unit to its carrying value. If the carrying value of the reporting unit exceeds the estimate of fair value, impairment is calculated as the excess of the carrying value of goodwill over its implied value. Intangible assets that are determined to have definite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value to be impaired in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. There was no impairment of goodwill as of December 31, 2004.

Stock-Based Compensation.    We have elected to follow the intrinsic value-based method prescribed by Accounting Principles Board Opinion (APB) No. 25,Accounting for Stock Issued to Employees, and the related interpretations in accounting for employee stock options rather than adopting the alternative fair value accounting provided under SFAS No. 123,Accounting for Stock Based Compensation. Therefore, we do not record any compensation expense for stock options we grant to our employees where the exercise price equals the fair market value of the stock options on the date of grant and the exercise price, number of shares eligible for issuance under the options and vesting period are fixed. We comply with the disclosure provisions of SFAS No. 123 and SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure, which require that we disclose our pro forma net income or loss and net income or loss per common share attributable to common stockholders as if we had expensed the fair value of the options. In calculating fair values of our options, we use assumptions of estimated option life, dividend policy, volatility and interest rates.

The fair value of equity units granted from October 2002 through December 2004 was originally estimated by our board of directors based upon the best information available to them on the dates of grant, including third party sales of equity units. We did not obtain contemporaneous valuations by valuation specialists because, at the time of the issuances of stock options during this period, our efforts were focused on acquiring new customers, developing our operational infrastructure and executing our business plan. We engaged an independent third party valuation specialist to perform a valuation of our common stock at December 31, 2004. We also engaged a third party valuation specialist to perform a valuation of common stock at April2004, May 1, 2005, June 30, 2005, August 1, 2005, September 1, 2005 and June 30,October 1, 2005 in connection with the grant of options to purchase shares of our common stock to employees, consultants and members of our board of directors. The May 1, 2005 valuation was restated in the third quarter of 2005 to adjust certain estimates based on our expected market value in the initial public offering. The original value of $3.38 per share was revised to $5.91 per share. Our estimates of fair value of our stock wereare based on assumptions that we believe are reasonable. The fair value of our stock is affected by a number of assumptions and judgments including the timing of sales of equity instruments, the negotiated value of those sales, the timing of our third party valuations and significant assumptions included in those valuations, including our estimates of our future performance, discount factors used and comparable companies and transactions selected, among others. If we were to make different assumptions, the estimated value of our stock could differ materially from our estimates.



As discussed below under "Recent Accounting Pronouncements," the FASB has issued SFAS No. 123(R), which we expect to be required to implement beginning January 1, 2006. We are evaluating the impact that adoption of SFAS No. 123(R) will have on our financial statements.

Quantitative and Qualitative Disclosures About Market Risk

We haveAs of December 31, 2005, we had a $5.0$20.0 million line of credit with a lender. As of September 30, 2005, we had $5.5 million outstanding on this facility, including $0.5 million advanced under a letter of



credit under the facility, and we expect that we will continue to borrow under this line or a new line in the future. To the extent we borrow under our revolving credit facility, which bears interest at floating rates based either on the Federal Funds Rate or Bank of America's prime rate or an adjusted LIBOR rate, we are exposed to market risk related to changes in interest rates. At June 30,December 31, 2005, we hadthe applicable interest rate on borrowings outstanding under ourthe credit facility at an interest rate of 7.28%was 7.25% per annum.year. If applicable interest rates were to increase by 100 basis points, for every $1.0 million outstanding on our revolving credit facility, our income before income taxes would be reduced by approximately $10,000 per year. We are not party to any material derivative financial instruments. Our credit facility will be repaid upon consummation of this offering.

We pay our overseas third party manufacturers in U.S. dollars and have not had significant revenues from foreign sales in past periods. As a result, we have not faced, and do not currently face, any material risk relating to fluctuations in foreign currency exchange rates. In the event our foreign sales increase and are denominated in currencies other than the U.S. dollar, our operating results may be affected by fluctuations in the exchange rate of currencies we receive for such sales.

Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS No. 151,Inventory Costs—An Amendment of ARB No. 43, Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage), and requires that such items be recognized as current-period charges regardless of whether they meet the "so abnormal" criterion outlined in ARB No. 43. SFAS No. 151 also introduces the concept of "normal capacity" and requires the allocation of fixed production overheads to inventory based on normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period incurred. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and is required to be adopted in the first quarter of fiscal year 2006. We have not yet determined the effect of adopting this pronouncement.

In December 2004, the FASB issued SFAS No. 123(revised 2004),Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

SFAS No. 123(R) and the related interpretations must be adopted no later than January 1, 2006. We expect to adopt SFAS No. 123(R) on January 1, 2006.

SFAS No. 123(R) permits companies to adopt its requirements using one of two methods:



We have not yet determined the method of adoption or the effect of adopting this pronouncement.

In December 2004, the FASB issued SFAS No. 153,Exchanges of Non-Monetary Assets. The statement refines the measurement of exchanges of non-monetary assets between entities. The provisions of this statement are effective for fiscal periods beginning after June 15, 2005. Historically, we have not transacted significant exchanges of non-monetary assets, but future such exchanges would be accounted for under the standard, when effective.

In March 2005, the FASB issued FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations. FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143,Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. We will adopt FIN 47 in its fiscal year 2006. We are currently evaluating the effect that the adoption of FIN 47 will have on our consolidated results of operations and financial condition.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections (SFAS 154), which replaces APB No. 20, "Accounting Changes" and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements—An Amendment of APB Opinion No. 28. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. This pronouncement is required to be adopted by us in the first quarter of 2006. We are currently evaluating the effect that the adoption of SFAS 154 will have on our consolidated results of operations and financial condition but does not expect it to have a material impact.



BUSINESS

Overview

We are a rapidly growing designer, manufacturer and marketer of footwear for men, women and children under thecrocs brand. All of our footwear products incorporate our proprietary closed-cell resin material which enables us to produce a soft and lightweight, non-marking, slip- and odor- resistant shoe. We believe our proprietary closed-cell resin, combined with our unique styling, represents a substantial innovation in footwear comfort and functionality, allowing us to offer a differentiated line of products in the casual lifestyle footwear category at attractive retail price points ranging from $29.99 to $59.99. We currently offer nine10 footwear models in up to 1718 different colors and plan to introduce one additional color during the remainder of 2005.colors. We market our footwear products to a broad range of distribution channels and currently sell our products in over 5,7006,000 retail locations in the United States, and have begun selling our products in over 3040 additional countries. In addition to our footwear products, we market a line ofcrocs-branded apparel and accessory items that are intended to increase awareness of our brand and our products. We also selectively use our proprietary closed-cell resin to manufacture a variety of other non-branded products, such as spa pillows and kayak seats, which are marketed to original equipment manufacturers.

Industry Trends

In recent years, footwear manufacturers have increasingly offered more casual shoes in response to growing consumer demand. We believe that the market for casual footwear is expanding and that several factors are driving this trend, including a desire for more comfortable and functional shoes, the incorporation of athletic features into casual shoes, and a general fashion trend towards more casual attire.

We believe that continuing consolidation among retailers, as well as consumers' demand for unique products at attractive prices, has resulted in an increasingly competitive environment for footwear retailers. Retailers continually strive to more efficiently stock limited floor space, improve their sales volumes and profit margins and reduce risk of over or under-stocked inventory. As a result, most footwear retailers seek unique and differentiated footwear products at attractive retail price points to increase consumer traffic and improve sales per square foot in their stores. Additionally, retailers seek footwear models that offer strong profit margins and have broad demographic appeal. We also believe that retailers have recently strategically reduced the number of footwear vendors with whom they work and have attempted to enhance their relationships with their remaining vendors. Specifically, retailers are looking to establish more efficient, just-in-time supplier relationships, allowing for more effective inventory management, increased inventory turns and reduced inventory risk.

Business Strategy

We seek to differentiate thecrocs brand and our product offerings by focusing on several core strategies. Our principal strategies are to: